Major Liquidiation Analysis for HIH Insurance and ABC Learning

Question: Discuss about theMajor Liquidiation Analysis for HIH Insurance and ABC Learning. Answer: Introduction The companies are required to operate in the best manner by effectively utilizing the assets of the company and by efficiently operating the functions of the company. The basic premise of the running the company is to earn profits on the one hand and cater to the needs of the various stakeholders including the shareholders of the company on the other hand. The company may work for two or three years more and can revive itself when first premise is not met but it cannot function properly when the second premise is not met in any manner. There has been the cases in which the second premise has not been fulfilled and thus leading the companies to go into the liquidation of the companies. These are HIH Insurance, ABC Learning and the One Tel Phone Company. Each of the company has its own listings of irregularities on the basis of which the companies have faced the worst liquidation. Along with the two basic premises, the companies shall have the effective corporate governance in place so as to ensure that in case any rectification action is required then the companys management will take that into consideration and will also take the steps to reduce any kind of risks if any come into the notice of the management of the company. The report has then ended up with the conclusion and the recommendation. Reasons For Liquidation HIH Insurance Four events have been identified which has led to the liquidation of the companies. The company has entered into the area which is connected with the high degree of risk. At first the event is associated with the acquisition of the big insurance company of that time which is Fire and All Risk Insurance (FARI). The company has incurred the huge liabilities because of this acquisition in spite of the fact that then partner Winterthur has resigned only because he has projected the downfall of the company with this acquisition. Then secondly the company has stepped its shoes into the business of financing the films which again has made the company to suffer the losses of approximately 100 million dollar. The both events are the beginning of the liquidation. (OBrien,2008). The third event is the entrance into the major risky areas which has distorted the whole picture of the financial status of the company and in actual the company has suffered a major loss. The area is the insurance against any natural disasters and after that the typhoon at Florida has occurred. The last event that the company has faced is the amendment in the regulations of the government. The company has been forced to pay the higher compensation claims to the workers at California. Next event is that gradually the company has entered into the insurance from the damage caused by natural disasters and the company has suffered the major loss from the Typhoon of Florida. (Mak, Deo and Cooper, 2005 and Mirshekary, Yaftian, and Cross, 2005). One Tel Company The major event that has led the company into liquidation is the company has not adopted the matching concept as per the accounting principles. The company shall match its revenue and expense and account for in the same period. But in the given case the company is reporting the revenue for the concerned period but has been booking the expenses in the near future years. Due to this the financial health of the company in actual has been distorted and in future has been forced to report the losses in big figures. The second event is that the company is in the move of paying the higher remuneration irrespective of the fact that the company has been incurring losses. The third event is that the company in order to become bigger and known in the market has been selling the services on the credit of six months due to which the income has been blocked whereas the company is required to pay its suppliers immediately (Reza, 2011). The next and the last cause is the unqualified audit report issued by the auditors of the company. ABC Learning In this case, the major cause for the liquidation of the company is the financial irregularities. The financial irregularity is the accounting practice that the company has followed for the licenses and the intangible assets. The company has been in the urge of revaluing the intangibles assets of the company due to which out of the total assets of the company 70% of the assets counts for the intangibles that has been created with the revaluation. The company has been making the wrong forecasts of future incomes and rather in actual the company has declared the decrease in the profits to forty three percent approximately. The other event is the low quality of service being provided to the children kept at their learning centre and the same have been notified by the New South Wales Child Care. Presence Of Ethical Climate HIH Insurance The ethical atmosphere shall be present in almost all the companies. In the given case two defaults have been noticed and observed in ethics. These are related to the business and statutory compliance (Cheng and Seeger, 2012). The former entails with the entrance of the companies in the major business risky areas which has led to the huge losses ran over the span of two years. The latter entails the event when the company has entered into the acquisition of the Fire and All Risk Insurance Company and that too without the prior approval of the board of directors and without conducting the technical and feasibility of the companys functions. (Lipton, 2013; UK Essays, 2013). One Tel Company One of the major ethical issues is the wrong practice of accounting rule and procedures in the sense that the company is not following the matching concept of the accounting principles. The company has followed the method where the higher revenue is reported in the current years