Large Corporate Collapses: Analysis of Allcon Finance Group and Beechwood Home Builder - Case Study Example

Large Corporate Collapses (Allcon Finance Group and Beechwood home Builder) Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction World over in the recent past, has been big outcry on how big investors have lost the money by investing in those projects that cannot withstand the dynamics of the business environments. Large and very well know companies both in Australia and the rest of the world have collapsed for failing to sustain themselves by paying their debts as required. Some of the corporate bodies in Australia that have collapsed and this report will pay particular attention to include Allco Finance Group in the financial sector and Beechwood Home Builder in the construction sector. On the other hand, the well known globally corporate bodies that have collapsed include Enron and WorldCom both from the United States. To some extent the process of accounting and the ethics in the accounting profession, have been blamed on the mishap that these corporate bodies are in. this is more especially in regard to reporting its financial performance. The purpose of the report 1. First, to identify two corporate bodies that have collapsed in Australia in the recent past and a brief overview of what their failure entails 2. Second, discuss what warning signs of impending corporate disaster were missed 3. Discuss governance practices that were breached 4. Discuss what role did the accounting profession play in the financial reporting of these companies 1. Collapsed corporate bodies Allco Finance Group Allco Ltd collapsed in 2008 following a debt of $1.1 billion. The company syndicate came into the open when the Commonwealth Bank which Allco owes about $500 million gave up its rescue mission and put the firm under insolvency under Ferrier Hodgson Firm as the receivers of the group. The work of the receiving firm was to break the company assets and sell them to pay its debts. The fall of the company that was in a very spectacular position in the financial industry, came as a surprise to many of the investors. In 2006 the company was worth about $5 billion and its two major shareholders David Coe and John Kinghorn were the market darlings. The failure of the Allco Finance Group had started in 2006 when the company had invested $300 in a private equity with Qantas Airline. Later on, after eight months the company posted a profit of $211.7 million. Immediately, this realization led to credit crunch when the company shares dived and financing banks were forced to review their loans with the company something that led many of the investors dump their shares for the fear of losing financially (SmartCompany 2012). Beechwood Home Builder Beechwood home builders collapsed and put into receivership in 2008. At the time the company was being put into voluntary administration and receivership, it owed $20 million to the clients in form of unpaid debts. The company was one of the most successful and advanced construction companies in the country and was owned by Larry King a well renowned entrepreneur. The company was put into receivership by its largest creditor BankWest who the company owed $10 million in debt interest. The remaining 50% of the debt was up for grab by the other creditors to the firm. Majorly, it had been pointed out that lack of fair trading and more especially with regard to financial reporting was the major cause of the collapse of this firm that had been successful in the construction industry for over years (SmartCompany 2012). 1. Warning signs missed by corporate bodies According to The Australian Financial Review reports, Allco’s fall from its position was very questionable and if for sure it was real performing as reported by its accounts. The company was estimated to be worth $5 billion by 2006 and was on top in terms of profit making in the financial sector. This is the first point where the question could have been raised as to how the company was doing its reporting and if for sure it was meeting its financial obligations especially in terms of paying its debts. As Adam Schwab puts it, there are those financial engineering boom-years when the cunning bankers and accountants report on large profits but do not on the savings that are there and which are being blown away through dubious means. In his book, the Pigs at the Trough, Adam Schwab uses an example of a young who built a childcare empire on sand which may seem very attractive but very unstable and can easily be blown away during bad weather to show how businesses are quick in making everything look good for short-term benefits without looking into the future sustainability of the business (Schwab, 2010). Second, the other sign that had gone without being noticed took place during the decision to invest $300 million in the private equity bid for Qantas was made. This is because, even though idea looked lucrative given the performance of the Qantas Airline, it was not clear how the investment decision was made. Perhaps, this could have been informed by the speculation that Qantas Airline was to be very successful in the awakening of penetrating into different global markets. However, this never came to be, as the world financial crisis was on the looming. According to Adam Schwab, this was a sign of greed and something that has contributed greatly into the Worst World Economic Crisis since the great recession. This happens when investors make quick decisions to maximize their profits without taking into account the effect of such behaviors to the ordinary investors. What this means to the business is to try and create good business times also known as “boom times” on very shaky grounds according to Schwab where most fortunes only exist on papers (Schwab, 2010). In the case of Beechwood Home Builder, the sign that was clear that everything was not going the right direction in the company is the number of complaints that had been labeled against the company by different stakeholders. By the time the company was put under receivership 119 complaints had been launched against it through the Office of Fair Trading. The cases reported against the company involved those of not paying the creditors, defaulting bank loans, insurance payment and payment of dividends where most claimants were of the view that equity was not being applied in paying dividends to the shareholders (SmartCompany 2012). 