Financial Stress in Australian Companies: ABC Learning, HIH Insurance and One Tel Companies - Case Study Example

FINANCIAL STRESS IN AUSTRALIAN COMPANIES: ABC LEARNING, HIH INSURANCE AND ONE.TEL COMPANIES Name Name of the Tutor Date of Submission EXECUTIVE SUMMARY This report provides an evaluation and analysis of three companies in Australia that went into liquidation. The three companies are ABC Learning, HIH Insurance and One. Tel Phone Company. The events that led up to the liquidation are narrated and analysed. A discussion on ethics and governance in explaining the company’s financial stress is outlined. The aspect of liabilities as a major factor contributing to the liquidation of the company is also explored. The paper further gives recommendations on what needs to be done by companies to avoid failure. TABLE OF CONTENTS EXECUTIVE SUMMARY 2 2 TABLE OF CONTENTS 3 1.0 INTRODUCTION 4 2.0 EVENTS THAT LED TO COMPANY FAILURE 4 2.1 ABC Learning 4 2.2 HIH Insurance 5 2.3 One.Tel 6 3.0 EFFECTS OF ETHICS AND GOVERNANCE ON COMPANY’S FINANCIAL STRESS 8 3.1 Ethics and Governance in ABC Learning 8 3.2 Ethics and Governance in HIH Insurance 10 3.3 Ethics and Governance in One.Tel 11 4.0 RECOMMENDATIONS 12 REFERENCE 13 1.0 INTRODUCTION Recently, quiet a number of well-developed and thriving companies have gone into liquidation as when they fell due, they were not able to meet their liabilities (McCarthy 2011.p.110). In Australia, there exist three such companies: ABC Learning, HIH Insurance and One.Tel phone company. This paper focuses on these three companies and analyses their road to liquidation as well as the ethical and governance issues that propelled them to fail. 2.0 EVENTS THAT LED TO COMPANY FAILURE 2.1 ABC Learning ABC Learning was a company in Australia which at one time was the largest provider of services of early childhood education in the whole world. ABC Learning was listed at the Australian Securities Exchange with a market capitalisation of $2.5 billion as at 2006 (Chen.2014. p.36) ABC Learning was founded in Ashgrove, Queensland in 1988. It expanded rapidly and had 43 centres of childcare 2001. It had 697 Early Childhood Education Centres by 2005, throughout New Zealand and Australia. It forecasted that it would have 950 Early Childhood Education centres in New Zealand and in Australia by 2006 (Monem.2011.p.340-351) ABC Learning was considered a company that was highly profitable in FY2004/5(Chen.2014. p.36. It recorded a net profit after deduction of a tax of $52.3 million and the revenues totalled to $292.7 million. In addition, the company was considered to have a market capitalisation which was about $4.1 billion. At around 2005, the company showed no signs of slowing in its financial momentum. Despite it flourishing, in 2007, there was a drop in its profit of about 42% to $37.1 million and this was totally unexpected. This triggered its decline. In addition the company was unable to service a debt of $1.8 billion. The share price began to fall to 43% to $2.15 after they traded at a low $1.15. At the end of these sales, the founder of ABE Learning, Eddy Groves together with the wife sold their stakes of 26 million whereas Martin Kemp the director, did away with 2.7 million shares (McCarthy 2011.p.110). ABC Learning trading of shares was thereafter suspended in 2008 in August when the company was unable to release to the public its earnings 2007-8 financial years. Despite the company selling off its assets, it fell in receivership in 2008 after they increased their obligations to debt servicing and the auditors were not able to sign off its accounts. The government put $22 million in ABC Learning to keep the childcare centres opened till end of 2008. The company thereafter was delisted from the S&P/ASX 200 (Australian Broadcasting Corporporation 2005.p.3) Creditors then voted to liquidate the ABC Learning company in 2010. A total of 570 ABC early Childhood Learning centres were taken by Goodstart, which is a consortium of Mission Australia, the Brotherhood of St Laurence, Social Ventures Australia and the Benevolent Society (Monem.2011.p.340-351). 2.2 HIH Insurance HIH Insurance once Australia's second biggest insurance company was founded by Michael Payne and Ray Williams in 1968. It had assets worth $8 billion Later in 1971, HIH Insurance was acquired by a British company called CE Heath PLC(Clarke & Dean.2005,p.15-39). HIH Insurance off set its assets with potential insurance claims that were against the company and several debts which led to this firm being left with net assets worth $133 million on paper. The board were forced to appoint a provisional liquidator who would take charge of HIH Insurance and control his 17 entities in the year 2001. The board had hopes that this would give the firm time for reviewing its operations and assessing its position financially. HIH was scheduled to announce the firms result for the year ended 31 December 2000. Because the announcement was delaying, rumours started spreading that the firm’s result for the first half was of a $100 million loss. The figure rose to $200 million loss then $300 million loss. Finally the results were never announced but McGrath went ahead and announced that he had been appointed the provisional liquidator, he then estimated that the firm had made a loss of over $800 million in the last six months to December 2000. McGrath attributed HIH Insurance failures to greed, reckless management, rapid expansion, false reports, self-dealing, unsupervised delegation of authority, fraud, under-pricing, extensive as well as complex reinsurance arrangements, reserve problems and incompetence. Today the insurance company is a complete run-off and the demise of HIH insurance is described as the biggest corporate failure in the history of Australia. The liquidators of HIH Insurance have estimated that it collapsed with a loss of $5.3 billion (Monem.2011.p.340-351). 