ACC701 Financial Accounting- One Tel Phone Company

Answer

Introduction

Over the past years Australia market has faced a major downfall caused by failure and bankruptcy of the organizations dealing in their market. Liquidation is basically the result of thefailure of these organizations and their inadequacy to payout their debts. In the present report, we have taken the case study of three big companies namely as ABC Learning, HIH Insurance and One.Tel phone company. These companies once had a great share in the Australian market but due to poor management and bad corporate governance, they faced heavy losses which in turn lead their organizations to end up with liquidation procedure. Overall debts of companies had been therise and companies found themselves incapable of paying all the debts and lead the way of liquidation. These are the two components which are basically reason behind the failure of corporates. This is nothing but theonly negligence of their management and their poor management skills as well as their unethical behavior towards their work and the organization. Integrity is the basic and foremost feature for working in any corporate. Individuals having a higher position and authority are placed on a fiduciary stake where they cannot work for any personal bias and their individual interests. The report will help in identifying the possible reason which leads to liquidation of these companies. The company may face three type of liquidation which could be compulsory, member voluntary and creditor voluntary.

Overview and analysis

Overview of this assignment consists of 3 categories. The analysis of this report is based on the case study of the companies that faced insolvency has been discussed in this report. The foremost and basic reason behind the downfall and shutting down of these companies are given below-

ABC learning failure

In the case of ABC learning the company was founded in the year 1988 and with the rapid expansion has reached to 43 childcare centers by the end June 2001. By the end of 2005 the company has 697 centers and was planning to 950 centers till the end of 2006. In spite of the rapid expansion the reason behind the failure of the company was that the company fails to effectively manage its expenses.

It is one of the major hype created liquidation in the financial market of Australia. The downfall began long before it was realized by the management of the company. The problem is not only of grabbing the market but there were some quality issues regarding the education providing in the study centers. There was a prescribed ratio for the children to staff. However, it is not possible to make as much profit as was earned by the big centers with the given rules at that time. Therefore, there were certainly in the degradation in the quality of education as there was never enough staff for the children as was actually required by them. Some of the children were disabled while on the other hand some of them are having problems which required them to be attended by the staff which was never beingpossible. In 2003-04 the financial statement of the company showed a harsh position (Wood, 2003). Only 56.7% of the revenues earned by the company were provided to the staffs. The percentage in the case of the small NPO’s was 80%. It was clear that there was some difference in the quality of education provided in centers. In early 2006, there was a continuous hike in the stock prices by the company, due to which paying off of debts on atimely basis was become animpossible task for the company.
The company showed poor standards meticulous model of infrastructure to their clients in which lacking has been witnessed in the overall process which in term violated ethical & governance part. Subsidies given by the government and another private player to the company made the things more harsh and difficult. The government of Australia has minimized its support and supervision over adifferent period of time which resulted in increased cost debts. ABC learning group has made its initiatives to receive anchorage to fund its operations, due to which the company debts has risen by more than $1 billion. In addition to this, thecompany also surpasses the risk of non-payment of employee’s claims which are in atotal of $20 million over the span of time (Teen, 2012).

Cut throat competition and ineffectiveness of management resulted in the downfall of the childcare group company. This crisis revealed the malpractices used by the giant companies. The excess part of the assets of the company consisted of intangible assists in form of operating licenses. Analyst of the company showed a high value of those operating licenses (intangible assets) while bringing them to rectification it was discovered that those intangible assets were of no value in actual monetary terms.

This window dressing of financial statements of the company was done with the intention of gaining market reputation and anupward trend in themarket valuation of the organization. The auditor and the key management were found responsible for the act of not disclosing material facts to stakeholders. The management of the company was indulged in attaining personal benefits which in turn affected the growth of the organizational growth.

HIH Insurance group failure

The HIH insurance was the publicly listed company in Australia and prior to the collapse in 2001 was the second largest insurance company operating in the country. The main reason behind the failure of the company was due to lack of corporate governance which has led to manipulation in the financial statement of the entity. This creates the fake picture of the company by overvaluing assets and in real the company was unable to meet out its liability.

The financially sound insurance sector can be a supporting pillar of economic growth and it can be supported by the risk management capability, allocation of resources, and mobilization of long term savings or deposits while on the other hand,HIH Insurance group failure splotches a black paint on the Australian stock market. Spontaneous increasing debts were the main reason behind the shutting down of the organization. Shutting down of the company puts a deep pressure on the economy of the Australian government as the organization was the second largest employment provider of that time (Saville, 2003).By the year 2000 HIH Insurance was one the reliable companies in the market of Australia consisting of high asset value ranging $8.1 billion. The company collapsed with a $5.3 billion overall debt in 2001.

