Underlying Cause Liquidation Can Attributed-Myassignmenthelp.Com

Question: Discuss About The Underlying Cause Liquidation Can Attributed? Answer: Introduction With the due passage of time there has been major liquidation of companies in Australia. The major among them are HIH Insurance, OneTel and ABC learning. The notable differences among all the three have been the liquidity crunch owing to a huge burden of debt and a complete disturbance in the ethics. The liquidity crunch together with the improper governance played a leading role in the liquidation. In short, it can be said that liabilities was the major factor that led to the downfall of all the companies. It needs to be noted that when the debt of the company stretches over a particular limit then the business faces immense problem. Moreover, if the business does not have proper liquidity to meet the obligations then liquidation is bound to happen. In the report below, the major highlight of study will be on liabilities that led to the liquidation of the companies. Analysis OneTel is one of the largest telecommunication companies based in Australia that encountered liquidation owing to improper measures and ineffective developments throughout its operations. Furthermore, the company also failed to implement effective corporate governance strategies into its affairs that enhanced more of its complications. For instance, internal control mechanisms, inefficient audit processes, etc are some of the inefficacies that prevailed within the companys operations that resulted in its downfall. HIH Insurance Ltd encountered the same situation in the year 2001 even though it was considered as one of the biggest companies that had a massive base of assets. In the year 2001, owing to maximized liabilities and debts, the company failed to repay its obligations with its base of assets, as it was immensely burdened by such obligations. Besides, it was also observed that because of inadequate knowledge and interpretation in association with business risks, the company fa iled to sustain in the market. Other issues like improper managerial practices, fraud, etc also played a role in degrading the companys position (Heeler, 2009). Thus, both these companies encountered liability issues that were the major reason behind their downfall. With the help of this report, the exact complexities have been discussed for a better understanding of this context. Issues in corporate financial reporting Financial reporting must be done in a way that it presents a true and fair view of the companys performance. However, in relation to OneTel, such reporting requirements were not properly complied as many financial reports like the debtors reports and trial balance were verified unprofessionally (Sawyer, 2003). Besides, the finance director of the company was proved incapable of assessing such reports for the benefit of the company as a whole. This proves that the management was hardly concerned about the companys reputation and hence, these resulted in the appearance of significant risks within the companys affairs (Heeler, 2009). This also highlights the inappropriate strategies within the companys affairs that resulted in its disintegration. On a whole, the major reason behind the low-income level of OneTel can be attributed to its adoption of accrual system of accounting in a traditional sense. In simple words, since the strategy was outdated, it failed to generate an influence up on the company. Major cause behind liquidation Increment in liabilities Since HIH Insurance was one of the biggest companies, its main objective was to diversify its business across the entire world so that it can fetch enhanced revenues to the company. However, the company in order to fulfill its vision enhanced its liabilities more than its assets that created major complications for it. The company thought that the ratio of its takeover to its liabilities was of no importance but this was not the actual scenario. As a matter of fact, the strategy of takeover only played a key role in disintegrating the company (Westfield, 2011). Besides, the company initiated no attempts to change the additional provisions based on market fluctuations. Moreover, it had the opportunity to control the same and yet it failed to do so. This sheds light upon the ineffective management standards within the company that failed to rectify its inaccuracies. In short, the management and the ethics situation was weak thereby leading to major concern in the system. Future claims This reason also resulted in the downfall of HIH Insurance because proper tuning for future claims is vital for the survival of a company and yet, HIH failed to do so. As a result, the company witnessed a negative trend of 1.7% that played a key role in disintegrating it. Moreover, the major reason behind such weak strategy can be attributed to the ineffective management measures for changing strategies based on market fluctuations. This resulted in an increment of liabilities and since no verification measures were implemented by the management, the situation became worse. Further, it is well known that based on market fluctuations, insurance companies may get affected and adoption of adequate safety measures can assist in safeguarding such situations but the management of HIH failed to adopt such strategy. On a whole, the dominance of HIH in the insurance market and its major takeover attempt resulted in the generation of major risks that caused its downfall. Secretive plans The plan of cost cutting came out to be an excellent opportunity for HIH but it also resulted in the increment of liabilities. Besides, such an opportunity could have assisted it in making up its losses for the future. However, the management did not adopt such measure and instead decided to portray fraudulent statements so that it could grant additional power to the company. The major reason behind the portrayal of fraudulent statements was to conceal financial secrets from the common public and the management thought that the takeover attempt could also be concealed from such a strategy, but this backfired the management and enhanced its complications more. Moreover, the statutory bodies had no idea about such a situation and it was implied that the company would adopt immoral activities especially when it had resulted in a situation of its disintegration. Inadequate planning process Since the process of the takeover was going to be a big one, accurate safety measures had to be adopted but HIH failed to do so. Besides, it was also compulsory to have effective strategies to overcome the issues of liabilities with the companys dominance but it was observed that the company entered the market with no prior research and