Accounting Financial Analysis Report

Question:

Discuss about the Accounting Financial Analysis Report.

Answer:

Introduction

Australia is one of the fastest growing countries considering the financial status and economy having several largest organizations across the world. The corporation law and accounting board of Australia is designed to facilitate the investment and international trade by developing the administration for the solvency of the organizations. In recent years many companies are facing the liquidity issues for not being able to meet the liabilities on due date and several unethical reasons (Emmermann and Boey, 2015).    

The following report presents the reasons and events of liquidation encountered by the companies particularly in the country Australia. During the research, it has been observed that several companies in recent years have experienced the liquidation process due to lack in meeting their obligations for creditors. The presentation is created by using the Australian Companies ABC Learning, HIH Insurance and One. Tel Phone Company. On the other hand, the report will include the discussion on business ethics and governance with respect to the company’s financial pressure. Ethical issues are significant factors for the organizations because it affects the overall business activities to maintain the sustainable growth. In the recent years, financial crisis has been the most serious issue as a part of the governance by the business organizations (Zhu and Pace, 2015). Therefore, the assignment points out the reasons and factors of liquidation that companies are facing apart from the factor of liabilities.

Discussion

Companies’ background

ABC Learning, an Australian company was one of the largest service providers of early childhood education founded in the year 1988. In the early years it had around 697 centers and purchased another largest childcare operator in the year 2005. The company had highest revenues amounted to $292.7 million and net profit amounted to $52.3 million in the financial year 2004/2005. However, the company went into voluntary liquidation in the year 2008 and acquired by Goodstart Early Learning in the year 2009.

On the other hand, HIH Insurance founded in the year 1968 by Ray Williams, was second largest insurance organization in Australia. The company had its business operations in several geographical areas like United Kingdom, United States, Asia and several other regions with the total asset valued at $8,327 in the year 2000. Unfortunately, the company went into provisional liquidation along with its subsidiaries in the year 2001 under the scheme of arrangement (Hih.com.au. 2016).

Similarly, One.Tel Phone Company, a group of Telecommunication Company based in Australia which was formed in the year 1995. It was considered to be fourth largest company in the industry of telecommunication using 3GSM 1800 network. The organization had the strong customer base of around 2.2 million and revenue amounted to $653 million between the years 1998 to 2000.

Liquidation Events

All of the above mentioned companies went into liquidation despite of being largest organizations in their respective industrial sector (Roome and Louche, 2016). Liquidation of a company means the termination of legal existence of the organizations by concluding its business activities which is also termed as winding up of the company. Liquidation of an organization takes place either by voluntary decision or as compulsory wind- up (Gertler and Kiyotaki, 2015). There are several reasons that lead an organization to liquidate its business such as:

Lack of visionary management

Increase in current debts and liabilities and inability to pay off the obligation

Increase or rise of fictitious assets that are not important

Involvement in fraudulent or falsified activities

Profiteering of minority security holders

High competition in the industrial market and regular changes in the policy of government

Lack of profit planning and structure and persistence of huge losses

Liquidation Events in ABC Learning

As reported, the company went into the liquidation in the year 2008 after it sold off 60% of its business to Morgan Stanley to repay the accumulated debt of around $1.5 million. The company was considered as one of the largest children education service provider until the year 2006/2007. However, in the later months of 2007 the organization encountered a fall of 42% in its profit and eventually failed to meet the obligations of amounted to $1.8 billion resulted a huge decline in shares price. Due to failure in payment of its liabilities and inability to incur sufficient profits in the financial year 2007-08, trading in shares of ABC Learning Company was restricted.

Liquidation Events in HIH Insurance

The company went into provisional liquidation along with its group companies and subsidiaries on 15 March 2001. It was considered as Australia’s largest corporate collapse with the estimated losses of around $5.3 billion. It was reported that the company found to be charged with several fraudulent charges including imprisonment of certain members. However, in the year 2000/2001 the company faced a huge decline in its value of net assets from $8 billion to $133 million. It was also observed and evaluated that a slight movement of 1.7% in the assets value might result the financial position of business as deficiency in net assets. On appointment of official liquidator, the loss of company had been identified the losses over $800 million during the six months in 2000 (Hih.com.au. 2016).

