ACCTING 2501 : Financial Accounting : Liquidation of Companies

Introduction:

The research below will focus on three companies that is One. Tel Phone, HIH Insurance and ABC Learning and take into account some of the reasons which led to their collapse. It will also include the corporate governance of the firms.

Liquidation of Companies

Generally, liquidation is a process which involves terminating a company and this may be attributed by the fact that it is not in a position to survive in the prevailing marketing conditions. Upon the termination of a company, all the assets are sold and revenue generated is paid to the creditors, however if there is surplus, they are given to the shareholders of the company (Elinon, 2013). Liquidation is also winding up of a firm when it is unable to meet its obligations when they fall due. There are various types of liquidation and they include;

Creditors Voluntary Liquidation

Under such liquidation, the creditors of the company may decide to liquidate the company by jointly agreeing to the idea.

Members Voluntary Liquidation

It entails a process in which the members of the company voluntarily wind up a company due to certain reasons such as loss being incurred by the company.

Liquidation by a court

The liquidation by court occurs when a particular creditor files a petition in a court to wind up the company and the court finds it necessary to do so. In such an event the company is wound up by the court.

Functions of Governance and Ethics

Governance and ethics are considered significant especially as a skill and knowledge base for the professional accountants and this is as far as CPA Australia is concerned. It is expected that all the accountants should possess the knowledge the working mechanisms and regulations in relation to governance (Elinon, 2013). Such knowledge helps a variety of accountants to carry out their duties in compliance with the law and ethics. Ethics and governance are considered to be of significance in financial accounting and this is because it helps in making good decisions by the management through the advice of the accountants.

ABC Learning

According to Hodge, (2015), the ABC learning was developed in 1988. It is a child care center and it has grown to become one of the biggest child care centers in Australia. Based on statistics, the company’s share has risen over the years and this is up to 300 percent in the market price. The profit for the year 2004-2005 for instance which was generated by the company was estimated to be about $50 million. Additionally, the company has grown with many centers being set up and there are about 1037 of them.ABC Learning offered services to over 100,000 children with 16,000 workers and this was during its peak times.

Liquidation of ABC Learning

There were several reasons attributed to the collapse of the company. One of the key challenges which it faced was the poor quality of education which was offered to the children. Additionally, the number of staff were also inadequate and hence could not provide sufficient services to the children and in the financial statements, there were numerous errors which the management could not identify, and thus it was found out that the reason for the collapse of the company was a misappropriation of finances.ABC Learning therefore could not pay of the liabilities it owed (Foreman, 2014).

Apart from the financial mismanagement, the other reason for the collapse of the company was due to the fact that, the management was involved in certain unethical practices of accounting (Debbage & Dickinson, 2013). At one point in 2008, an equivalent of 0 percent of the assets was intangible and the remaining were in the form of operating licenses. A commission of inquiry was later set up by the Australian government. The malpractices which were carried out by the company led to a loss of value in their shares and most of the investors ran away.

HIH Insurance

The HIH Insurance company was set up in 1968 and it was an amalgamation of many different insurance companies.However the other companies which had integrated with the company had government licenses. The company expanded most of its services worldwide and not just in Australia. Based on the financial report released by the company, the estimated revenue was $2.5 billion while the value of the assets was $8 billion.

Liquidation of HIH Insurance Company

According to Corbi (2011), the company was wound up based on an order by New South Wales court in 2001, and this was considered a surprise since the company was doing well financially. However, it was a provisional liquidation, and a temporary administrator was appointed to run the affairs of the company. A commission referred to as the Royal Commission was set up to investigate certain fundamental reasons for the collapse of the company. Upon the completion of the investigations, it was found out that the company was complying with the set standards of corporate governance. Also, some of the clauses in the standards could not be easily comprehended by the management of the firm. According to the Royal Commission, corporate governance operates just like a human being, and hence it should be verified continuously.

 The regular monitoring of the corporate governance is significant for any particular business enterprise. The other key reason based on the report provided by the commission was the non-performance of duties by the directors according to the set standards (Damiani Bourne & Foo, 2015). Additionally, the corporate governance was not continuously being reviewed by the company management, and hence the management was poor since it had no capacity to look into the corporate governance. Some of the duties which the board of directors had failed to accomplish according to the commission included;

• Duty of confidentiality such that information is not used for the advantage of the directors
• Duty of exercise of power in good faith
• Duty to exercise power with due care and diligence in all decisions made in the company
• Duty to properly use power or authority

The company's corporate culture can be said to have been poor since the top level management could not provide real facts about the company to the board of directors. The decisions made by the CEO were final, and nobody could question that authority. The collapse of the company can also be attributed to the overpricing of mergers and acquisitions. For example, the company understated its liabilities, and this was by $18 million. When HIH Insurance wanted to acquire FAI, it had to finance such an event by obtaining extra debt of $300 million. The real estimate of FAI was considered low while HIH Insurance had overpriced it (Damiani et al., 2015). When it wrote off some of the investments in FAI, it was estimated to be $400 million, and this was above the real value of FAI.