2.3 One.Tel One. Tel is made up of groups of telecommunications companies in Australia. It was developed by Brad Keeling and Jodee Rich. It was also backed by high-profile individuals that is the Lachlan Murdoch and James Packer families who were members of the company board (Chen.2014. p.36). One.Tel became the fourth biggest telecommunications company in Australia. The firm was firmly established in the market of telecommunications and it operated in Hong Kong, Amsterdam, Australia, Frankfurt, Zurich, London and Paris. Between the years 1998 to 2000, the customer base of One.Tel more than just tripled. It went to 2.2 million and its revenues doubled to about $653 million (Agrwal &Chadha.2012.371-406). In the years 1995 to about 1999, One.Tel simply flourished. It floated at the Australian Stock Exchange, it was trading $2 per share in the month of November 1997. $208 million was the Initial market capitalization. Packer turned a $250,000 investment into a $17 million investment, FAI turned $950,000 investment to a $51 million investment and two individuals Rich and Keeling also had combined stake which was worth over $100 million. To add to this, One.Tel paid out dividends of $4 million and paid $2.85 million as consultation payment to Packer, Rich, FAI and Keeling. An amount of $16.9 million was also paid to original shareholders after One.Card and One.Net businesses were sold (Agrwal &Chadha.2012.371-406). One.Tel got a profit of $8.8 million before tax in the year ended 30th June 1998 and it bought mobile spectrum, Consolidated Press Holdings and $43 million worth shares that belonged to FAI just to mention but a few. In the year ended 30th June 1999 they reported a profit of $9.8 million before tax. The 23rd November 1999 was one of the greatest in the history of One.Tel. as Lucent Technologies made an announcement that it was going to finance and build for One.Tel a GSM European mobile network at up to US$10 billion cost. In the same month on 26th, the market capitalization of the company reached A$5.3 billion thus it became one of the largest company in Australia's biggest 30 companies (Australian Broadcasting Corporporation 2005.p.3) Things took a different turn in June 2000 when One.Tel made a loss of about $291 million and the price of shares went down to under $1. In 2001, it was reported that One.Tel had become insolvent (Australian Broadcasting Corporporation 2005.p.3) 3.0 EFFECTS OF ETHICS AND GOVERNANCE ON COMPANY’S FINANCIAL STRESS Researchers have come up with findings on what must have led to the failures of ABC Learning, HIH Insurance and One.Tel. The findings touch on ethics and governance in these three companies (Agrwal & Chadha 2012.p.371-406). The following discussion focuses on issues of governance and ethics in the failure of ABC Learning, HIH Insurance and One.Tel companies. 3.1 Ethics and Governance in ABC Learning As most operators of community childcare struggled, ABC Learning rapidly grew, made hefty profits and reported fantastic figures. This raised questions on how this was possible. A very big discrepancy was noted between the success story of ABC and the brutal reality of financing child care as highlighted by a submission that was made to the Senate childcare. McCarthy (2011.p.110) also attributes the fall of ABC to discrepancies realised in financial information that the company provided. According to Chen (2014.p.36), the major causes of failure of ABC Learning were: ambitious and unrealistic growth, valuation of goodwill and intangible assets and accounting irregularities. It was reported that the problems of corporate governance included the margin loans that was fronted by former chief executive Mr.Groves in order to invest into the business. Such high debts caused the decline. ABC was exposed to public eye when its financial crisis begun in the year 2008 and malpractices behind its fantastic boom was coming to light. The provided financial information gave a grave picture. In the company’s balance sheet, the assets side constituted 72%-81% intangible assets and intangible assets consisted several operating licenses (Bhagat & Bolton.2000. p.98). The government became concerned about the operating licenses and set up commission for investigation called Australian Securities and Investment Commission (ASIC). Consequently, ABC failure of effectively valuing the company’s operating licenses was questioned by the commission. They in defence claimed that the value of licenses was high but in real sense the licenses had no value trading in the sense of the term. The company had unethically used the valuation of the license to attract the traders in market and thus raising high values. It is therefore clear that ABC Learning was unethical in following malpractices in maintaining their accounts (McCarthy. 2011.p.110). Another ingredient that caused the liquidation of ABC was presence of related party transactions. Mr. Grooves the founder of ABC was unsuccessful as a manager and under his governance, the company was not following corporate governance rules. During his reign there existed various related party transactions for example Queensland Maintenance Services (QMS) which was run by Frank Zullo brother-in-law to Mr. Grooves received a payment of $74 million for some works in ABC (Monem.2011.p.340-351). In conclusion, ABC Learning went into liquidation and liabilities was indeed a major factor contributing to the liquidation of the company the high debts and the discrepancies in its accounting and the policy change of Australian Government accelerated its fall. 3.2 Ethics and Governance in HIH Insurance Poor governance and unethical practise are the major factors that led to the collapse of HIH Insurance. The leaders responsible for the failure include the auditors and the regulators of the company and the Government (McCarthy. 