Decline Of ABC Learning HIH Insurance Essay

Question:

Discuss about the Decline of ABC Learning HIH Insurance.

Answer:

Introduction:

Winding up is more popularly known as the process of liquidation of the company that is associated with the proceedings through which all the affairs of the business are wound up. Its rights and liabilities are discerned and the claims of the creditors are settled either completely or to the extent as it may be warranted by the assets of the company. Large number of the companies functions at the discretion of the board of directors (Carlonet al. 2015). The board of directors forms the central part of the management of the company. They possess of powers of undertaking the decision for the company. The decisions are usually undertaken in context with the interest of the shareholders and stakeholders of the organization. Decision-making forms the effective tool in determining the longevity of the organization as it forms the essence of survival for the organization.

The effective operations of any organizations is generally regarded the corporate governance. The effectiveness of the performance of an organization is based on the principles, guidelines and the provisions of numerous statutes that is prevalent in a nation (Macve 2015). Failure to abide by the principles of governance will reflect an organizations incapability of complying with the guiding principles of effective governance. The study is based on the determining the winding up of the companies such as ABC Learning, HIH Insurance and One Tel phone company (Atrill and McLaney 2016). The report also focuses on the reason behind the liquidation of the above stated companies together with the principles of ethics and corporate governance.

Overview of the companies:

ABC Learning:

ABC learning in the earlier years was viewed as one of the largest company in Australia serving in the areas of educations. The company was listed on the Australian Securities Exchange having a market capitalisation of the approximately A $2.5 billion (Barkeret al. 2014). The company however went into the managerial receivership following the fallout from the subprime mortgage crisis because of the debt repayments to overwhelm the organizations. The auditors failed to sign off on the monetary reports by citing the requirement of recasting the profits of the preceding years.

The company was formed in the year 1988 in Queensland. Ever since the inception of the company it was successful in establishing more than nine hundred centres throughout Australia and New Zealand by the year 2006. During the month of 2006 ABC learning announced that it would acquire second largest child care provider located in United States for a sum of 330 million US dollars together with the acquisition of Busy Bees Group which is viewed as the 5th largest provider in UK (Tricker and Tricker 2015). With this acquisition the company expanded into the UK and US market with a market share of 1 per cent.

One Tel Phone:

One Tel is regarded as the group of Australian based telecommunications companies that was established in the year 1995 soon after the deregulations of the Australian telecommunications industry with most of them are currently under the external management by the court appointed liquidators. The basic business purpose of the company was that the company will be giving more focus on the delivery of better service to meet the wants and needs of the customers (Dimopoulos and Wagner 2016). One Tel attempted to establish a youth oriented image to sell the mobile phone and One.Net internet service. Prior to the collapse One Tel became the fourth largest telecommunications company. The original through process of the company commenced from a very simple initiative of starting a new mobile phone company where an average individual would understand. The company majorly focused on the people and the residential market as opposite to the commercial business. The company wanted the consumer or the regularly person to gain the access of the entire suite of the telephone products which ultimately resulted in high marketing of the company.

HIH Insurance:

The HIH Insurance Company came in to the business of insurance and was regarded as the major insurance company in Australia. Through the years of 1997 and 1998 HIH Winterthur acquired a large number of companies both in Australia and globally. In the year 1992, HIH was listed on the Australian Stock Exchange and in the year 1995, the company sells the stake to the insurer based in Switzerland and ultimately changed the name of the company to HIH Winterthur.This comprises of the Colonial Ltd General Insurance operations in Australia and New Zealand.

The liquidators have estimated that the HIH is total amount of losses stood up to $5.3 billion. Investigations into the cause of the collapse of the company have resulted in the conviction and imprisonment of large number of members of HIH management on numerous charges related to fraud (Pearson 2016). The fall of HIH is regarded as the largest corporate collapse in the history of Australia.

Events that contributed to the winding up and the failure of corporate governance:

HIH Insurance:

The below stated events have resulted the company in to liquidations;

  1. HIH acquired the business of the FAI Insurance that comprises of more investment that is hazardous in the business of insurance. Because of this, the company had incurred a considerable amount of damage.
  2. Another risky event leading to the downfall of the HIH was the entering in the financing of films that ultimately resulted in huge amount of loss of over one hundred million dollar over the year (Morgan 2014).
  3. HIH suffered a huge financial loss when the natural disaster struck at Florida; this ultimately resulted in occurrence of huge amount of debt, which contributed to the loss of HIH business.
  4. Another noteworthy cause of demise of the HIH was the abrupt change in the policy of compensation payment that was paid to the workers working in the Californian industry (Macve 2015). This ultimately contributed to huge monetary loss and fall of HIH.
  5. The provisional liquidators have estimated that HIH has lost over $800 million over the span of six months and this was attributed to the quicker expansion, unsupervised delegation of the authorities and complex structure reinsurance.

One Tel:

The below stated are the following reasons for liquidations of the company;

  1. One Tel has been constantly reporting superior amount of profit and deferred its expenses over the period of three years. The practices adopted in financial reporting was against the standards of accounting and policies of bookkeeping that is generally considered by companies across the world.
  2. The emergence of problems originated from the year 2000 when One Tel reported a loss of $291 million. This resulted the price of share to fall below $1.
  3. The company started to run out of the fund by the end of April in the year 2001 with director Rodney Adler selling 5 million shares for $2.5 million (Geisler and Wickramasinghe 2015). The reported of the administrators report defined that the company became insolvent and had commenced laying off the workforce of 1400.
  4. The liquidation followed a report that sought for the compensation of $92 million from the director of One Tel because the company did not exercise its power with regard to appropriate due care and diligence (Dimopoulos and Wagner 2016).
  5. Another reason that resulted in the decline of One Tel is that the company charged a price of One seventh from the customers in considerations that the company will in future recover the cost of purchase however this did not happened. Soon the company began running into the problems of low cash, which eventually contributed, to the liquidation of the company.