One Tel.Phone Company

The company was established in 1995. It has grown over time, and therefore it has been operating in more than eight nations. Before it was liquidated in 2001, the company was among the leading companies in the telecommunication industry in Australia. It also had over a million customers across the globe.

Liquidation of One Tel.Phone

One of the key reasons which contributed to the winding up of the company was non-sincerity in the financial report (Clarke & Dean, 2014). The reports contained numerous errors, and other critical aspects were missing in most of the reports. Additionally, the company had poor board of directors who made sure that no one in the company could ever challenge their power and authority. Some of the directors included Brad and Jodee Rich. The events which led to the liquidation of the company could be seen as one of the vital examples of bad corporate governance by the executive members. Another reason that resulted in the liquidation of the company was high costs which were being incurred by the firm. Statistics indicate that the company had made plans for various expenses including growth plans. For instance, the cost which was used in the purchase of telecommunication licenses was estimated to be about $520 million, and this was ten times that of the key competitors of the company such as Telstra and Vodafone.

In the year 1998-2000, the company was seen to be placing low charges for its services, and this was below the cash costs. According to the financial reports by the company, it indicated that there was a full collection of accounts receivable however that same fiscal year, the company had reported a net operating loss (Forbes & Walter, 2012). Even though the sales revenue of the company kept doubling, it still recorded operating losses, and by 2000, the danger of the company facing a financial crisis was spotted, and management alerted. Finally, it was confirmed that the company could not meet any of its financial obligations when it asked for additional capital from two of its shareholders.

The absence of appropriate governance was another reason attributed to the collapse of the company.For instance, the audit firm for the organization was just one throughout the years. The auditors offered unqualified audit reports in all the years. When the Institute of Chartered Accountants of Australia did a verification on the statement of financial position of the company, it was found out that there were about 48 items which contained errors. The institute deregistered the auditors who had been carrying the audit practice.

Recommendations:

Based on the above cases, the leaders of the companies should work towards good corporate governance and this has to be implemented. The board of directors and the CEO should all be separated to help control and coordinate work. Additionally, the board of directors should be monitored since the above cases illustrate that the failure of the board were some of the key contributors to their collapse. The disclosure of information on the statement of affairs of a company has to be given a key priority in the firms to help know the true fair view of a particular company. Further, auditing in the companies should be done properly and in reliance on the various accounting standards. It should be such that it is done at the right hour since there is no particular firm which is big to fail. Another fundamental element which should be looked into is the remuneration of the executive such that it has to be based on the level of performances of the managers. Such a system will help in the reduction of self-interest which had been displayed in the cases of the three companies.

Conclusion:

In summary, the above cases show examples of non-compliance of firms to accounting standards. The above report is an indication of how the companies collapsed for certain reason relating to the failure to adhere to the standards of ethics and good corporate governance. The companies mentioned above were liquidated for reasons such as failed expectations, unconstrained growth and poor strategies. The audits which were being conducted by some of the auditors could not even identify any of the mistakes mentioned. However such audits only displayed just the viewpoints. It is, therefore, necessary that the auditors be kept honest through strong enforcement in the organization. The case thus suggests that the auditors must provide financial reports which are accurate and indicate the exact progress of a company including the value of the assets.

References:

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

Corbi, R. J. (2011). Applies to Australian Liquidation. American Bankruptcy Institute Journal, 30(2), 48.

Damiani, C., Bourne, N., & Foo, M. (2015). The HIH claims support scheme. Economic Round-up, (1), 37.

Debbage, S., & Dickinson, S. (2013). The rationale for the prudential regulation and supervision of insurers.

Elinon, A. (2013). Technology-based accounting innovations: implications for accountants and organisations.

Forbes, P., & Walter, D. (2012). Establishing reliance on financial reports in shareholder litigation: De Bortoli. Keeping Good Companies, 64(5), 288.

Foreman, R. (2014). Insolvency: It's a wind-up. Law Society Journal: the official journal of the Law Society of New South Wales, 52(1), 71.

Hodge, S. (2015). U.S. Patent No. 9,143,609. Washington, DC: U.S. Patent and Trademark Office.