ACC701 Financial Accounting | Liquidation of Individual Companies

Introduction:

An organization is faced with the liquidation when it is unable to make payments of its liabilities or any obligations within specified period of time. There are several reasons associated with the company being insolvent and highly leveraged organizations are prone to become liquid. Financial health of companies is adversely impacted by continuous increase in amount of debt and thereby resulting in their liquidation. It is required by the business to follow some of the fundamental assumptions such as going concern according to the accounting principles. The present study discusses on the several organization such as One Tel Company, HIH insurance and ABC learning that have gone into liquidation because of several reasons. It is indicated by such corporate giants collapse that accounting and auditing profession have been noticeably less good than they are supposed to be (Betta 2016). The aim of the paper is to explore the events that are responsible for liquidation of organizations and code of ethics that should be followed as recommended by Australian securities and Investment commission.

Discussion:

Evaluation of the events that led up to the liquidation of ABC learning, HIH Insurance and One Tel phone company:

ABC Learning:

ABC learning was one of the largest childcare providers operating in Australia providing services to more than one lakh children. It was proposed by ABC Learning in the financial year 2007 and 2008 that their current assets are at 30 % and 40% of their current liabilities. It is indicated by such figure that company was suffering from potential liquidity crisis and till that date, they had total debt of amount $ 1.9 billion. The factor contributing to making ABC learning a highly leveraged company was inorganic expansion and poor strategic planning. The expansion strategies used for expansion was by way through acquisition and merger and thereby creation of leverage in the market (Carnegie and O’Connell 2014). Indeed, ABC learning had tapped into the industry demanding huge quality services related to childcare. However, the crash down of ABC learning resulted due to lack of proper supervision, planning and administration.

HIH Insurance:

HIH Insurance was considered as one of the biggest collapse in Australia that led to the establishment of Royal commission. An estimated deficit of assets over liabilities of amount of $ 7 billion was reported by company on their balance sheet. Liquidation of HIH Insurance was attributable to poor structure of corporate governance. The profession of audit was significantly influenced by the collapse of HIH Insurance and this led to eruption of number of lessons regarding auditor responsibilities and profession (Clarke and Dean 2014).

One Tel Company:

One of the major corporate collapses was witnessed by One Tel Company in year 2001. One Tel was the fourth largest telecommunication company operating in Australia and other countries and having more than two million customers. It has been analyzed using qualitative and quantitative data from different sources that failure of One Tel can be attributed to several reasons such as strategic mistakes, failed expectations, wrong policies and flawed corporate governance practices (McGivern and Handford 2015).

Evaluation of liabilities as major factor contributing to liquidation of such companies:

From the evaluation of the case of ABC Learning, it can be inferred that the major reason responsible for the failure of organization can be attributable to increased amount of borrowings. For rapid international expansion, ABC borrowed an enormous amount of money that made it a highly leveraged organization and eventually made them enable to meet the claim of borrowers and eventual collapse of organization. One of the main reasons for the collapse of ABC learning was the expansion programme that was frantically undertaken by government. Such expansions have been funded by increased borrowings that led to accumulation of interest on debt along with repayment of the principal amount. There was lack of transparency and manipulation of several accounts resulting from fundamental flaws in the accounting method. It can be seen from the financial statements o company that there were significant discrepancies in the profit, revenue and liabilities figure presented in the books of account.

It has been found that the main reason that was responsible for collapse of HIH Insurance from financial perspective is inability of company to make the payments of debt claims and holders of insurance policy when they fell due. Another reason that led to collapse was the poor cash position for meeting its operating cycle. The risk pricing ability, provision of outstanding claim and investment vehicle are the three important vehicles of HIH Insurance. Agency cost problem was one of the major reasons associated with the bankruptcy of the company (Lessambo 2014).

There was evident occurrence of failure of HIH Insurance resulting from incurring of large amount of debts and their eventual failure to meet the debt payment. Some of the fundamental problems associated with the company also led to their failure. The glaring governance deficiencies and conservative corporate culture had been seen as a surprising factor contributing to their downfall. In addition to this, there was conflict between implementation of procedures of corporate governance and profit maximization along with their strategy of aggressive acquisition that triggered the difficulties faced by HIH Insurance (Griffin and Stunda 2016). 

A number of key deficiencies were highlighted in the demise of One Tel Company. A greater amount of profits was generated over the three years by way of considerable amount of profits deterring. The accounting policies and the accounting standards are not complied with and breached. Some of the poor corporate governance practices resulted in the failure include weaker system of internal control, poor quality of audit, insufficient disclosure of policy and accounting affairs of company, ineffective management scrutiny and poor link between pay performance and firm performance (Yahya et al. 2018).

APES 110 Code of ethics for professional accountant:

Some codes of ethics have been issued by ethical and professional standard in the public interest.

Confidentiality- Any confidential information pertaining to the entities that has been acquired resulting from professional and business relationship should not be disclosed to any third parties and should be respected. Such disclosure should not be used to any personal advantage and without the consent of proper and any specific authority (Asic.gov.au 2018). Nevertheless, disclosure of such information can be done if there is duty of making such due to existence of legal and professional rights.

Integrity- Members as per integrity code of ethics requires them to be straightforward and honest in every professional and business relationship. It implies truthfulness and fair dealings (Phillipson et al. 2018). If it is believed by the members that information is misleading and materially false, then they shall not be associated with returns, communications.

