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Accounting Finance ACC701

Executive Summary:

There are many necessary steps which should be taken to run an organization effectively. Some key points which should be considered for running an organization are proper business plan, the structure of the organization should be choose rightly, skilled; loyal and dedicated employees should be hired and to go with the flow to make a position in the competition. An organization may face liquidation when the company faces insolvency. By insolvency it means that the company can’t pay the bills owed. And liquidation is the process that brings a business to an end by giving away all its assets to the claimants. The major reason behind the liquidation is management system. The management system holds the executive power of an organization. When the management can’t handle all kinds of pressure and find a better solution for the problems the organization may face the insolvency, that can lead the organization to liquidation. Dishonest activities by the employees and the executive members are also the reasons for the liquidation. And the main reason for liquidation is if a company fails to meet the liability when the fell due. Three renowned company ABC learning, HIH Insurance and One.Tel Phone company faced liquidation because they have not been able to meet their liabilities when they felt due. The reason they gone into liquidation was for ethics and governance system.

1. Introduction:

 The management of an organization is liable for running the organization smoothly. The major responsibilities go to the management for the maintenance of the company. When the company face any kind of problem it is all upon the management to solve the problem and find a way so that they don’t face the problem in future. For ensuring the growth of the organization the management should follow the ethics and corporate governance and they must be able to meet the liability if the company fells due.  And by this way the management of an organization can ensure the long-term growth of the organization.

  1.2 Corporate Governance

 The processes, systems and rule by which a firm is directed and controlled is called corporate      governance.

  1.3 Ethics

  Ethics is a branch of philosophy that involves to make someone’s mind to determine the       concepts of right and wrong. In business ethics refers to the proper study of business policies and act according to the policy honestly.

  1.4 Liquidity

  Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.

2. Analysing the reasons that led the following companies into liquidation:

2.1 ABC Learning:

  2.1.1 Introduction  

  ABC learning was an Australian company which provided early childhood education service. It made their name listed on the Australian Securities Exchange reaching the asset worth of A$ 2.5 billion. It was listed in the Australian Securities Exchange in the year 2006. ABC went into liquidation in the year 2008. The ABC learning was founded in the year 1998 in Queensland. The company expanded thoroughly and by the year 2001 it had 43 childcare centres. After 2005 the ABC learning had nearly 697 early childhood education centres throughout the Australia and New Zealand. It purchased the third largest childcare operator in the US in the year 2005. The name of the operator was Learning Care Group Inc. That had almost 467 centres in the USA and south-east Asia. In the year 2006 the company was announced as the second largest child care provider in the Chicago, USA. The company was a highly profitable company with a total revenue of 292.7 million dollars.

   2.1.2 Reasons of liquidation

   ABC learning was a highly profitable company. The company expanded rapidly and they were also the company who bought many big companies to expand their organization. But the company in the year 2008 announced that they would sell the 60% of the American childcare business to Morgan Stanley. This decision was taken to pay the debt. The company was liquidated in the year 2008. The company was voluntarily liquidated. The reason behind the liquidation was the improper business plan, accounting issues and aggressive capital expenditure. There is criticism that the company earned the most of the profit by inequitable low stuff wages and cost-cutting. The quality of education was also questioned. Ethical and morale issue was also aroused against the company. The company expended the majority of the capital gained by the business in buying more companies expand their business. And this resulted to the weak cash flow. The company had no proper business plan. The company used the capital to expand their business and by this way they took the risk of earning more profit. Because of this weak management decision, the company had suffered a lot. The suffering resulted to the voluntary liquidation.

 2.2 HIH Insurance:

    2.2.1 Introduction

    Among the largest insurance company, the HIH Insurance company was the second. In the year 1968 Ray William and Micheal Payne founded the HIH Insurance company. The HIH Insurance company acquired a large number of companies within the year 1997-1998. The companies include Colonial Ltd General Insurance, Solarta, Great State Insurance etc. They had the companies all over the globe including Australia, New Zealand, Argentina and USA. The notable achievement of HIH Insurance company was they acquired the largest Insurance company in Australia named FAI Insurance. They also bought the 51% share of Winterthur Swiss. The reason they gone into liquidation was they had some ethics issues among the main executives. Some criminal charges were brought against them for not following the and manipulating the stock market, dishonesty and many other reasons.

   2.2.2 Reasons of liquidation  

   Within the year 1968-2000 the HIH Insurance company had their growth rapidly. The HIH Insurance company gained success in their business. But in the year 2001 the company gone into liquidation. The financial report of the company shows that the company was held the second largest insurance firm in Australia with an asset worth of 8 billion dollar. But after deducting their asset with debts the company had assets of only 133 million dollars on paper. It is said that the HIH Insurance company lost around 8000 million dollars over six months to the end of the year 2000. The liquidator of HIH Insurance company predicted that the company collapsed with a loss of total 5.3 billion dollars.

The reasons behind the collapse of the company was the corporate governance issue, board structure, accounting issue and some ethical issue among the founding members. The HIH Insurance Group refocused the controversial issue of the independence of the auditor from the client. In October 2000 the HIH’s financial report shows that the company had the asset worth of 8.32 billion dollar against the liabilities of 7.38 billion dollar. In retrospect, certain items on HIH Insurance Group’s balance sheet requires further scrutiny. Shareholders’ funds in the 2000 annual report were estimated to be $939 million, but the supporting was of suspect value. In the 2000 annual report HIH’s assets included intangibles of approximately $500 million, the bulk of which represented goodwill for FAI. On the liabilities side, there was approximately $500 million in borrowings. The substantial amount of debt carried by HIH is troubling. An insurance company’s investment portfolio holds the premiums the company collects from its policy holders and generates investment income as an internal source of capital. Thus, there is little reason for an insurance company to seek external debt except for one-time purposes such as a takeover. Compared with the previous year, HIH’s debt had risen by $170 million in 1999-2000 (a nearly 50% increase). According to its cash flow statements, HIH’s premium income dropped 15%, or $486 million.