ABC learning:The below stated are the following reasons for liquidations of the company;

  1. ABC learning unexpectedly suffered a fall of 42 per cent in the profit during the second half of 2007 for a sum of $37.1 million and its liability to service incurred a debt of $1.8 billion that ultimately triggered in the fall of company’s share price.
  2. The combined effect of falling share price caused it to fall by 43 per cent to $2.15 after trading with a low of $1.15 (Slade and Prinsloo 2013). By the end of the period of selling the founder of ABC learning had to virtually sell all their stakes of $20 million and $6 million respectively for a sum of 2.7 million. This ultimately led to suspension of trade for ABC learning after the company’s failure to release its earnings for the financial year of 2007-08.
  3. In spite off selling all the assets the company fell into the receivership during the year 2008 following a massive increase in the debt servicing obligations and its auditors failed to sign off the accounts.
  4. The company followed the incorrect method of accounting of its intangible assets such as Goodwill. ABC learning valued its goodwill to $2.4 billion of the licenses and other intangible assets but only charged an impairment of $8.4 million (Krieret al. 2014). As a result of this the future amount of cash flow that was taken for valuation of intangibles were found to be wrong that ultimately resulted in loss of profits by 42 per cent. This could be attributed as one of the prime reasons for the fall of ABC learning.

Ethical Strain:

HIH Insurance:

  1. HIH insurance had acquired the FAI Insurance without gaining the approval from the Board of Directors and instantly Winterthur disposed his shares and simultaneously resigned from the company. It can be concluded that the company suffered from a poor corporate governance (Damiani, Bourne and Foo 2015).
  2. Prior to the liquidation, it can be stated that the company suffered from poor decision making as it entered into the venture that were involved more risk such as financing of film, marine and natural disaster.
  3. The ethical issue that contributed to the demise is that prior to the acquisition the company did not paid adequate attention in carrying out the work with due diligence and it was noticed that there was a constant change in the managerial position (Betta 2016).
  4. Mr William was charged with the charges of improper management of the company, issuing of prospectus with material omission and overstating the profits in the books of accounts for the fiscal year of 1998-99.

One Tel:

  1. By violating the rules and accounting practices, it can be stated that One Tel had effected the compliance ethics
  2. Concerning the operations of the companies, the administrators of HIH failed to monitor the financial performance of the organization and even ignored the areas of investment that contained high risk (Union 2014).
  3. The failure in the adoption of strong pricing strategy by the directors could be considered as one of the prime reason for the liquidation of HIH, which ultimately resulted in loss of income and problems of liquidity (Northouse 2015). It can concluded that the directors failed to act ethically in discharge of business obligations.

ABC Learning:

  1. For ABC Learning one of the prime reason for the liquidation is the incorrect adoption of accounting policies that ultimately led to fraudulent accounting practices. It can be stated that the ABC Learnings ethically displayed a weak bookkeeping practices, which can be altered and modified to suit the business needs (Cornelissen and Cornelissen 2017).
  2. Another ethical issue that contributed to the liquidation of ABC Learning was the rendering of service to the customers. The customers and government concerning the improper rendering of service sued up against the company.

Recommendations:

As evident from the above stated discussion, it is understood that poor corporate forms have forced these companies to suffer losses. Not only monetary factor contributed to the liquidation of the company but ethical issues such as improper management have contributed to their demise. It is recommended that there must be an adequate management practices by giving due recognition to the interest of the stakeholders and shareholders.

Conclusion:

To conclude with, from the analysis it can be depicted that the main cause of liquidation for the above stated organizations was poor corporate governance and incorrect identification of risk in expanding the business. These firms even failed to adopt true and fair accounting practices to locate the areas of risk and financial position. Henceforth, these companies must strive in the interest of both stakeholders and shareholders.

References:

Atrill, P. and McLaney, E., 2016. Financial Accounting for Decision Makers 8th edn. Pearson Higher Ed.

Barker, R., Lennard, A., Nobes, C., Trombetta, M. and Walton, P., 2014. Response of the EAA financial reporting standards committee to the IASB discussion paper A review of the conceptual framework for financial reporting. Accounting in Europe, 11(2), pp.149-184.

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 Netherlands.

Carlon, S., McAlpine-Mladenovic, R., Palm, C., Mitrione, L., Kirk, N. and Wong, L., 2015. Financial Accounting: Reporting, Analysis and Decision Making. John Wiley and Sons Australia.

Cornelissen, J. and Cornelissen, J.P., 2017. Corporate communication: A guide to theory and practice. Sage.

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

Dimopoulos, T. and Wagner, H.F., 2016. Corporate Governance and CEO Turnover Decisions.

Geisler, E. and Wickramasinghe, N., 2015. Principles of knowledge management: Theory, practice, and cases. Routledge.

Krier, P., Parman, A., Piercy, D., Erlandson, J., Keele, R., Hill, S.L. and Erlandson, J., 2014. CODE OF ETHICS.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?.Routledge.

Morgan, J., 2014. Too big to insure? Tabulating the costs of failure. Law and Financial Markets Review, 8(2), pp.103-106.

Northouse, P.G., 2015. Leadership: Theory and practice. Sage publications.

Pearson, G., 2016. Failure in corporate governance: financial planning and greed. Handbook on Corporate Governance in Financial Institutions, p.185.

Slade, S. and Prinsloo, P., 2013. Learning analytics: Ethical issues and dilemmas. American Behavioral Scientist, 57(10), pp.1510-1529.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Union, N.S.T., 2014. Code of ethics. private copy supplied by Bruce Kelloway, assistant executive director, NSTU.

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