ACC701 Financial Accounting- HIH Insurance
Required: Use the companies above and find (via electronic journals) the events that led up to the liquidation. Discuss the ethics and governance in explaining the company's financial stress. Was liabilities a major factor contributimtg to the liquidation of the company?
In the past few years, a number of Australian firms have been liquidated as a result of their failure to settle their liabilities once they turn due. Some of these firms include the ABC Learning, One-Tel as well as HIH Insurance. As a result, this study aims to present analysis of the major events which led to these firms being liquidated. It will start with background information about the three firms followed by analysis of the events leading to their liquidation and then ethics and governance practices of these firms.
Background Information of these three firms
ABC Learning was the Australian largest childcare provided established in 1988. It was once the largest provider of the early childhood education services across the world. Within its first operations, the company ran around 4,700 childcare centres and delivered child-care services to over 110,000 children across New Zealand, UK, Australia and US. It main role was operation of long day care centres across the globe (Rush & Downie 2006). It provided childcare services for children ranging from six weeks to pre-school age. In addition, other centres provided after and before school as well as vacation care. It had four building blocks that were to ensure development of children such as learning curriculum, facilities and environment, centre staff training and development as well as nutrition and physical development (Teen 2012). Evaluated by its market share and turnover, ABC was one of the largest childcare provide in Australia and one of the largest listed provider across the globe. During the year 2005, ABC Learning had total revenue of around $300 million and controlled in between 20%-25% of Australian childcare market. Despite its market size, ABC acquired Learning Care Group in 2005 that operated 460 centres (Khan 2017).
After all it successful history back in 2008, the company had its distress of sever financial stress and debt that forced it to go into receivership by November 2008. During this time 40% of its centres were a bit unprofitable and in April 2008, it CEO was forced to sell part of the business in order to settle some of the debts. Despite of selling part of its assets, ABC feel into receivership by November 2008 after it increased debt financing obligations. On other hand, HIH Insurance is an Australian insurance company established in the year 1968. The company was then acquired by a British firm known as British Company CE Health plc in the year 1971. In 1996 the company which was currently known as Health International Holdings transformed to HIH Winterthur and through 1997 to 1998, the company acquired numerous firms both in Australia and across the globe (HIH Royal.Com 2003).
One-Tel was one of the Australian Telecommunication entity established in 1995 (Trute 2001). Before it liquidation, was one the fourth biggest telecommunication firm in Australia and the fastest growing firm under ASX. It initial capital was contributed by Lachlan and James (Reza 2009). After it success, the company was hoping to expand to the global market particularly in US and Europe by putting on relatively low price tactics as well as customer-driven technique. In addition, its customer base increased as from 1,000 clients to around 100,000 which were attributed to the fact that it was in a position to provide high quality telecommunication service at significantly low price (Monem 2011). The company earned a total of $3.723 million profit in the year 1997, and $6.965 million in 1999 making it the fastest growing organization in Australia and second-highest ranked telecommunication firm in the country. Nonetheless, despite the great expectations, the company’s good performance was no longer achievable and in the year 2000, it reported a total loss of $291.1 million which is said to send alarm to the top administration and the investors. In spite of the shareholder’s effort of investing more cash in the firm to overcome this crisis, it was not successful and on May 2001 the company collapsed (Allan 2006).
ABC Learning Collapse
ABC is said to have collapsed in the year 2008 after numerous months of financial distress that started on early 2008 after share value of the company decreased from $8.80 by December 2006 to around 0.50 by August 2008 (Rush & Downie 2006). The reason behind this collapse was its rocketing debt levels resulting from its rapid expansion acts overseas. To be more specific, the main reason for ABC collapse is as follows; first, opaque operations. Basically, business model of this company was not planned in the right manner. In addition, the company did not have organizational hierarchy and its organization was not properly decentralized (Khan 2017). Thus, there was not supervision for its subordinates. In other word, there was no transparency in its operations.
Furthermore, due to its opaque operations, its income statement was generated via unusual system of the liquidated damages as well as compensation from the developers of the new centres. Another reason for the ABC Learning collapse was staffing problem where the company is said to have relief staff provider who were named as 123 careers (Rush & Downie 2006). Due to this issue the company made high turnover and lacked efficient employees since these employees were unsure of their work security. Furthermore, employment all through the centres were not properly distributed meaning that the ratio in between the careers and children were not correctly managed. Inorganic expansion as well as poor risk management is another reason for ABC Learning collapse. To be more specific, expansion of the ABC was basically on debt and equity margin (Teen 2012).