Objectivity- This particular code of ethics requires entity to account that the conflict of interest, any undue influence and bias should not override the professional and business judgment. Members have the certainty of exposing to the situation impairing objectivity and defining such situations is impracticable. If the professional judgment of member is unduly influenced by any relationship biases and circumstances, they should not perform professional services (Asic.gov.au 2018).

Professional behavior- Members according to the professional behavior is required to avoid or ignore any such activities that does not comply with the applicable and relevant laws and regulations and thereby disregarding the professions. Such actions would involve omission and actions that informed and third party of the specific circumstances and facts would adversely affect any profession good reputation. Members should not make any unsubstantiated comparisons and disparaging references to other works (Mladenovic et al. 2017).

Due care and professional competence- According to this particular ethical code, clients and employers are entitled to receive professional services which would help in ensuring that the professional knowledge and skills is maintained at all levels (Damiani et al. 2015). Furthermore, the applicable technical and professional standards should be applied in event of receiving such services that should be based on the practice, legislation and techniques development.

Listing rules governing listed companies in terms of corporate governance according to ASIC:

Companies can have access to public capital if they are listed on any stock exchange that entrust them to become responsible to shareholders by being transparent. The driver of the performance of organization lies in the principles of corporate governance. As against any unlisted company, there is high expectation on part of listed company to have continuous and periodic disclosure. A view is presented by the Australian securities and investment commission on various aspects of corporate governance that include regulatory guidance issues. Companies are required to review their financial reporting system and areas of corporate governance prior to the transformation for listing. In order for listing entity to comply with the requirements post listing, it is required to revise their corporate governance policy (Crockett and Ali 2015). The existing practices concerning corporate governance should be benchmarked by listed entities against the council recommendations. Some of the listing rules that is required to be complied by listing entity are as follows:

• Respecting the rights of security holders-Listing entity is required to respect the rights of security holders and they should be capable of exercising their rights effectively by providing them with appropriate information and facilities.
  
  
• Laying down solid foundations for management- The roles and respective responsibilities of management and board should be established and adequately disclosed by monitoring and evaluation of their performance (Adams 2016).
  
  
• Reviewing of the internal procedures- The internal procedures of the listing entities should be reviewed for ensuring that it complies with the obligations relating to continuous disclosures. In addition to this, such procedures are required to be audited independently which forms the practice of corporate governance.
  
  
• Recognition and management of the risks- Listed entity is required to establish a framework of sound risk management along with periodically reviewing the efficacy of framework.
  
  
• Making timely and balanced disclosure- All the matters related to the practices of corporate governance of entities should be disclosed in a timely and balanced manner. It should also account that the reasonable person is liable to create material effect on the price and value of securities (Finney 2017).
  
  
• Remunerating fairly and responsibly- Listed entities should remunerate their directors in such a way that it helps in attracting and retaining high quality directors. Remuneration of directors should well align with the creation of value for shareholders and therefore the remuneration policies should be designed accordingly (org.au 2018).

Conclusion:

The report prepared for explaining the case of collapse of corporate giants of Australia and identifying the major reason behind their liquidation. From the analysis of the cases on all such companies, it has been ascertained that large amount of liabilities and borrowings for carrying out their operations and expansionary activities has resulted in companies eventually going liquid. However, there were some other factors also that triggered the collapse of organizations such as poor corporate governance principles, poor audit quality, improper accounting policies and unethical practices. However, the major factor that has been identified is increasing burden of borrowings leading to collapse of organization.

References

Adams, M.A., 2016. Contemporary case studies in corporate governance failures. Governance Directions, 68(6), p.335.

Betta, M., 2016. Three Case Studies: Australian HIH, American Enron, and Global Lehman Brothers. In Ethicmentality-Ethics in Capitalist Economy, Business, and Society (pp. 79-97). Springer, Dordrecht.

Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s. Critical Perspectives on Accounting, 25(6), pp.446-468.

Clarke, F. and Dean, G., 2014. Corporate Collapse: Regulatory, Accounting and Ethical Failure. In Accounting and Regulation (pp. 9-29). Springer, New York, NY.

Crockett, M. and Ali, M.J., 2015. Auditor independence and accounting conservatism: Evidence from Australia following the corporate law economic reform program. International Journal of Accounting & Information Management, 23(1), pp.80-104.

Dean, G., Clarke, F. and Egan, M., 2014. Corporate capers, accounting and governance reform. Governance Directions, 66(9), p.541.

Finney, C., 2017. Systemic risk in insurance: Common thinking errors, and their resolution. In Systemic risk and the future of insurance regulation (pp. 56-74). Informa Law from Routledge.

Griffin, H. and Stunda, R., 2016. The case of mis-management and lost accreditation. International Journal of Teaching and Case Studies, 7(2), pp.99-104.

Lessambo, F.I., 2014. Corporate Governance, Accounting and Auditing Scandals. In The International Corporate Governance System (pp. 244-263). Palgrave Macmillan, London.

McGivern, B. and Handford, P., 2015. Two problems of occupiers' liability: Part two-the occupiers' liability and civil liability legislation. Melb. UL Rev., 39, p.507.

Mladenovic, R., Martinov-Bennie, N. and Bell, A., 2017. Business students’ insights into their development of ethical decision-making. Journal of Business Ethics, pp.1-13.

Phillipson, S., Garvis, S. and Richards, G., 2018. Early childhood education and care in Australia: a historical and current perspective for a way forward. In International Perspectives on Early Childhood Education and Care (pp. 24-37). Routledge.

Yahya Uthman, A., Ishak, R. and Sawandi, N., 2018. Outsider vs insider: Does firm governance matter. Business and Economic Horizons, 14(3), pp.689-699.