Financial Accounting For Complex Working Mechanism: Case Studies Of HIH Insurance, ABC Learning, And One Tel Company

Analysis

Describe about the Financial Accounting for Complex Working Mechanism.

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The modern world as we know it is full of competitive organizations based on complex working mechanism and this requires the use of extensive machinery and use of capitals from the entrepreneur and the market. Every organization working in an economic environment involves the use of assets and liabilities, and a proper balance of these two traits is useful for efficient working of an industry. If there is an imbalance in these to accounts, it results in a drop in the value of the organization. Every industry needs to maintain its assets more than its liabilities to active in the market and keep profit because very firm enters into the market to earn a profit.

This assignment is based on the case study of the three companies, namely HIH Insurance, ABC Learning and One Tel company. These industries are few examples of Australian companies, which have gone into liquidation due to incapability to meet their liabilities (Thai, 2013).

This assignment evaluates the reasons behind the liquidation of these businesses and the corporate governance and the ethics of these industries and their demerits, which led to the liquidation of these organizations. The study also verifies whether an inability to pay off the liabilities was a major issue behind the liquidation of these industries.

The following assignment in detail deals with the assessment of HIH insurance, ABC Learning, and One Tel company in detail discussing them and their ethics and governance. The discussion and the assessment of these organizations are as follows:

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HIH insurance is one of the fastest growing insurance company in Australia which was established in 1968 and till then it has been growing since. But on 15th March 2001, the company went into provisional liquidation because it was incapable to pay off its debts on time. The collapse of this firm was one of the largest falls in the corporate history of Australia. This fall led to an adverse effect on the society, and the consumers were in a dilemma to invest in the company. From audits point of view, the collapse of this organization was due to the financial stress of the firm, which occurred due to lack of corporate governance practice and having a poor framework for ethics and governance. The main reason for the fall of this company in the financial perspective was due to the inability for the industry to pay off claims of its policyholders and other loans taken by them. The finance resource management of the company was indigent which led to a weak cash position of the company, which was one of the due reasons for the collapse of the company.

HIH Insurance

We all know that every organization entering a market has the ultimate goal of earning a profit in the long run just to survive in the business. So the cash position of any company will determine the financial and operating policies of the organization. Thus to analyze the problem of HIH insurance it is evident to evaluate the operating and the financial activities to determine the true reason for its liquidation (Phillips, 2013).

The liquidation of this company resulted in the establishment of a Royal Commission which was asked to look at the grounds for the collapse of the organization. The results obtained by this commission made adverse reforms in the corporate laws of Australia. The industry having such a remarkable ethics and governance could fall so rapidly was a question to everyone. The report provided that the collapse of the sector was due to arrogance and self-pride and due to an inadequate supervision and lack of system rather than any fraud in the framework. It was discovered that some management employees neglected their duties, and so they were suspended from any involvement in the company indefinitely along with financial penalties.

The company was thought to be an organization with a traditional corporate culture and thus a collapse of the organization due to weak ethics and governance came out as a surprise for everyone. The company was run by an appealing and controlling CEO who always undertook practices of high risk in the competitive markets to earn high revenue and establish its organization as one of the leaders in the insurance industry. Few members of the board of directors of the company were partners of the firm run by the auditor, and thus these directors did not have freedom to take decisions themselves. The other leaders of the industry complained that they were misled about the actual financial position of the company. The industry had an attacking accusation strategy, and thus, there grew a conflict between maximizing profit and adhering to a proper corporate governance. The reason for the bankruptcy of the organization was also found out to be a collision between the entrepreneurs, managers, and debtors inside the organization. A balance between the stockholder and the debtors is necessary to maintain the value of the company and for this purpose, corporate governance is a key factor. Thus the liquidation of the industry is due in large part to the faulty corporate governance of the organization.

One Tel phone company

According to Johnston and Too (2015), the company had a false outlook showing everyone that they progressed according to a structured ethics and corporate governance whereas they had a faulty management framework which led to the collapse of the industry so rapidly. The commission after a series of investigation recommended a lot of governance changes which resulted in the creation of corporate governance principles which would guide all the organizations in Australia. The commission also realized that a good corporate governance is achievable through a mixture of regulatory action, application of company codes of governance and ethics and the method of best practice in the organization. Thus it has been found out he reason for financial stress for HIH insurance company was mainly due to a faulty corporate and ethics governance, which at last led to the liquidation of the enterprise. 

One Tel phone company was one of the leaders in the telecommunication sectors of Australia. The industry was founded in 1995 after the deregulation of the telecom sectors in Australia. The industry created a youth based image to market their product of phone and internet services.  But later in 1999, this industry also started to face problems like HIH insurance and the problems which led to their liquidation was also due to an inefficient corporate governance system. The company was in operation in across seven countries when the industry fell with annual sales of around AU$ 650 million approx. 

The company was in a safe financial condition, but the only problem within the organization was their inadequate governance structure. The two CEOs of this organization had an immense authority over the board of directors that the organization never had a constant Chairman in position, which leads to an ad hoc based Chairman which was held by the CEO s or the executive directors according to the situation. The non-executive directors were free from supervision, which led to the lapse in the management system. Such mistakes led to weak corporate governance and wrong auditing practices because the executive directors and the CEO controlled all of these (Durie,  2013).