This collapse of thecompany is not happened just because of one reason but it was followed by many other severe reasons like the internal management of the company was found guilty of misconduct and gaining an undue advantage while taking the benefits of their positions. Insider trading was one of the major drawbacks for the dropping of the organization which was founded in the financial statements accounts of the company amounted to $2 million loans to a company.

Financial reports were not made according to their respective FRF’S (Financial reporting framework) but on the other hand, the financial statements were out of the result of window dressing made by the management in the financial reports and the overall actual situation of the organization showcased the worst position of the organization. The management of HIH Insurance group overhyped the financial reports of the organization by which the company could easily get a sound reputation in the financial market (Buchanan, et. al., 2003). The other major reason for the downfall of the organization was to not provide proper claims for the future covering future claims is one of the most fundamental aspects of any insurance company’s business yet by the end of its standing, HIH was in a position where only a negative of 1.7% would be enough to lead their organization to the level of insolvency.

They concealed this by under-reserving and using "financial reinsurance" contracts to turn losses into gains. The financial assets were overvalued and the actual liabilities and contingencies were not considered in the financial statements (Mak, et. al., 2005). Apart from that, the company faced severe substantial losses which in long run affected their going concern, which in turn lead their company to be called off from the market.

One.tel phone failure

The company which was one of the major collapses in Australia was One.Tel Phone Company which was one of the leaders in the Australian telecommunication sector. The reason behind the failure of the company was due to lack of corporate governance as both the CEO of the company has complete control over the organization and was controlling the working of the other key player of the company. Also the company has entered into related party transaction which was reason behind the company failure and the company has gone for the member liquidation.

A decade ago, the One.tel phone was on tremendous hike but the liquidation of One.tel phone leaves a mark on the face of Australian economy as it was the 4^th largest telecommunication companyin Australia at that time, which in term reflects it as a large employment provider for the economy having customer base of more than 2 million with operations across 8 different countries (Parker, 2005). The company, in the beginning, has developed ayouth oriented picture in order to sell the mobile phones and giving one net internet service to its customers (Monem, 2011).

Liquidation of the company went into the year 2001. The factors for theliquidation of One.tel phone were amisrepresentation of financial statements of accounts of the organization, Influence of higher management over the BOD and bad corporate governance by the management & the due authorities having the powers.

At last the company goes for winding up and the foremost reasons for the liquidation being the non-executive director were having a close connection with CEOs due to which they were ineffective in their working (Avison and Wilson, 2002). Investors were totally relying upon the roads created by the management despite fact that they were misleading by the true financial position of the organization by their CEOs and other bodies of the management. Influence of two CEOs over the BOD up to the extent that the BOD was unable to look after the organization; effective control of the BOD has been reduced. The compromise made by the Auditor for his conflict of his interest for provisioning of unofficial audit services provided by him to the organization (Elliot, 2010). And last reason was the nonindependence of the BODs chair due to which BOD was unable to work effectively and control its directions as well as its way of work. Finally, One.tel phone went for the demise having a great reason of bad corporate governance and poor & inferior work ethics.

Conclusion

Recommendation

References

Avison, D. and Wilson, D., 2002. IT failure and the collapse of One. Tel. In Information Systems (pp. 31-46). Springer US.

Buchanan, B., Arnold, T., and Nail, L., 2003. Beware of the ides of March: The demise of HIH Insurance.

Elliot, T., 2010.OneTel...one big debacle. [Online] Available at : https://www.abc.net.au/news/2009-11-20/28324 [Accessed on: 02 September 2017].

Mak, K., Deo, H.N. and Cooper, K.A., 2005. Australia's major corporate collapse: Health International Holdings (HIH) Insurance" May the force be with you".

Monem, R ., 2011. The One.Tel Collapse: Lessons for Corporate Governance. [Online] Available at https://onlinelibrary.wiley.com. [Accessed on: 02 September 2017].

Parker, L.D., 2005. Corporate governance crisis down under post-Enron accounting education and research inertia. European Accounting Review, 14(2), pp.383-394.

Saville, M ., 2003. HIH: The Inside Story Of Australia's Biggest Corporate Collapse. [Online] Available athttps://www.smh.com.au. [Accessed on: 02 September 2017].

Teen, M.Y., 2012. The ABC of a corporate collapse. [Online] Available at : https://governanceforstakeholders.com [Accessed on: 02 September 2017].

Wood, D.F., 2003. ABC of learning and teaching in medicine: Problem based learning. BMJ: British Medical Journal, 326(7384), p.328.