Liquidation of Companies-Free-Samples for Students-Myassignment

Question: Anayse of reasons of Liquidation of Companies-HIH Insurance, One Tel and ABC Learning. Answer: Introduction Each and every company shall work properly and effectively and shall serve the needs of their stakeholders. It is because the company basically survives in the market because of the satisfaction received by the stakeholders of the company. If the stakeholders of the company are not satisfied then the company will not be able to run in the market. If such circumstance prevails then, after sometime, the company gets into liquidation. Similar cases have been happened in the last few decades across the globe. In this report the main consideration has been made in the Australian based companies and for the purpose of the report three companies has been chosen HIH Insurance, One Tel Phone and ABC Learning. All the three companies have been gone into liquidation because of the different reasons. The company shall have ethical climate as the ethics governs the behavior of the personnel working in the organization and along with that shall have good corporate governance. These are two considered as the major pillars for effective working of the organization. With these two pillars and the financial information, the companys history has been discussed. Events That Led To The Liquidation Of The Company HIH Insurance Due to entrance in the high risky areas, the company has gone into the liquidation. First event that has taken place is the acquisition of Fire and all Risk insurance company. With this acquisition the company has incurred the considerable damage claims. Second event is that the company has entered into the insurance of the film financing which again has resulted in the loss of dollar hundred million in the year (OBrien,2008). Next event is that gradually the company has entered into the insurance from the damage caused by natural disasters and the company has suffered the major loss from the Typhoon of Florida. The fourth event is that due to change in the government regulations, the compensation claims of the Workers of California have been increased, due to which the company has incurred the huge amount of losses (Mak, Deo and Cooper, 2005 and Mirshekary, Yaftian, and Cross, 2005). One Tel Company The major cause of the liquidation of the company is the financial irregularity that the company is pursuing deliberately despite of knowing that the practice that the company has adopted is not permissible by the companies. The company is reporting the higher revenue and deferring its expenses over the next three years. Due to this in the future years the company has been forced to report the huge amount of losses. The other major financial irregularity was the company has been paying the compensation to the key managerial personnel at the increased rates regardless of the fact that the company is entering into the losses and the share price has been fallen to 16 cents of the Australian Dollar. The other major event was that the company has been charging very less price from the customers in the view that the company would be able to cover the loss and generate the profits over the period of six months. The company has purchased the per customer bundle of Australian dollar 350 and has charged from the customer only Australian dollar 50 in the view that the cost will be recovered in the next six months on purchase. But the same case has not happened and the company has run into losses. The last event was the poor quality of the audit by the audit firm of chartered accountants as they are signing off the financial statements without looking after the consequences along with the irresponsibility o f the management of the company (Reza, 2011). ABC Learning The major event which has led the company to go for liquidation is that the company has been engaged in wrong accounting of the Licenses and other similar Intangible Assets. The company has in actual made the revaluation of the intangibles and has increased the profit accordingly but simultaneously has made provision of the impairment but it has been calculated without the proper base as the impairment has not event counted as 10% of the recognized revalued cost. While making the revaluation of the intangibles, the company has not estimated the correct future cash flows as in the future years the company has went into the decrease of profits by 42% as compared to the earlier year. The second major event is that the company has been making the profits at the cost of the employees and the quality of service provided to the children at centre. It has been done by providing the low wages and salary to their employees and providing low quality of education and care to the children. The same fact has been argued by the community of Child Care of New South Wales. Ethics Of The Companies HIH Insurance Two ethical issues have been identified. One is related to the Business ethics and another one is related to ethics in compliance. The company violated the ethics in business and ethics in compliance. Ethics in business provides that the company shall enter into such business practices which will increase the wealth of the shareholders and the survival of the company. But the company has violated the ethics by engaging into the more risky areas like Marine, Film financing and the natural disasters (Lipton, 2013). Second business