Corporate Governance failure and Financial risk management in ABC Learning

Question:

Discuss About The Behind Collapse Of These Three Companies?

Most of the people all over the world know the process of liquidations as another name of winding up of businesses. Liquidations refer to the process to wind up all the operations of the businesses (Hanrahan, Ramsay and Stapledon, 2013). In this process, liquidators recognize the assets and liabilities of the companies; and the obligations of the creditors wither fully settled or they are adjusted against assts of the companies. It can be seen that the board of directors are the main operators of the businesses as they are the central part of the company’s governing body. They have the power to take major business decisions and they take all the business decisions by considering the interest of all the stakeholders of the companies like shareholders, customers, employees, investors and others. Effective decision-making process ensures the growth along with the long run of the companies (Singh, 2015).

There is a positive connection between effective business operations and corporate governance of the companies. In every organization, some principles, guidelines and provisions ensure the performance effectiveness of the business organizations. It is the failure of the business organizations in the field of corporate governance in case they fail to comply with the guiding principles of the companies (Xavier 2012). This particular report takes an honest attempt to discover the major reasons of the winding up of the business operations of three of the major Australian companies; they are ABC Learning, HIH Insurance and One Tel. The major financial, corporate governance and ethical reasons are discussed below:

In the initial years, HIH Insurance was one of the major insurance companies when they started their business operations. From the period to 1997 to 1998, HIH Winterthur acquired large numbers of companies all over Australia and all over the world. HIH Insurance got ASX (Australian Stock Exchange) listed in the financial year 1992. In 1995, an insurance company of Switzerland bought all the stake of HIH Winterthur and the name of the company changed to HIH Insurance. This particular deal included the business operations of Colonial Ltd General Insurance in Australia and New Zealand. As per the estimations of the liquidators, the total amount of loss of HIH Insurance was $5.3 billion. Due to the investigation of the cause of the collapse of HIH Insurance, many of the management employees of the company were convicted and imprisoned based on different kinds of fraudulent charges. The collapse of HIH Insurance is seen as the biggest corporate collapse of Australia (Corkery and Taylor 2012).

Corporate Governance failure and Financial risk management in HIH Insurance

Soon after the deregulation of the telecommunication industry of Australia, the inception of One Tel can be seen in the year of 1995 as one of the major telecommunication companies in Australia. Due to the process of deregulation, most of the Australian telecommunication companies are under the management of liquidators. The major goal as well as objective of One Tel was to deliver better service and quality products in order to cater to the demands of the customers. For a short period, One Tel became the fourth largest telecommunication company in Australia. The main initiative of the company was to develop a simple mobile phone company that would be easy understandable to the customers. One Tel put major focus on the Australian residential market instead of focusing on the commercial market of Australia. It is because One Tel wanted their customers to have full access in all types of mobile phones so that One Tel can be beneficial (abc.net.au, 2017).

In the initial years of inception, people of Australia considered ABC Learning as the largest company in the Australian education industry. ABC Learning was listed in ASX with a capitalization amount of approximately $2.5 billion. As a result of the subprime mortgage crisis, ABC Learning had to face some major managerial issues as the company failed to repay their overwhelming amount of debt. In addition, it was also the auditor’s fault as they failed to conclude about previous year’s profit. ABC Learning established in the years of 1988 in Queensland. From the time of establishment, ABC Learning was successful to establish more than nine hundred centers in the regions of Australia and New Zealand by 2006. During the year of 2006, ABC Learning made an announcement about the acquisition of  United State’s second largest child care provider for $330 million and United Kingdom’s fifth largest child care provider, Busy Bee group. In this way, ABC Learning expanded their business in both United States and United Kingdom with a market share of 1% (Sumsion 2012).

The major reasons for the winding up and corporate governance failure of HIH Insurance are discussed below:

1. HIH Insurance made the acquisition of FAI Insurance and these deals did cost the company a huge level of investment above the danger level. This particular aspect largely damaged the financial condition of the company.
2. In can be seen that HIH Insurance entered into the film industry in order to diversify their business. HIH Insurance had to face a loss of over hundred million dollars as the business idea totally flopped (Debbage and Dickinson, 2013).
3. HIH Insurance had to face large amount of financial loss due to the natural disaster of Florida. Due to this, the company had to take huge amount of debts that contribute to huge loss to HIH Insurance.

1. It can be seen that there was abrupt change in the accounting policies regarding the compensations of the employees of the industry of California. This particular aspect resulted in a huge monetary loss for the company.
2. According to the provisional liquidators of the company, HIH Insurance had to face a loss of $800 million in a time span of six months. Some of the major reasons behind this loss are quick expansion, complex business structure and others (Tricker and Tricker, 2015).

