Over the last few years Australia experienced the increase in collapse of businesses which urged to explore it further and find the main reasons of these failures. As a result, these liquidations made a long-term impact on further Australian business where outstanding liabilities and audit profession were indicated as the main reasons of bankruptcies which led businesses to liquidation (Mirshekary, S., Yaftian, A. & Cross, D. J Financ Serv Mark, 2005). This case study report analyses three major collapses of well-known Australian companies such as ABC Learning, HIH Insurance and One.Tel phone company. This report focuses whether mismanagement of liability or financial audit were the main issues of these major failures. The first part of this report introduces a short prehistory of each company and the main reasons which caused liquidations. The second part focuses on ‘APES 110 Code of Ethics for Professional Accountants’ and corporate governance listing rules whether ABC Learning, HIH Insurance and One.Tel phone company were following or not.
ABC Learning, a childcare centre, was co-founded in 1988 by Edmund Groves and his ex-wife Le Neve Groves in Queensland, Brisbane city. At the beginning it was non-profit organisation which was supported by the government. In early 1996 ABC Learning was managing just 18 childcare centres. After Australian government (in 1997) moved its subsidy to families’ direct payments, it opened doors for ABC Learning for potential growth (Teen M. Y., 2012). In addition, to fund company’s further expansion, ABC Learning was listed on ASX, Australian Stock Exchange, which led to a further growth of the capital. Very fast company’s net profit and share price were growing rapidly and it attracted a lot of new shareholders willing to invest in one of the best performing stock at that time (Sumsion J., 2012). At the beginning when ABC was just listed, it showed just $25 millions of market capitalisation and in 2006 it reached $2.5 billion (Teen M. Y., 2012). In 2006, ABC was already the largest listed childcare company in the world and in 2007 ABC Learning owned at least 2,300 centres in more than five countries such as US, Indonesia, Philippines, Hong Kong with the idea of further expansion into China, New Zealand and UK (Sumsion, J. 2012).
Liquidation and Causes
Regardless of the rapid growth of ABC Learning, the company had some service quality problems due to the shortage of qualified and experienced staff, doubtful budgeting into equipment, food, cleaning which did not meet required standards and an ethical audit (Sumsion, J. 2012). However, the company was more concentrated into rapid expansion by huge acquisitions (which was classified as ‘childcare licences’) rather than into quality of service (McRobert, A., 2009). What is more, company’s evaluation of assets was significantly high as 70% of assets were intangibles and it showed the major accounting issue in the business (Teen M. Y., 2012). According to Teen M. Y. (2012) in late 2017, due to refinancing, almost $1.1 billion of current liabilities were reclassified to non-current liabilities and created a large debt to the company. In early 2008, when the global financial crisis occurred, ABC learning shockingly dropped its profit by over 40% and accordingly share prices decreased by more than 65%. ABC Learning financial crisis was followed by unexpected 60% sales of company’s holdings in US and all in UK. Edmund and Le Neve Groves had to resign (Sumsion, J. 2012). To sum up, the main causes of ABC Learning liquidation were indicated as accounting, business model, capital expenditures and aggressive acquisitions.
In 1968 Michael Payne and Raymond Williams established insurance company under MW Payne Underwriting Agency’s name. Later in 1971 Michael and Ray renamed their company as CE Health Pty Ltd. The main fields where business was operating were: professional indemnity, third party accidents insurance and workers compensation. After over twenty years in 1992 the company was listed on ASX (Australian Stock Exchange) under Health International Holdings (HIH) name. In1995 HIH merged with Winterthur Insurance, one of the largest Swiss companies, and became its company’s name was changed to HIH Winterthur. However, after three years in 1998 Winterthur Insurance decided to sell its holding as was concerned about its operations. After the sale, the company was named under HIH Insurance Limited name. The main policy which company agreed to follow was its expansion and market shares gain. In 1998 HIH Insurance non-executive director Rodney Adler approved purchased of FAI Insurance without any board consultation or report. Unfortunately, it appeared that FAI Insurance assets were overvalued and as a result in 2000 HIH Insurance had to write off this investment worth of $400 million. In 2001 ASX stopped trading in HIH and ASIC (Australian Security and Investment Commission) overtook investigation. HIH Insurance accumulated loss was $5.3 billion (Mirshekary, S., Yaftian, A., Cross, D., 2005).
Liquidation and Causes
One of the biggest business failure of Australia was liquidation of HIH Insurance and as a result Liberal Federal Government established the Royal Commission (RC) which impacted some changes in Australian Corporate Law. RC stated that HIH Insurance failure was related with egos, vanity and poor business monitoring system rather than fraud (Long God ; Associates 2011). Under Corporation Act few directors on HIH Insurance were found guilty of breaching directors’ duties (Hanrahan P., Ramsay I., Stapledon G., 2018). According to Allan G. (2006) bad accounting and poor management were the main causes of HIH Insurance collapse. What is more, by the company’s decision to come back to US market, even a few years ago for the strong reasons they withdraw, shows that HIH did not set up long-term plans and was poor managed. Mirshekary, Yaftian and Cross (2005) adds that HIH failed by purchasing FAI at high valuations without prior debates in the company. Royal Commission identified more accounting failures such as deferred acquisition costs, delayed information technology costs and goodwill and accounting failure for future income-tax benefits (Allan G., 2006). HIH Insurance collapse is also related with auditor failure. Andersen (HIH’s auditor) relied just on internal company’s audit which was inaccurate as the company itself did not follow internal audit policies and procedures such as testing company’s operations or conducting its evaluations (Allan G., 2006). In addition, aggressive expansion and acquisition policy, lack of communication in the company between board lead to HIH’s liquidation (Long God ; Associates 2011).