ethics has been violated when the company has acquired the Fire and All Risk Insurance Company at a premium from Rodney Adler, then director of the acquired company. Thereafter Rodney Adler has become the Non Executive director of the company. The acquisition has been made without the consent of the Board of Directors and without carrying and due diligence for the same (Cheng and Seeger, 2012). This has led to the unethical practice in relation to the Business Expansion. It is because the said acquisition has led the company to run in the huge losses. Simultaneously the ethics in compliance has been violated as no due diligence has been conducted and no prior approval has been taken which has led to the default in compliance with the provisions of Corporation Act, 2001 (UK Essays, 2013). One Tel Company Two ethical issues have been identified. One issue is related to ethics in accounting and second issue is relating to ethics in business. First issue is that the company has not following the proper method of billing. This cause is referred to as the major one for the collapse of the company. With the introduction of the Goods and Service Tax in the year 2000, the billing of the company remains pending for weeks and also in most of the bills the amount has been calculated wrongly (Avison, 2012). This has led the companys financial statements incorrect due to which the auditors have refused to sign the financial statements. Second issue in accounting was that the company has been deferring the expenses over their future year which has led to huge losses in upcoming years (Brown and Caylor, 2009). The issue is that the company has been charging the lesser amount from the customer in the view that it will be recovered is wrong and has been considered as futile. It affects the pricing strategy of the management of the company. It depicts that the company has not adopted ethics in business. Two issues have been identified. One is ethics in accounting and other is ethics in services. In the first instance the company has not followed the correct method of accounting of intangibles and has violated the Generally Accepted Accounting Principles and also the Accounting Standards. Second issue is that management of the company has not deliver the best services to the customers and has received several complaints and suits from the different authorities on account of mismanagement of the children as in 2005, one child have fled from the centre after broking the fence. Corporate Governance In all the cases, corporate governance practices are very low but the same have not been reported in the Annual Report of the company or the Corporate Governance Statement. HIH Insurance The basic aspect due to which the company has bad corporate governance and the poor management is that the company fails to identify the risk that has been undertaken by the company and the risk that is associated with the nature of business of the company which is insurance. The first major reason for the corporate governance failure was that the dominant roles of the chief executive officer of the company who is Mr. Ray Williams. He has dominatingly kept all the friends and relatives on the board so that there will be no accountability to the senior management. Through this he has then started mixing the personal funds and the funds of the company together as the company does not have any clear policy about this. Despite of having the policy, the matter came to the Chief executive officer and it is resolved on discretionary basis. The second instance which shows the failure of corporate governance is the establishment of operations in the United Kingdom. The minutes of the meeting of the board of directors have not shown any discussion regarding the opening of office at United Kingdom and no reference has been made with the strategy of the company. With the poor management information system and the irregular accounting system, the companys ability to monitor the operations has been greatly impaired and thus depicts that low corporate governance. The second major reason of the corporate governance failure was that the acquisition of the business in the United States has been made without analyzing the management concern that setting up the operations at United States will be profitable. As a result, the company has incurred the losses of $620 million (Jiangbo, 2003). One Tel Company In this case, the reason for having the bad corporate governance is companys management strategy regarding the price of the company. The company has charged very low and making its revenue deferred over the period of seven months (Morey, Gottesman, Baker and Godridge, 2009). The second reason was the composition of board of directors of the company. Annual report of the company for the year 1998, states that the board has comprised four members, out of which two are chief executive officer Jodee Rich and Brad Keeling and two are non executive directors of the company Rodney Adler and John Greaves. All members were subject to election except Jodee Rich which has ensured that Jodee Rich will remain the chief executive officer of the company. In the year 1999, the board of the company has been increased to eight members. The composition of the various committees Audit, Remuneration and Corporate Governance are the same. The same composition has been followed for consecutively three years. The violation