The high loan made the firm risky since its leverage was far much beyond its capability of repaying the loan. In addition, there was no proper risk management before and after the mergers that led to the increased debt to around $1.7 billion within a period of 18 months (Khan 2017). Further, there was no systematic accounting practice in place meaning that no professional accountant was hired by this firm. In effective HR department is also another crucial reason for ABC Learning collapse. In this company there was absence of human resource practices due to lack of proper HR planning process such as recruitment and selection as well as proper training of the employees.
Practice of nepotism is another reason for the ABC Learning collapse. First, the ABC CEO entertained nepotism by including his brother-in-law in major expenditures through provision of refurbishment and maintenance of the childcare centres (Teen 2012). To be more specific, the collapse of ABC Learning was mainly attributed by its unsustainable business strategies, poor auditing practices, potentially excessive management compensations, weak corporate governance, ineffective working capital management as well as questionable related transactions.
HIH Insurance Collapse
HIH collapse or liquidation in March 2001 sent shocks across Australian commercial sector. The nation’s second biggest business, HIH Insurance was at completion of key acquisition spree. With a total of $8.1 billion asset at end of the financial year 2000, HIH Insurance was perceived as a reliable and robust firm (HIH Royal.Com 2003). Nonetheless, private internal information had already begun demonstrating that HIH Insurance’s debt weight and its liabilities were relatively high resulting in real risks of liquidation. Eventually, in the early 2001, HIH Insurance’s unwarranted financial condition was indefensible and it tolerated the prevalent liquidation in the Australian time immemorial with a loss of over $5 billion. The collapse caused huge distress, uncertainty as well as loss to the taxpayers (Percy 2005).
The collapse is mainly attributed by its antagonistic expanded business strategies. The RC provided some insights as to how the form with such ostensibly goo corporate governance could fail or collapse in such an enormous manner. According to Buchanan, Arnold and Nail (2003), the collapse of this firm is related to its inflated and vanity egos, lack of monitoring as well as poor systems instead of the systematic frauds. In this case, numerous executives were said to have broken their tasks as executives and were barred from any other association in the firm’s management for substantial terms and knockout with significant financial fines (Percy 2005). Another event that could have led to HIH Insurance collapse is its aggressive acquisition tactic, culture of not giving and growth-at-all cost notion that led to conflict in between its profit maximisation and execution of sound governance practices.
In essence, In addition, the collapse of HIH was attributed by unsustainable business strategies, poor auditing practices, potentially excessive management compensations, weak corporate governance, ineffective working capital management as well as questionable related transactions (HIH Royal.Com 2003). In essence, HIH failure is related to its zeal of chasing low yielding practices and not saving adequate amount of cash in covering its liabilities exacerbated by its management and executives’ failure to efficiently monitor and enforce outstanding practices.
One-Tel Phone Company inception in the corporate world as one of the telecommunication company was prominent (Trute 2001). With financial support off high flyers, the firm appeared in the right track. Nonetheless, its collapse was very fast with the firm operating only for 6 years. The collapse of this company is attributed by numerous factors with the key aspect being it aggressive acquisition and deficiencies in it governance procedures (Monem 2011). Another event that resulted in One-Tel collapse was it failures in it governance. For instance, its CEO has excessive power over instead of inept BOD, reducing its capability in providing effective control and oversight (Carson 2005). Furthermore, lack of independent of the auditor is also another event that resulted in it collapse since it resulted to conflict of interest between the auditor and the company’s executive due to provision of non-audit services (Allan 2006).
ABC Learning Ethics and Governance
ABC collapse is linked with numerous ethical and governance issues. First, the collapse is associated with poor governance practices where there was poor planning in the company’s operations (Khan 2017). For instance, there was not organizational hierarchy leading to absence of transparency in its operations; hence, liquidated damages. In addition, there was poor governance practice resulting from inorganic or excessive expansion based on debt and equity margin where the high amount of the loan made the firm risky since its leverage was far much beyond its capability of repaying the loan (Rush & Downie 2006). There were also some ethical issues such as entertainment of nepotism by the CEO including his brother-in-law in major expenditures.