Besides the company had some ethical issues among the founding member of the board. Adler was charged with the stock market manipulation after an investigation. Adler was also charged for disseminating false information. Adler was also charged with the crime of intentionally acting dishonesty. In October 2000 a company named Business Thinking System was in financial trouble. Adler wanted the HIH company to invest 2 million dollars for the Business Thinking System. Later he told the chief of the Business Thinking System company that the HIH interested on investing about 2.5 million dollars for their company. Which was totally fake. The HIH board discussed about the investment and approved an investment of 2 million dollars. Adler attended the meeting and he failed to solve his financial interest on business. Former HIH Insurance chief executive Ray Williams was also sentenced nine months imprisonment for their illegal activities in the HIH Insurance company.  

  2.3 One.Tel Phone

     2.3.1 Introduction

     One.Tel was a telecommunication company established by Jodee Rich and Brad Keeling. It was established in 1995. This was an Australian company. The main focus of One.Tel was to sell its phone to the youths along with the internet services. The company also provided national and international long-distance telephone services. Before collapsing in 2001 it was the 4th largest company in Australia. The company operated throughout the world including Australasia, Europe, USA and South East Asia. The reason behind the liquidation was the company’s meteoric rise and fall, weakness in internal control, financial reporting, quality of audit and some conflicts in the managements.

      2.3.2 Reasons of liquitation

      The One.Tel company was founded in 1995. And they continued their business till the 2001. During its existence, the company occupied the fourth rank of Australian telecommunication companies. The notoriety that it gained probably exceeded its position in the market place. The company had a number of high profile directors and was always known for promoting itself very effectively. One.Tel was declared insolvent in June 2001 and has since been liquidated. Much has been written in the press about the reasons for One.Tel’s rapid descent into insolvency. Most of the material has focused upon the apparent failings of the company’s high profile joint managing directors, Jodee Rich and Bradley Keeling (and the involvement of the sons of the media tycoons Rupert Murdoch and Kerry Packer). As Barry (2002) and others have made clear, there can be little doubt that a number of management decisions were made which now appear seriously misguided. However, IT problems, especially those associated with the billing system, were a part cause of the demise of the company.

A complete history of One.Tel Limited is available in Barry (2002). An analysis of the IT failure and the contribution of the failure of the billing system to the eventual collapse of One.Tel itself is available in Avison and Wilson, 2002.

One.Tel used to pride itself upon its enlightened management techniques. The company operated a flat non-bureaucratic organisational structure and was organised into small functional teams. Each team was regularly measured against a set of key performance indicators, and bonuses were paid on achieving them. The directors worked in hands-on mode, and there was almost no middle management (One.Tel Annual Report, 2000). This organisational approach served two main purposes. It was a major differentiator compared to the competing telecommunications companies, and it was also designed to maximise staff productivity at minimum cost. All offices were open-plan and brightly painted to provide a cheerful motivational atmosphere. One.Tel tried very hard to build a “can-do” mentality, where teams were encouraged to work outrageously hard to achieve desired results. There is evidence that in the early years this approach met with considerable success. Within the IT group for example, a number of quite sophisticated systems for such a young company were developed in an unusually short time frame.

3. Conclusion and Recommendation:

The article is all about the liquidation the three renowned company of Australia. Which are One.Tel Phone company, HIH Insurance and ABC Learning. These companies were the most profitable and largest company in Australia. But still these companies were liquidated. The reason behind the liquidation of the company were a lot. But the main reasons were improper business plan, weak management system, accounting issues and most important ethical and morale lapse among the member of the management and founding members. Because of the management system the company faced a lot of failure in the business and which resulted the liquidation. Besides the morale and ethics lapse in the founding member and board of management also make the company to collapse despite of being the largest companies in the Australia. Though these companies ruled globally but still they failed because of the improper governance system and ethics lapse.

Recommendations for the companies are:

  • The company should start a business with a very smart management system. The management takes the decision for the company which they think is good for the company. So, the management should be very smart in taking any decision.
  • The board of the organization should be honest. The member of the board should follow ethics and morale. If any lapse in the ethics and morale among the board member is found the company should take actions immediately.
  • The organization should be very careful about the expenditure of capital. For expanding the business, the organization should not expense its capital thoroughly.
  • The organization should have a very honest and skilled audit team to support the organization team by giving valuable suggestion for the welfare of the company.

Reference:

One.Tel collapse anger magnets. BBC Online News. 30 May 2001

Paul Barry (8 April 2002).“The Great One.Tel giveaway”. The Age.

Anne Lamp (15 October 2005) “One.Tel quiz looms for Packer”. Sydney Morning Herald.

“One.Tel auditor was linked to Packer”. Sydney Morning Herald. 26 October 2005

“HIH Fraudster Walks Free”. The Sydney Morning Herald. 30 October 2010

“HIH founder released from prison”. News limited. Herald Sun. 14 January 2008

“White collar criminals urged to heed Cooper sentence”. News Online. Australian Broadcasting Corporation. 23 June 2006

“Brad Cooper, Last of the HIH three, free today”. The Sydney Morning Herald. 30 October 2010

ABC learning Centres Limited 2005 Annual Report

Smith, T& Fenner, R. (6 November 2008) ABC Learning Names Ferrier Hodgson Outside Manager. Bloomberg.

Hills, Ben (11 March 2006). “Cradle Snatcher” The Sydney Morning Herald.

Ambler, Emma (16 march 2006). “It’s all ABC on Kids Campus”. Melbourne: FaifaxDigital.