The major reasons for the winding up and corporate governance failure of One Tel are discussed below:

1. It can be seen that One Tel constantly reported low amount of profit for a constant period and deferred its business expenses for three years. Moreover, it can also been seen that the adopted accounting principles were against the accounting standards and policies of bookkeeping. These were some of the major reasons for the collapse of One Tel.
2. In the year of 2000, One Tel reported a major loss of $291 million. Due to this massive loss, the share prices of the company fell below $1.
3. It has been seen that at the end of 2001 April, One Tel fell short in the required capital for their business operations. After that, the director of the company, Rodney Adler sold 5 million shares of the company for an amount of $2.5 million. After this period, it has been seen that One Tel became insolvent and they started the process to lay off their workforce of 1400 employees (Meidl, 2014).

1. The liquidator of One Tel demanded clarification on a report that included a compensation of $92 million for the directors of the company. In addition, it needs to be mentioned that the directors of One Tel did not properly exercise their power regarding appropriate due care and diligence.
2. One of the major reasons behind the collapse of One Tel is that the company used to charge one seventh from their customers as they were determined that they would recover the cost of purchase in near future. However, this did not happened as per the company. As a result of this, One Tel had to deal with some of the major financial problems like low cash flow that contributed to the winding up of the company (Meidl, 2014).

The major reasons for the winding up and corporate governance failure of ABC Learning are discussed below:

In the second half of the year 2007, ABC Learning suffered a dip in the profit of 42 % and the amount was $37.1 million. In addition, massive rise in the debts if ABC Learning can be seen for $1.8 billion and the share price of the company decreased massively (Sumsion, 2012).

Corporate Governance failure and Financial risk management in One Tel

It has been seen that there was 43% fall in share prices to $2.15 and the share trading prices was very low that was $1.15. Thus, at the end of the year, it has been seen that the founder of ABC Learning had no option but to sell the shares of the company worth $20 million and $6 million for a combined price of $2.7 million. As the company failed to release the details about the earning for 2007 to 2008, the trading of the company was stopped.

ABC Learning had to face massive problem as the debt level of the company increased massively. In addition, the auditors of ABC Learning failed to conclude the accounts.

For the valuation of intangible assets, ABC Learning adopted the incorrect methods of accounting. ABC Learning values the $2.4 million amount of goodwill and intangible assets by charging only $8.4 million. It contributed towards the 42% fall in the company’s profit (Brennan 2014).

1. HIH Insurance did the acquisition of FAI Insurance without obtaining the approval from the board of directors of the company. This is a major evidence for poor corporate governance of HIH Insurance.
2. HIH Insurance had ineffective decision-making process as HIH Insurance entered into the business ventures that consisted of high risk. Thus, the company had to face financial losses.
3. It has been seen that the directors of HIH Insurance did not carry their work as per due diligence and frequents changes were made in managerial position.
4. Mr. William was largely responsible for inadequate management as the profit of the company was overstated wrongly (Liu, Yao and Hu, 2012).

1. It has been seen that One Tel did not comply with the ethical code of conduct of the businesses. In addition, the company also did not follow the accurate accounting principles. These are major ethical breaches for One Tel.
2. As per the business operations of One Tel, it has been seen that the administration department of the company massively failed in monitoring the financial performance of the organization. In addition, the management of One Tel did not put attention to the high-risk related investment areas of their business. This is a major ethical issue in the company (Prasad, 2012).
3. One of the major ethical issues for the liquidation of One Tel was the failure of the company in the adoption of effective pricing strategy. Due to this, One Tel had to face loss of income along with worsen of liquidity position. From this, it can be observed that the management of the company did not act ethically at the time of business operations.

1. Improper and incorrect adoption of accounting policies was the prime reason behind the liquidation of ABC Learning. Due to this, various fraudulent activities were spotted in the financial statements of ABC Learning. Unethical management of bookkeeping was the main reason of it.
2. ABC Learning failed to render proper service to their customers and this was another major ethical issue in ABC Learning (Bianchi and Drew, 2012).

Conclusion

From the above discussion, it can be seen that there are two major reasons that are responsible for the collapse of ABC Learning, HIH Insurance and One Tel; they are ineffective corporate governance policy and improper financial risk management. All the issues in these three companies are related with mostly these two aspects. Apart from these issues, there is another major issue related to the collapse of these three companies and that is ethical issue. Some of the major ethical issues in these three companies are non-compliance with accounting regulations, accounting fraudulent and others.

Based on the above discussion, some recommendations are provided below:

• It is necessary for the business organizations to implement effective corporate governance policies for the smooth running of the business operations.
• It is necessary for the companies to comply with all the accounting regulations so that the financial risk factors of the companies can be effectively managed.
• It is crucial for the companies to comply with all the ethical code of conducts of the businesses so that any kind of ethical issues can be prevente

References

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