Thus, One Tel broke down due to a large number of failures in the corporate governance. The primary reason behind this breakdown was due to extreme power and authority of the CEOs over the powerless board of directors, which meant that the decisions and policies taken by them were ultimate. Such a situation meant that the board of directors became inefficient and reduced their capacity to render efficient and supervision and control over the lower level management and the employees. The second reason behind One Tel’s demise was the inability of the investors of the organization who were reluctant to look in to the operations of the management and were entirely dependent on the decisions of the CEOs and the directors which overlooked the actual financial condition of the organization. The third reason for the decline of this organization was the inefficiency of the non-executive directors of the organization as they had a close relation with the CEOs, which prompted them from working according to the ethics of the organization. The non-executive directors avoided their responsibilities because they knew all the decisions would be taken by the CEOs. The auditor of the company had a conflicting interest with the board of directors, which was negotiated with the arrangement of non-audit services of the industry. Lastly, the Chair of the board of directors was dependent and thus an adequate supervision of the management control and conduct of the agenda of the board of directors was not possible. Thus from the above analysis, it is clear that the reason for a liquidation of this organization was mainly due to the faulty ethics and corporate governance framework and did not include any liability issue.

ABC Learning was a daycare school situated in Australia with the primary motive to provide training, learning and proper monitoring of infants in the pre school age. ABC Learning was established in the year 1988 and soon became the largest day care center all over the country. The day care school operated in the form of an organization and maintained a corporate management system, which led to the growth of the organization in a short period. The growth was visible from later 90s and the organization had more than eighteen centers whole over the country. The company grew more and more in the later years, and this resulted in an immense increase in the price of the shares in the stock market.

Every organization goes through highs and lows in the span of business, and so ABC Learning’s fortune started fluctuating and started facing trouble. Out of all the reasons, some of the reasons were due to mismanagement of the organization internally. An improper management and corporate governance are one of the main grounds for the downfall of the business. 

The rise of the organization was generally due to the standard of education provided by the other institutions to the children. The rule of maintaining a proper ratio of student to teacher was not supported because this would lead to a fall in the profit of the organizations. The standard of education thus started degrading as there were not as many teachers according to the children in the school. The financial position of the companies though remained in a proper state, but the remunerations provided to their staffs were not adequate. The small non-profit making organizations were more aggressive in paying off their profits to their workers. There was a difference in quality. The corporate chain management of the organization did not expect the shift of these children to ABC Learning. The company went on operating its way and thus resulted in the financial and operating problem in the organization. Another reason in the growth of this organization was due to policies of the Government.

The fall in the economic and financial problems of the organization came into existence during universal financial crisis during the year 2008, which had a long- term impact of the company. The company was aware of the misdeeds it committed during the time of expansion and if it had rectified then, such a time would not have come.

The primary reasons for the downfall of ABC Learning are as follows:

The financial conflict in the organization was one of the major reasons for its downfall. According to ACCC, the destruction of this institution was mainly due to financial miscalculations rather than increased rivalry in the market. The financial mismanagements in the sectors of high debts and abnormal acquisitions was another relevant issue. The company also provided false financial information, which attracted more investors and a good loyalty base in the market for the industry which became unrealistic at the time of global crisis.

At the time of financial problem in 2008, the cracks in the infrastructure of the organization came into limelight, and the ordinary customers became aware of their misdeeds. The subtle crisis opened the eyes of the Government of all the countries, and they became more alert about the malpractices of the organizations. The financial reports and statements provided by ABC Learning showed that their assets consisted of mostly intangible assets like operating licenses etc. The operating license having such a significant part in the asset of an organization made doubt in the mind of the Government and finally the Government decided to set up an investigation team to realize the value of these licenses. It was thus found out that the operating licenses, which the industry claimed to be of high value, in reality, did not have any value at all in the trading point of view. This was a malpractice used by the organization to attract investors from the market to invest in their shares and thus increasing the price of the share. Thus it was determined that ABC Learning was guilty of fraudulent financial practices, and thus the value of all the shares fell, and legal steps were also taken against the organization.

Transactions

The organization was able to rise to such a promising position with the help of related party transactions, but the mistake committed by the organization was due to abidance of the corporate governance rules. There were many related party transactions made by ABC Learning to increase its share price during its booming period. For example, The industry-sponsored the basket ball team named Brisbane Bullets. But the organization confirmed that these transactions were not related to the organization, and there was no concern of the industry regarding these transactions. This example of poor corporate governance led to the extinction of the confidence of the investors in the organization.

Thus it can be seen that ABC Learning grew like a phoenix in a short time span and collapsed like a pack of cards when the damaged structures came into light. This showed that the management of the industry was ineffective to control the growth it was having because it focused on growing avoiding to strengthen its root through proper ethical and corporate governance. So from the above study, it is found that the company collapsed due to financial malpractices, but this mistake was made due to lack of corporate governance (Jones, 2016).

From the above analysis, it is for certain that every organization requires a sound corporate governance internally so that a good supervision and monitoring will eliminate the chances of avoidance of responsibility and also creating a sense of responsibility within the management. The financial stress and liquidation of these companies were indirectly due to a lack of corporate governance because a good supervision and evaluation of these principles by the industries would not have led to this present condition.

Conclusion

The above assessment of these three organizations reflects that all the three industries collapsed due to their ineffective and inefficient ethical and corporate governance frameworks. HIH insurance, ABC Learning and One Tel company each had different problems all together one having a poor governance, and the other two having financial stress due to incapable corporate governance. So it is in the opinion that a proper corporate governance model is essentially required by the organizations for a smooth running of the industries and being competitive in the market.

The best routine for corporate governance is primarily needed to provide good financial achievements and optimize the returns to the investors. The cases of these three industries illustrate that corporate governance is way over the common guidelines in the market.

HIH had a remarkable supervision model, but it was ineffective where as One Tel and ABC Learning disrespected the good principles of corporate governance. All the organizations neglected the periodical evaluation of their corporate governance. Such liquidations of these companies led to the creation of new codes and rules introduced by the Government to avoid such cases shortly conserving the feelings and sentiments of the normal citizen of the country.

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