2011.p.110). . In addition, the collapse of the company was evidently because of large amount of debt that was incurred. HIH Insurance was unable to pay the huge debt. It is usually the responsibility of company accountants to provide ethically reliable, correct and relevant information. However, for HIH Insurance case, the assets were measured in exaggeration while the liabilities were under-exaggerated in order to make the company appear more profitable than it actually was and thus increasing HIH market value (McCarthy. 2011.p.110). According to Kaye(2016.p.37-41), the corporate culture was mismanaged. HIH Insurance itself had no objective of performing a fraud, however, corporate culture pushed managers and the directors conclude in inappropriate and mislead decisions . Clarke & Dean (2015.p.15-39) concluded that the company board failed in decisions concerning major transactions. The committee of auditors lacked professionalism in certain issues, and management board did fail to put an emphasis in their outstanding claims and debts. Another factor attributed to the failure was Ray Wiliams who was Chief Executive Officer of the company who pleaded guilty to recklessness and failure to discharge his duties as the director. (Kaye.2016.p.37-41). In conclusion I think the failure of HIH Insurance was out of a combination of several factors and the company directors, managers, all the board members, auditors and accountants are all to blame for the failure in one way or the other. I would also like to make an observance that liabilities was a major factor that contributed to liquidation of HIH Insurance as the failure resulted in attempts of papering over cracks brought through acquisitions that were over-priced as well as corporate extravagance because there was a belief that the company had money. 3.3 Ethics and Governance in One.Tel If One.Tel was to be judged on standards about good governance, it would be revealed that many of the company’s practices was not compliant with good governance( Agrwal & Chadha.2012.p.371-406) To begin with, there existed discrepancies in documents and records including the trial balances(Kaye.2016.p.37-41). In addition to this, One.Tel had no real-time information on ageing, total number of debtors and debtors ‘risk profile. This suggests weaknesses in the internal control system at One.Tel. It seems that integrity and accuracy of data and financial records was not a priority to the senior management. According to Agrwal & Chadha (2012.p.371-406) the reported earnings of One.Tel was not a representative of the company’s earnings process. The quality of financial reporting was low and the audit quality was also low, being that the quality of financial reporting is related to the quality of edit. This concealed the company’s actual financial distress and performance away from the shareholders and the board .This consequently blocked opportunity so that no remedial actions could be done to avoid collapse. Lastly, One.Tel did not follow the accounting principles in the operation of the board. The composition and activities of the board suggested that just one of the CEOs had too much influence and power on the board and that the board members were given incomplete and selective information about important aspects of the company. ( Agrwal & Chadha.2012.p.371-406). It is therefore important to conclude that liabilities were major factor contributing to the liquidation of One.Tel as seen from the discussions above. 4.0 RECOMMENDATIONS There is need for the boards of the companies to assume a fully strong monitoring role. There should be proper documentation and procedure in corporate matters because the absence of these two facilitates fraud. Self-regulation may fail sometimes and when it does it leaves no other alternative but the court’s involvement. Therefore companies must be wary of self-regulation. The Government must impose higher requirements of accountability to the operators of private sector, and specifically they should establish same type of price regulation as private sectors have to submit to. The top management members in the company should never involve family members into the affairs of the company they are heading. Accountants should be advocates of the firms they are representing. They must always give the right picture of the financial status of the company. The government should pass proper policies that encourage proper governance of firms. REFERENCE Agrawal, A. & Chadha, S. (2012),’Corporate Governance and Accounting Scandals ‘the journal of Law &Economics,48,and 2: p371-406 Australian Broadcasting Corporation. (2005) The Year of Corporate Collapses (Reporter: Alan Kohler) Tv program aired on 21 December, transcript available at http://www.abc.net.au/7:30/content/ Bhagat, S. & Bolton, B.(2000) ‘Corporate Governance and Firm Performance Journal of Corporate Finance, 14,3: 257-273 Chen, CY (2014) 'Bad Heir Day', Fortune, 144, 3, p. 36, Business Source Complete, EBSCOhost, viewed 7 May 2017 Clarke, F., & Dean, G. (2015) Corporate Governance: A case of Misplaced Correctness? Advances in Public Interest Accounting, 11, Corporate Governance: Does any size fit? (Elsevier.JAI.), p.15-39 Kaye, T. (2016) 'TOO BIG TO FAIL', Journal Of The Australian & New Zealand Institute Of Insurance & Finance, 39, 4, pp. 37-41, Business Source Complete, EBSCOhost, viewed 7 May 2017. McCarthy, G (2011) 'The HIH Royal Commission and the Tangled Web of Truth', Australian Journal Of Public Administration, 60, 3, p. 110, Business Source Complete, EBSCOhost, viewed 7 May 2017. Monem, Reza (2011) "The One.Tel Collapse: Lessons for Corporate Governance." Australian Accounting Review, vol. 21, no. 4, pp. 340-351. EBSCOhost, doi:10.1111/j.1835-2561.2011.00151.x. Read More