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ACC701 Accounting Financial

Required

Use thecompanies aboveand find (via electronic journals) the events that led up to the liquidation. Discuss the ethics and governance in explaining the company’s financial stress.Were liabilities a major factor contributing to the liquidation of the company?

Research Requirements

Students need to support their analysis with reference to relevant material from the text and a minimum of eight (8) suitable, reliable, current and academically acceptable sources – this should include at least 2 peer-reviewed academic journal articles.

Answer:

Introduction 

As and when a company is incorporated it is assumed that it will run for a long time as per the going concern concept. The concept implies that the company is going to carry on a business for forever and will not have any intention to disrupt or stop its functioning. However, economy has its own role to play and it make companies to go through the phase of recession, depression, boom and many more. Hence, it becomes impossible to predict the future of an ongoing business. Due to some unfavourable conditions, it may become insolvent and liquidate in future. However, when situations flip in unfavourable direction, any entity tries to fix up the scenario with everything that’s under its control. But sometimes the only solution is to close the economic activity which anyhow means liquidation. It is a process of shutting down or bringing a business to an end and distributing all its assets and liabilities to the claimant. It is basically an event that usually occurs when a company become insolvent and is not able to pay its financial obligations (RAJASEKARAN, 2011).

Events that led up to liquidation 

There are different companies conducting various types of business, having different market share and geographic regions. So, for every company, there are different events which can lead to its liquidation. In general, situations like where company has lack of capital, loss of revenue and is making losses it usually winds up their business because they become insol


vent. Apart from these internal factors, some external point are also there. Such as unfavourable change in the economy, global crisis and many more due to which entities find it difficult to survive in the market and choose to get liquidate (Lee and Lee, 2010). 

However, a better understanding of the events that has caused liquidation can be developed by analysing the case studies of the Australian companies who were wounded up in the past. Also, it is not necessary that the company who is doing well and making profits in the past will remains the same in future too. The same is been reflected in the situations of the following Australia based companies.

ABC Learning

This was an Australia based company dealing in the business of provide children education services. It was listed on Australian Securities Exchange and was doing well for itself in the past. Due to high profits, the company opted the practice of cost and wage cutting which does not prove to be right in future. This led to the financial distress and profits started declining. ABC learning was the only player in the industry of childcare. It has its own monopoly due to which it became liberal in its governance which resulted in escaping of a few children. As a result of which, company faces many challenges and was also dragged down in the court of law (Corbi, 2011). However, being financing strong it pay off all its claims but it was held guilty by the court. Due to this, the share prices of the company dropped and profits turned into losses. All this led to the suspension of its share trading and delisting of ABC from ASX. On the top of that, the creditors or lenders who were unable to receive their payments argued for liquidation and soon the same happen and company was voluntary wounded up (Governance for Stakeholders. 2012).

HIH Insurance 

It was another company which has gone through the phase of liquidation. Brought up by Ray Williams and Michael Payne, HIH Insurance was the second largest insurance company of Australia. It got liquidated on 15 March 2001 and its collapse is treated as the largest corporate collapse in the history of Australia. Usually, it is considered that the entity which is involved in an insurance business will never run out of money and will continue to operate in the long run. But the situation got reversed in case of HIH Insurance (Mirshekary, Yaftian and Cross, 2005). The company started crushing, when its administrative staff was caught indulging themselves in the unethical and illegal practices. Initially it was strong on the both the ends, financially and administratively. But the situation did not remain the same and the company started earning losses due to the inefficient management who was busy in fulfilling their own needs instead of working for the organization (Van et. al., 2007).

On the top of that the director of HIH was proved to have a criminal background as he was caught indulged in a criminal offence. This affected company’s goodwill to a great extent. It got defamed and became financially weak. As a result of which, its asset balance shows a deficit which lead to a provisional liquidation of HIH Insurance. The company was demised with the losses totalled up to $5.3 million (Chen and Suchanecki, 2007).

One.Tel

The company was established in 1995 and was a group of telecommunication companies operating in Australia. The company was founded by Jodee Rich and Brad Keeling and has a high-profile family background. Before its liquidation in 2001, it was rewarded as the fourth largest telecommunications company of Australia serving mobile phones and One.Net services to its customers. It had a customer base of over two million and it provide its service in almost eight countries around the world. However, the destiny played its role and the existence of One.Tel vanished in 2001 (Semanticscholar.org. n.d.).

The company had attained many heights in its initial years which led it to start a business in partnership with Optus, but due to some uncertainties, the partnership did not last for long and it was ended by a mutual consent. Furthermore, the company faces financial issues when its accounts were manipulated by the chief executive officer named Jodee Rich. The shareholders of One.Tel were unaware about this mischief and due to such manipulation hey had faced financial stress. Also the strategies of the company failed to a huge extent and created a blunder. This destroys the whole company and it got liquidated on 8 June 2001 (Griffith.edu.au. 2011). 

Ethics and Governance that explains the financial stress

The legitimacy theory states that each and every company has to comply with the norms, rules and regulations of the society in which they are operating. Its operations, actions and activities are required to be correct and legal in eyes of law and should be in favour of society or communities (Tricker and Tricker, 2014). According to this theory, anything which is harms the society is illegitimate and unaccepted. Getting in the books of good ethics, companies must face their legal issues properly and should work according to the law. It must be the responsibility of the organizations to disclose their each and every activity done in favour or against of the society. Such responsibility of disclosure is often called as Corporate Social Responsibility. Along with this, company must have a good corporate governance, which comes with the factors like management of the company has to perform in the best interest of its society and shareholders, proper utilization of the resources must be there and desired outcomes should be achieved (Hoque, 2018).