Ethics and governance practices of One-Tel
In One-Tel case there were some ethical issues that could be pointed out which could be linked with it financial stress (Trute 2001). For instance, the auditor was not honest and straightforward in conducting their duties whereas there were numerous unqualified reports that were issued each year. In addition, the auditors failed to observe objectivity while auditing the financial statement which is a key requirement for any auditor (Monem 2011). This could be also linked with the current financial stress experienced by the company. In spite of it ostensibly secure financial status; the company had dangerously insufficient corporate governance procedures (Reza 2009). For instance, its two CEOs had excessive power on its directors to an extent that it had regular, designated director in place. Basically, its CEO as well as other executives were acting as directors while its non-executives have insufficient oversight and monitoring of the administration (Allan 2006). These issues are said to have attributed to its recent financial stress. In essence, there were numerous ethical issues pointed out in One-Tel scenario ranging from lack of independence from the auditors to the non-executive which could have also attributed to the company’s financial stress (Carson 2005).
Ethic and Governance of HIH Insurance
HIH Insurance is described of having some conservative corporate culture and some glaring governance deficiencies that led to its collapse (Buchanan, Arnold & Nail 2003). In addition, HIH governance was poor since the company lacked any independent director where three of its directors were former partners at its auditors (HIH Royal.Com 2003).
Conclusion and Recommendations
In conclusion, based on the above analysis of the three scenarios, it is clear that the collapse of the three firms were mainly attributed by numerous aspect or events ranging from poor or failure in corporate governance, aggressive expansion to unethical practices of the directors and auditors. One overall, the collapse of HIH, One-Tel as well as ABC Learning were attributed by unsustainable business strategies, poor auditing practices, potentially excessive management compensations, weak corporate governance, ineffective working capital management as well as questionable related transactions. In spite of these aspects, their failure was related to their enthusiasm of pursuing low yielding practices and not saving adequate amount of cash in covering their liabilities. In essence, the major event that resulted in liquidation of HIH Insurance, One-Tel as well as ABC Learning is aggressive expansion or excessive liabilities. This is mainly based on the fact that aggressive expansion resulted in increased debt to equity margin or increased liabilities which in turn made the firms risky since their leverage was far much beyond their capability of repaying the loan. This means that proper corporate governance is crucial in any organization in facilitating good financial management and practices to avoid any event where liabilities become more than the amount of return being generated.
Allan, G 2006, The HIH collapse: A costly catalyst for reform. Deakin L. Rev., 11, 137.
Buchanan, B, Arnold, T & Nail, L 2003, Beware of the ides of March: The demise of HIH Insurance.
Carson, V 2005, "One.Tel auditor denies conflict". The Australian (Canberra, A.C.T.) (1038-8761), p. 22; Viewed at 5th September 2017 from; https://0-global.factiva.com.library.ecu.edu.au/ha/default.aspx
HIH Royal.Com 2003, The failure of HIH insurance. Viewed at 5th September 2017 from; https://www.hihroyalcom.gov.au/finalreport/Front%20Matter,%20critical%20assessment%20and%20summary.HTML#_Toc37086537
Khan, IR 2017, Critically evaluate the main reasons for ABC Learning’s collapse; Viewed at 5th September 2017 from; https://supervmarketing.blogspot.co.ke/2017/05/critically-evaluate-main-reasons-for.html
Monem, R 2011, ‘The One. Tel collapse: lessons for corporate governance,’ Australian Accounting Review, 21(4), 340-351.
Percy, K 2005, Rodney Adler receives prison sentence; Viewed at 5th September 2017 from; https://www.abc.net.au/worldtoday/content/2005/s1345296.htm
Reza, M 2009, ‘The Life and Death of OneTel’, Griffith University. Paper presented at the American Accounting Association Annual Meeting, 2009. Viewed at 5th September 2017 from; https://www.afaanz.org/openconf.../request.php?module
Rush, E., & Downie, C. (2006). ABC Learning Centres. A case study.
Teen, YM 2012, The ABC of a corporate collapse; Viewed at 5th September 2017 from; https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/
Trute, P 2001, "One.Tel to close within 21 days", Daily Telegraph, 6 June. Viewed at 5th September 2017 from; https://www.news.com.au
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