The One.Tel was established in 1995. At the beginning, One.Tel had an agreement with Optus (one of the largest telecommunication company in Australia) that One.Tel will receive all customer calls details, network service, SIM cards from Optus. One.Tel company’s goal was to attract more customers by cheap and profitable calling rates. Company was growing fast by increasing its customer base from 1,000 to 160,000 just in two years and reached sales revenue of $148 million. However, since 1996 some disputes start developing between Optus and One.Tel as they also were main competitors for subscribers. In 1997 One.Tel was listed on ASX (Australian Stock Exchange) and by the end of the year One.Tel had over 400 dealers and more than 200,000 customers in Australia. Soon after in 1998, One.Tel expanded to London, Paris, Amsterdam and Los Angeles. One.Tal was expecting net positive margin from other products as local calls would do loss. In 1999 company reached its peak making the business worth $5.3 billion. However, One.Tel ambitious and aggressive growth plan led expenses for its supplies and employees grew very fast. In early 2000 only expenses for telecommunication licences was worth of $523 million, which was ten times more than Telstra, Vodafone or Optus would spend. After that very rapidly One.Tel was running out of cash reserves which led to resignation of two company’s CEOs, Brad Keeling and Jodee Rich. In 2001 one of One.Tel non-executive director Rodney Adler sold his shares and One.Tel went to liquidation (Monem, R. 2011).
Liquidation and Causes
In 2001 One.Tel phone company’s collapse was one of the major corporate failure in Australia. At its peak One.Tel had annual sales of $653 million, over 2 million customers, was operating in eight countries and was in the fourth place between the largest telecommunications companies in Australia. One.Tel failure was related with inaccurate financial policy, aggressive growth, week corporate governance, strategic management mistakes, lack of management communication with board and questionable quality of audit (Monem, R. 2011). Long God & Associates (2011) adds that One.Tel had unqualified corporate governance structure were only two executive officers had the main impact on board of directors and never had a regular chairman in the place. Company’s audit, remuneration committees, corporate governance and management were run by executive directors and COEs. What is more, the largest investors of the company relied too much on One.Tel COEs and executive directors and failed in passing interest into management structure. The other major problem was that non-executive directors and board of director’s chair were non-independent and audit faced a conflict of interest (Long God & Associates, 2011). Financial reporting was another major problem. One.Tel by investing in its own telecommunication system caused financial tension that company had to hide its losses by converting its expenses into capital expenditure. These failures led to reforms such as ‘the CLERP 9 Act’ which were created later in order to improve financial reporting and audit quality (Allan G., 2006). In case ‘ASIC v Rich’ ASIC claimed that defendants breached their duties by assessing and informing boars about real financial position (Hooper M., 2011).
ABC Learning, HIH Insurance and One.Tel, shared some common problems which led them to the liquidation, such as poor corporate governance, mismanagement, unstable business strategies, week auditing, excessive compensations to managements, questionable transactions, high liabilities and aggressive acquisitions and financial reporting. The collapse of three big companies showed importance of strict implementation of corporate governance practice (Long God & Associates, 2011).
Ethical Consideration. APES 110 Codes of Ethics for Professional Accountants
All three corporate collapses (ABC Learning, HIH Insurance, One.Tel) entailed very technically difficult accounting. (Allan G., 2006). As per Auditing and Assurance Standards Board (AUASB), financial reports must show a ‘true and fair view’ (APESB, 2017). Allan G. (2006) pointed out the importance of accepted accounting standards which all three companies failed to meet.
APES 110 Codes of Ethics for Professional Accountants specifies five main codes of ethics which are accountancy profession distinguishing mark and highlights responsibility of accountants to act in the public interest. The first code of ethic is ‘integrity – to be straightforward and honest in all professional and business relationships’. The second code of ethic is ‘objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgements’. Third – ‘professional competence and due care – to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent Professional Activities based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. Fought – ‘confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the Member or third parties’. And final fifth code of ethic is ‘professional behaviour – to comply with relevant laws and regulations and avoid any conduct that discredits the profession’ (APESB, 2017).
ABC Learning managers ignored quality issues and breached professional competence and due care and professional behaviour ethic codes. HIH Insurance and One.Tel companies’ managers did not comply with almost all five codes of ethics by giving false and misleading information between to the board (Mirshekary, Yaftian, Cross, 2005).