of the accounting standards has shown the inefficiency of audit committee. As per the ASX good governance principles, there shall be clear responsibilities between the chairman and the management of the company. In the board meetings of the company, most of the meetings have been either chaired by Finance Director and Company Secretary of the company and the Chief executive officer of the company. It is in total inconsistent with the ASX governance guidelines. The other major reason is that company fails to disclose the full particulars through the flash report to director monthly basis. This failure has shown the inefficiency and incapability of the board of directors of the company. ABC Learning Being a listed company, the company shall have the proper audit committee, remuneration committee and the grievance committee, etc. But the company does not have the same since its listing at the Australian Stock Exchange. Along with non existence of the committees, the company has been entering into the investment proposals without having the proper and correct violation and without reviewing the investments terms and conditions. The management of the company has not even relied upon the valuation of the proposed investment made by the KPMG, being an independent valuer of the company. For the proposed investment of 123 Centre, KPMG has assessed the value of $30 million whereas the company has purchased the same at the value of $70 million. It depicts that the companys management has not exercised their skill and due care while entering into the investment proposal. The liabilities of the company have been the same for 2007 full year and the liabilities under the head current liabilities has been shifted to Non Current Liabilities. It depicts that the management is not participating effectively in the operations of the company and thus shows the inefficiency of the management of the company. The corporate governance system is very low as the company is providing the child care services by sacrificing the quality of service and thus, leads to failure of the company. Financial Stress And The Role Of Liabilities In all the three companies, it has been observed that although the companies have run into huge losses and expenses, but the main reason of the collapse was the bad corporate governance and the bad functioning of the management of the company in regard to accounting function, strategy making function, pricing function and auditing function, etc. The liabilities have been incurred by the company only because of the aforesaid reasons. Therefore, it cannot be interpreted that the liabilities has been the major factor that have contributed towards the liquidation of the company. Recommendation It is recommended to have the best management policies and practices and due professional care shall be made before opting for any decision for the company. Conclusion The liquidation of the companies in the earlier decades has strongly hit the corporate world across the globe. Every company after that has been putting more focus on the internal control system and on the working of the corporate governance and has started ensuring that the company will have good corporate governance. In all the three companies HIH Insurance, One Tel Phone and ABC Learning, the major reason for failure was the bad management of the functions of the company and also the presence of the bad corporate governance and ethical practices. To conclude, the companys function shall be managed properly and shall have the good corporate governance practices and simultaneously good audit firms shall be appointed which can figure out and disclose all the possible deviations and flaws. References Avison, D. (2012): IT Failure and the Collapse of One.Tel in Traunmuller, R. (ed.): Information Systems: The e-Business Challenge, Kluwer, pp 31-46. Brown, L. and Caylor, M., 2009, Corporate Governance and Firm Operating Performance, Review of Quantitative Finance and Accounting, 32, 2: 133-144. Cheng S and Seeger M, (2012), Lessons Learned from Organizational Crisis; Business Ethics and Corporate Communication, International Journal of Business Management, Vol. 7, No. 12, 74-86 Jiangbo X, (2003), HIH Insurance Limited: Corporate Governance and Corporate Excesses, available at https://www.seiofbluemountain.com/upload /product/201010/2010jjfzh05a8.pdf accessed on 29/08/2017. Lipton P, (2013), The Demise of HIH : Corporate Governance Lessons, EY Journal, 27th, 273-277. Mak, T., Deo, H. and Cooper, K. 2005, Australias Major Corporate Collapse: Health International Holdings (HIH) Insurance May the Force Be with You, Journal of American Academy of Business, 6, 2: 101-110. hekary, S., Yaftian, A. and Cross, D. (2005), Australian Corporate Collapse: The Case of HIH Insurance, Journal of Financial Services Marketing, 9, 3: 249-58. Morey, M., Gottesman, A., Baker, E., Godridge, B., 2009, Does Better Corporate Governance Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set, Journal of Banking and Finance, 33, 2: 254-71. OBrien, N. (2008), Williams walks free today but HIH victims continue to pay the penalty The Australian, p. 5. Reza M, (2011), The One Tel Collapse: Lessons for Corporate Governance, Journal of Australian Accounting Review, pp 1-28 UK Essays. (2013), Collapse Of HIH Insurance available at: https://www.ukessays.com/essays/business/collapse-of-hih-insurance.php?cref=1 Accessed 30 August 2017