Liquidation Events in One.Tel Phone Company

Most of the company’s business functions and activities are under the control of official liquidator appointed by the court. The company collapsed in the year 2001 due to huge losses of around $291 million and consequently the share price of the company’s shares dropped below $1. Apart from that, the company also faced the criticism in high payments made to the founders of the company even when the organization faced huge losses. Consequently the company sold its shares worth $5 million for $2.5 million and went into liquidation in the year 2001 due to huge losses and insolvency.

It can be said that the event of liquidation or wind up takes place due to various reasons but the primary reason becomes the inability to pay off the creditors. However, companies sometimes liquidate their business activities if it has achieved its target goals. However, in case of three selected companies, liquidation took place because of financial distress faced by the companies that resulted one of the companies in provisional liquidation. It is a procedure that exists as corporate insolvency after filing a petition for winding up of the organization by the court. All the three companies faced financial troubles resulting in huge losses and decline of value in the price of securities (Yao, Yang and Wang, 2016).

Ethics and Governance of companies’ financial stress

Ethics and governance are two core factors of the organizations to operate its business activities smoothly and safely. Ethics are the values and ideologies         exercise by the companies to govern the business functions and decisions for maximization of profit and sustainable growth. On the other hand, governance is a set of rules and procedures to regulate the business policies and activities according to the legal means (Vitale, 2016). There are several governing bodies and committees that are formed to regulate the framework of business entities for the purpose of verifying the genuine and safe acts of business functions. Accordingly, ethics and governance plays an essential role in the organizations’ financial information with respect to revenues, expenses, liabilities and capital employment (Parastuty et al., 2016).

In case of ABC Learning, the company experienced financial collapse resulting in not able to pay back its creditors. The company had a downfall in the profit at 42% in the financial year 2007, which reflects the poor management and governance issues in the business activities of the company. Trading in ABC Learning’s shares was restricted as the price of the shares declined to $1.15 since the financial year 2008 due to huge losses incurred by the company. In consideration with the ethical and governance norms, the company failed to prepare and present proper business model as well as accounting issues. There were ethical issues that the company failed to maintain in accounting standards and principles by disclosing its tangible and intangible assets at higher value than the actual value. On the other hand, the auditors of the company presented the opinion on financial statements by stating unqualified report despite of several accounting issues (Reinhart and Sbrancia, 2015).

However, it is the management’s responsibility to prepare and present the financial statements by complying all the principles and regulations of the accounting standards. It is important to disclose the business and financial information in compliance with the set of standards and principles, which was not followed by the management of ABC Learning. The company is required to value its business and assets at fair price at prevailing market standards to disclose the transparency of company’s financial position (Iliev et al., 2015). For instance, goodwill of company reflected the value at $271 million at the end of the financial year 2007/2008 whereas the impairment charges disclosed at only $2 million. Considering the principles of Accounting Standards on Intangible Assets and Accounting Standards on Impairment on Assets, goodwill should be reported in the financial statements at fair value after accounting for impairment charges according to market value. Similarly in valuation and reporting of company’s license, expected future cash flows that was not certain for the realization. Therefore, it can be said that the company did not follow the ethical issues on preparing and presenting the accounting information for the stakeholders (Michael and Goo, 2015).

Additionally, company’s business stability and growth is majorly dependent on the governance policies undertaken by the organizations. Company’s financial stress was primarily due to lack of proper governance policies for delivering the services, recognizing and measuring the financial information and other significant business functions (Berger, Imbierowicz and Rauch, 2016). The management reclassified its debts to non- current liabilities from current liabilities for refinancing. However, as per the accounting governance policy current liabilities cannot be classified as non-current liabilities unless its payable period is more than 12 months.

In case of HIH Insurance, conservative approach for corporate culture and governance deficiencies resulted in huge decline in the company’s profitability. Accordingly, the company faced the provisional liquidation estimating the business loss of $5.3 billion in the year financial year 2000/2001. The primary reason for encountering such huge business loss was due to lack in following the appropriate governance policies. The company involved its business practices at high risk when the market was extremely competitive. According to fair governance policies and ethics, business activities should be conducted by applying moderate values and practices. Similarly, company failed to maintain the ethical practices in accounting the business information by true and fair means (Chell et al., 2016). Unethical practices in recognizing the financial information by HIH Insurance reflected the net asset deficiency in the financial position and eventually the value of its share price declined at huge percentage. The company also held on the fraudulent charges for practicing unethical issues in conducting business activities. Charges for manipulation in share market, disclosing false information in to the stakeholders and other voluntarily malpractices related to investments indentified as unethical business practices by the company.