and lesser in the future years (Brown and Caylor, 2009). Secondly the company has not been preparing the sale bills in accordance with the Goods and service tax act 2000 and has been remained unprepared for so many weeks and months. Thirdly the auditor has not mentioned any note or clarification in its auditors report (Avison, 2012). ABC Learning One of the basic ethical issues is that the company has revalued the intangibles to the higher values by wrongly estimating the future cash flows of the company. Due to revaluation the major portion in the total assets is the intangible assets. The other issue is that the company has not been made able to deliver the high quality services to children at their centre and rather has kept focus on the business expansion only. The best case noticed is that in the year of two thousand and five, one child have gone out of the centre at its own and none of the security guard has done something. Presence Of Corporate Governance Low corporate governance practices have been observed in the cases of all three companies and have been regarded as one of the major cause of the liquidation of the companies. HIH Insurance The chief executive officer of the company has played the dominant role by keeping the board of directors of the company filled with the relatives and the friends of the company. By having the board of its own in actual terms, he has engaged the company in transferring of funds to the company in which he has stake. Second instance is of the major acquisition of the company made without the prior approval of the board of directors (Jiangbo, 2003). One Tel Company The company has adopted the bad pricing strategy in relation to the products of the company and also has adopted the wrong accounting method. The strategy details that the goods are sold on credit for seven months. Wrong accounting method has made the company as highly liquid and profitable in current year and lower in future years (Morey, Gottesman, Baker and Godridge, 2009). ABC Learning The company has not formed any committee as defined in the listing rules of the Australian Stock Exchange. Secondly the auditor has not issued the qualified audit report. Liabilities And Its Link With Financial Stress Liabilities are the amount which the company is required to pay in due time and if not possible then in the event of liquidation of the company. These liabilities as outstanding in the financial statements of the company are the obligations for the company and which if not cleared in due time will become the financial stress for the companies. Covering all the three companies, there has been the huge liability due to which the company has gone into liquidation. The liabilities have been occurred due to the improper operation of the finance function, improper conduct of the auditing as the auditors have issued the clean audit report in all the three cases, improper execution and development of strategy. Thus, in this way the liabilities have the important role in bringing the liquidation of companies. Recommendation On the basis of the whole analysis, it is highly recommendable for every company to consider the collapses made as the lessons for future and shall take into account all the considerations and procedures that have come out of the report. Conclusion The three liquidations that have occurred have led the recession in the market across the globe and also hampered the working and operations of the companies either operating in the same industry or operating in the same country. The major liquidations that have been analyzed are the HIH Insurance, One Tel Phone Company and ABC Learning. The reasons for all the collapses are different but the basic premise of having the manipulated practices involved is the same. Each company has entered into the financial irregularities by making wrong entries in the books of accounts without considering the nature of the business of the company. In order to close the report, it is concluded that the collapses have been majorly done because of the financial irregularities and the improper attention of the management on the situations and the circumstances which has led to the collapses. References Avison, D. (2012): IT Failure and the Collapse of One.Tel in Traunmuller, R. (ed.): Information Systems: The e-Business Challenge, Kluwer, pp 31-46. Brown, L. and Caylor, M., 2009, Corporate Governance and Firm Operating Performance, Review of Quantitative Finance and Accounting, 32, 2: 133-144. Cheng S and Seeger M, (2012), Lessons Learned from Organizational Crisis; Business Ethics and Corporate Communication, International Journal of Business Management, Vol. 7, No. 12, 74-86 Jiangbo X, (2003), HIH Insurance Limited: Corporate Governance and Corporate Excesses, available at https://www.seiofbluemountain.com/upload /product/201010/2010jjfzh05a8.pdf accessed on 08/10/2017. Lipton P, (2013), The Demise of HIH : Corporate Governance Lessons, EY Journal, 27th, 273-277. Mak, T., Deo, H. and Cooper, K. 2005, Australias Major Corporate Collapse: Health International Holdings (HIH) Insurance May the Force Be with You, Journal of American Academy of Business, 6, 2: 101-110. Mirshekary, S., Yaftian, A. and Cross, D. (2005), Australian Corporate Collapse: The Case of HIH Insurance, Journal of Financial Services Marketing, 9, 3: 249-58. Morey, M., Gottesman, A., Baker, E., Godridge, B., 2009, Does Better Corporate Governance Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set, Journal of Banking and Finance, 33, 2: 254-71. OBrien, N. (2008), Williams walks free today but HIH victims continue to pay the penalty The Australian, p. 5. Reza M, (2011), The One Tel Collapse: Lessons for Corporate Governance, Journal of Australian Accounting Review, pp 1-28 UK Essays. (2013), Collapse Of HIH Insurance available at: https://www.ukessays.com/essays/business/collapse-of-hih-insurance.php?cref=1 Accessed 08/10/2017.