1. Governance practices that were breached Governance practices in the corporate world are important in making sure that the business remains focused on what his objective is by remaining ethical in its endeavors. In other words, governance practices outlines what the company stands for and how it plans to achieve that. Governance practices also touches on accountability and transparency and how all stakeholders should be involved. However, in the two cases, it can be argued that a number of areas especially those that talk about corporate governance have been breached. First and foremost managing margin loans in an organization is a governance issue that should be dealt with, with the seriousness it deserves (Thomson J 2009). Failure to manage marginal loans has been a major cause of collapse of many companies world over. One of the major reason as to why the Allco Finance Group and Beechwood House Builder have been put under receivership is because their chief executives David Coe and Larry King do have huge margin loans as opposed to what they have as personal shareholding. What this means to the two companies is that the executives have taken some of the margin loans to buy shares with other companies like is the case when Michael one of the chief executives of Allcon took company marginal loans to start his own Polo Complex at Queensland. For example, when an executive has a shareholding of $200 million and then takes a marginal loan of $20 million might not be a big problem, until when the shares lose value and drops to $50 million and making it very difficult to pay the marginal loan. In this case, the company is likely to lose significant ground given the direction of share trading which will be caused by the activities of the executives (SmartCompany 2012). 1. Role of the accounting profession in the financial reporting of these companies Ways on how accounting profession contributes to corporate collapse has been discussed extensively. According to Professors Frank and Graeme (2007, p 4) argue that accounting has been a major problem in many corporate bodies. First, accounting has been blamed on indecent disclosure of company performance and progress reports. For example, accounting alone is not sufficient in dealing with the complexities that surround the modern world of business. This is because some businesses are large and complex whereby some accounting costs are absolutely big and shareholders are unwilling to bear and consequently compromising the information reported about the company by accounting professionals. This can be demonstrated from the case of Allco Finance Group where the company failed to account how much was expected from the investment in Qantas shares and how that will affect the company profits. In general, lack of comprehensive reporting by the accounting professionals carries the blame for giving information that cannot be used for making company strategic decisions. This problem can be blamed both on the incompetence and ethical practices by the accountants (Thomson 2008). Conclusion and recommendation This study has established that corporate failure is a big challenge for many companies globally. Much of the blame has been blamed on the accounting and poor corporate governance. While on accounting has been blamed for not being competent in disclosing all company accounts either because of negligence or lack of expertise, the executive is being blamed for not taking serious earlier signals to business failure and also by misusing their positions to reap from the company they have been entrusted with. With this regard therefore, it is recommended that corporate bodies must always be at top in employing competent accounting staff and also be will to act early in advance whenever, they detect some mishaps in running of the business. References Graeme, D and Frank, C 2007, Mission Im possible, Accounting Regulatory and Ethical Failure, London, Cambridge University Press Schwab, A 2010, Pigs at the Trough, Sydney, John Wiley & Sons. SmartCompany 2012, Finance giant Allco placed in administration, Retrieved on 25th September 2012, available at: http://www.smartcompany.com.au/Free-Articles/The- Briefing/20081105-Finance-giant-Allco-placed-in-administration.html SmartCompany 2012, NSW home builder collapses, retrieved on 24th September 2012, available at: http://www.smartcompany.com.au/Free-Articles/The-Briefing/20080515-NSW-home- builder-collapses.html Thomson, J 2008, 10 ways to lose your business in a downturn, Retrieved 25th September 2012, available at: http://www.smartcompany.com.au/Premium-Articles/Top-Story/20080331- 10-ways-to-lose-your-business-in-a-downturn.html Thomson, J 2009, 25 Corporate Collapses-and lesson learnt, Retrieved on 24th September 2012, available at: http://www.smartcompany.com.au/strategy/20090212-25-corporate- collapses-and-the-lessons-learnt.html Read More