Liquidation of One.Tel Phone Company also occurred due to deficiencies in fair practices of corporate governance. Despite of having annual revenue of $653 million it went into liquidation due to unfair ethical and governance practices for operating business activities. Inadequate management and lack in proper monitoring of production process, sales activities and recognizing financial information were the major cause of financial stress faced by the company. Management of the company is responsible to prepare and present the financial information in true and fair view for the use of stakeholders and to maximize the business profitability (Yawar and Seuring, 2015). However, the management of One.Tel failed to maintain the ethical practices on part of large investors in the form of interest charges and misleading valuation and presentation in the financial statements. Unethical practices on close association of non-executive directors with the chief executive officers, compromise on the audit procedures due to provision for non- audited services affected the financial position of the entity (Lozano, 2015). Apart from that, the chairperson of the Board of Directors of One.Tel was dependent and therefore lack in effective monitoring the organization’s management process and behavior. Such unethical practices and lack of proper governance led the company to experience financial stress and liquidation event (Schaltegger, Hansen and Lüdeke-Freund, 2015).

Recommendation

In view of the above discussions on liquidation of the three selected companies, it can be said that the major contribution in companies’ liquidation was not only overdue of liabilities but other important factors. In case of HIH Insurance and One.Tel the major reason of liquidation was poor governance and unethical practices by the management. On the contrary, liquidation of ABC Learning was majorly due to huge losses and inability to pay off its liabilities when they fell due. All the companies faced liquidation event as well as suspension in trading of shares due to inadequate financial position of the business.

A company’s success and sustainability depends on the efficient and effective business practices. In the present case, HIH Insurance could save its business by fair valuation and disclosure of the assets and other financial information. The chairperson of One.Tel should have been independent to provide effective and transparent monitoring over the business operations. The companies could value its tangible and intangible assets at fair value and concerning with the prevailing market value. Further, the companies should have taken steps to control the production costs by maintain the quality to improve the sales revenue of the products and services. Therefore, it is essential to maintain the ethical business practices and manage the governance policies by fair means to maximize the profitability and sustainable growth of the business.

Conclusion

It can be concluded that the liquidation or winding up of business organization is not only due to financial crisis but also due to poor exercise of business practice in corporate governance. Business sustainability highly depends on the effective and efficient monitoring of the business functions with respect to the ethical practices. In case, the companies fail to follow the business activities and operations with fair and honest practices it would affect the operational continuity. As per the regulations of good corporate governance, business entities are required to prepare and present their financial information to reflect the transparency and accountability of the business operations. On the other hand, voluntary malfunctions, undisclosed financial interests by the directors or management, unfair valuation of assets are some activity that affects the business sustainability.

Accordingly, in case of the selected company ABC Learning faced the liquidity event due to high losses and decrease in the shares price. The trading of shares of the company was restricted because it failed to incur profits to survive and to pay off the liabilities. On the contrary, liquidation of other two companies HIH Insurance and One.Tel failed to sustain because of deficiency in adequate corporate governance and ethical business practices. Fraudulent acts, non- disclosure of financial information and non- disclosure of substantial interests are certain activities undertaken by HIH Insurance and One.Tel that provided financial stress. Therefore, companies faced the financial collapse encountering losses and decline in capitalized value that affected the business sustainability. Moreover, it can be argued that the liquidation of the company is not only due to lack of repayment of liabilities but also due to poor management monitoring behavior and controlling activities. 

Reference List

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Emmermann, K. and Boey, M.Y., 2015. Reorganizing and Restructuring Insolvent Companies in Germany: A Move Toward Chapter 11?. American Bankruptcy Institute Journal, 34(8), p.26.

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Hih.com.au. 2016. HIH Insurance – Home Page. [online] Available at: http://www.hih.com.au/ [Accessed 20 Aug. 2016].

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