However, when a company does not follow the ethics and got involved in unethical practices, it started facing a financial stress. Along with this, their reputation is also kept on stake and sometimes such practices ruin everything. The same was observed in the case of above mentioned companies. All of them were financially strong and were doing well for themselves. But as when profits started turning into losses and ethics got eroded, the companies started losing their existence due to high degree of financial stress (Balachandran, 2011). ABC learning’s governance was liberated to a high level which proved to be a curse for company’s fate. The greed of earning profits went too high that the management started playing with the lives of children. Quality got compromised, workers left unpaid and leverages were misused. On the top of that the motive of serving best quality services got ignored and the company resulted in making losses. This resulted in financial stress for the company and it indicates the violation of business ethics and bad corporate governance.

In case of HIH Insurance, the director was involved in a criminal activity which hindered the reputation and financial position of the company to a great extent. He was charged for abusing and manipulating the customers to fulfil his self-motives. Also the top management was also accused for conducting unethical practices. All this was a sign of breach of ethics and financial instability which eventually ended up in the liquidation of the company.

One.Tel was the huge corporate collapse as there was no transparency in its financial accounts and operations. Also the 41% shareholders were unaware about the actual condition of the company. On the top of that, the CEO lacked accountability and heard commenting that, everything always appeared fine in the business. This scenario left inadequate impact on the governance of the company and causes the chances of liquidation.

The three companies has faced a huge financial stress due to their illegal activities and unethical operations. They did not perform in interest of the society which led them to remove their existence from the community or society in which they operates.

Liabilities – Being a trouble seeker

There is no harm in saying that the whole concept of liquidation is based on the liabilities of the company. The concept states one thing that when a company is failed to pay its liabilities, whether short term or long term, it has to wind up its business. In other words, liquidation is refer to the event which arises when a company ran out of cash and assets and is not capable enough to meet its obligations. So it can be said that liabilities are the one which plays the main role and the only factor which can cause the winding up of the company.

The whole scenario of liquidation revolves around on factor which is payment of liabilities. Unpaid obligations tend to create a cause and effect of liquidation. It is like if there are no liabilities and obligations, then there is no need to sell the assets to make payments. Eventually there will be no winding up of the business. However, it is not true that for every liquidation, liabilities are the reason. The situation can be other way around. Such as a business established for a purpose and got dissolved once it is completed. Some business units are framed according to a certain time period and after the time got completed, they end up their operations. Also there can be situation the business of a company proved to be illegal and illegitimate which forces them to shut down their activities. So apart from liabilities, there are many other reasons for liquidation of a company. But most of the times, it was the unpaid liabilities which makes the companies weak and force them to get liquidate.

Conclusion 

The report concludes that it is very important for the companies to properly comply with the ethics and should have a good corporate governance in order to avoid the situation of getting liquidated. The Australian companies that were earning profits in their initial stage of business got wounded up due to their illegal and unethical practices. The fraud conducted on part of management forces them to undertake a financial stress which made them insolvent. It also states that bad governance and ethics can lead to great amount of financial stress for the company. This make them weak on many grounds as they are not able to meet their obligations, retain their goodwill and work in the best interest of society. As a result of which they have to face a situation of liquidation. Also the report states that always liability is not the sole reason for the failure of any business. It can be the other situations and factors also which the trouble maker for the companies become.

References 

Balachandran, V., 2011. Corporate Governance, Ethics and social responsibility. 2nd ed. New Delhi: PHI Learning Pvt. Ltd.

Chen, A. and Suchanecki, M., 2007. Default risk, bankruptcy procedures and the market value of life insurance liabilities. Insurance: Mathematics and Economics, 40(2), pp.231-255.

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

Governance for Stakeholders. 2012. The ABC of a corporate collapse. [Online] Available at: <https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/> [Accessed 14 May 2018].

Griffith.edu.au. 2011. The One.Tel Collapse: Lessons for Corporate Governance. [Online] Available at: <https://research-repository.griffith.edu.au/bitstream/handle/10072/42673/74746_1.pdf > [Accessed 14 May 2018].

Hoque, Z., 2018. Methodological issues in accounting research. 2nd ed. United Kingdom: Spiramus Press Ltd.

Lee, C.F. and Lee, J. eds., 2010. Handbook of quantitative finance and risk management. London: Springer Science & Business Media.

Mirshekary, S., Yaftian, A.M. and Cross, D., 2005. Australian corporate collapse: The case of HIH Insurance. Journal of Financial Services Marketing, 9(3), pp.249-258.

Semanticscholar.org. n.d. IT Failure and Professional Ethics: The One.Tel Case. [Online] Available at: <https://pdfs.semanticscholar.org/e291/7dd59fe849c2e875d86def1bab73a129cd81.pdf > [Accessed 14 May 2018].

RAJASEKARAN, V.L., 2011. Corporate Accounting. New Delhi: Pearson Education India.

Tricker, B. and Tricker, G. 2014. Business Ethics: A Stakeholder, Governance and Risk Approach. Abingdon: Routledge.

Van Peursem, K.A., Zhou, M., Flood, T. and Buttimore, J., 2007. Three cases of corporate fraud: an audit perspective. (Department of Accounting Working Paper Series, Number 94). Hamilton, New Zealand: University of Waikato.

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