professionalism. Furthermore, the company failed to adopt measures to restrict itself within a scope so that adequate provisions can be framed based on market fluctuations. This sheds light upon the inappropriate management practices within the company and the situation worsened when false statements were released for concealing facts. OneTels disintegration From the case of OneTel, it can be stated that handling of financial statements was not done properly and the management did not maintain significant reports like debtors aging report, trial balance, etc. Furthermore, since these financial statements were not given due priority by the management, it created major complications for the company. The most crucial factor that resulted in the low revenue figures for OneTel was the adoption of a conservative approach in its affairs. Besides, it implemented two basis alterations in its base policies. The first alteration was that no accounts were decided to be put up in contrast to the companys intangibles and secondly the deferred expenditure policy of the company was altered in the subsequent year. Owing to non-conservative policies of accounting, and decisions to write-off few subscriber acquisition expenses played a key role in the companys loss (Gilbert et. al, 2005). Besides, the auditors also issued a fraudulent report despite the fa ct that the management adopted unethical strategies. The means and mechanism of running the company was not ethical thereby was a big cause of worry. Such immoral activities on the part of auditors are very inappropriate and hence punishable by law. On a whole, all these scenarios played a pivotal role in hampering the companys operations, thereby resulting in its liquidation as a whole. This clearly emphasized that the company was running on poor ethics and that the very situation indicates that the governance was altogether disturbed hence; the management was doing the irrelevant activities (Manoharan, 2011). ABC Learnings disintegration The previously mentioned scenarios form the foundation for ABC Learning that has assisted it to develop in the market. However, ABC also pursued a weak management team that resulted in its downfall within a short span of time. The concept of weak management emphasize that the company had poor ethics and governance was faulty leading to major issues. Even though the company attained massive enhancement in the segment of growth and development, yet it failed to stabilize its affairs for a better future (CPA, 2012). Besides, the previously mentioned causes also assist in highlighting the disadvantages of a company that was once a massive company of Australia. A pioneer in the field yet ABC lacked the ethics and the management thereby leading to a big fall of the company (Kruger, 2009). In the year 2007, ABC Learning became insolvent and hence, it encountered massive losses in the subsequent year. Based on the financial statements of the year 2008, it can be observed that the auditor of the company incorporated impairment expenses amounting to $1.168 billion and a loss of $364 million on the majority disposal of the stake (Kruger, 2009). However, such losses enhanced more than what was expected, thereby resulting in the increment of liabilities. Such losses and debts played a key role in generating a liquidity scarcity that decreased the net assets of the company from $2.22 billion to $284.5 million (CPA, 2012). Besides, the complication enhanced when the administrators and creditors witnessed that the company possessed 30c and 40c each for the current assets for every dollar of its current liabilities. These issues clearly shed light why ABC Learning had to witness a downfall. Furthermore, such issues represent a current ratio of 0.3 and 0.4 and it is well known th at when the current ratio of a company is lesser than one, it signifies major liquidity problems encountered by the company. Besides, this also means that the company cannot repay its debt obligations in the future (Teen, 2012). The current ratio, as well as quick ratio of the company stood too low meaning that the company has liquidity woes (Gilbert et. al, 2005). Such a situation clearly indicates that liabilities were the major concern and ABC failed to address owing to a lack of liquidity. Conclusion It can be observed from the previously mentioned analysis that ABC Learning, OneTel, and HIH Insurance encountered disintegration even though they were highly developed companies in their respective segments. The major reason behind their downfall can be attributed to their ineffective corporate governance strategies and inadequate risk management approaches that resulted in their liquidation as a whole. In addition, the inadequacies on the managements part can also be highlighted with the help of this study. Even though the situation started to worsen, yet the management adopted secretive attempts to conceal relevant data instead of initiating safeguarding measures. The downfall of these companies started because of liquidation and the management failed to address the situation in an efficient manner. On a whole, effective corporate governance measures and other strong may have assisted in this scenario to address the situation. Hence, ethics and governance is the need of the hour a nd is highly needed in the light of the prevailing situation so that any adverse situation can be negated. References Cook, T 2001, Collapse of Australia's fourth largest telco adds to growing list of corporate failures, viewed 10 September 2017, https://www.wsws.org/en/articles/2001/06/onte-j08.html CPA 2012, ABC learning collapse case study, viewed 10 September 2017 https://www.cpaaustralia.com.au/professional-resources/education/abc-learning-collapse-case-study Gilbert, W. Joseph J Terry J. E., 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol. 3, pp. 66-92 Heeler, D 2009, Audit Principles, Risk Assessment Effective Reporting, Pearson Press Kruger, C 2009, Lessons to be learnt from ABC collapse, viewed 12 September 2016, https://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-78f8.html Kruger, C 2009, Numbers finally start to add up as operators go back to basics, viewed 12 September 2016, https://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html Manoharan, T.N., 2011, Financial Statement Fraud and Corporate Governance, The George Washington University. Sawyer, L 2003, Sawyer's Internal Auditing, Institute of Internal Auditors. Teen, M.Y 2012, The ABC of a corporate collapse, viewed 12 September 2016, https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/. Westfield, M 2003, HIH : The Inside Story Of Australia's Biggest Corporate Collapse, viewed 12 September 2016, https://www.smh.com.au/articles/2003/03/14/1047583693489.html