Liquidation for Changing Face of Accountability- myassignmenthelp

Question: Discuss about theLiquidation for Changing Face of Accountability. Answer: Introduction Liquidation its basics Liquidation may be defined as the process by the company shut down its business and operations and sell off its assets in the market for cash and paying the creditors out of it. There can be multiple reasons for the same, some of which are voluntary liquidation and on being ordered by the court to do so. The court generally does so when the company has not been able to meet its debt obligations and is bankrupt or the creditors demand so on foreseeing the future of the company. It marks the end of the going concern status of the company and there are various laws and regulations which have been laid down to guide the overall procedure of liquidation (Alexander, 2016). It affects all the given stakeholders of the company and especially the shareholders. The official liquidator is appointed for giving effect to the liquidation process and in some case personal assets of the management may also be held for meeting off the liabilities of the company. The company should avoid liquidation t o the maximum extent as it marks the end of the company. Liquidation is also called winding up and in case the company is running into losses, the the directors on their own can call for the liquidation of the company. There can be various other reasons as well like business started for illegal purposes or wrong reasons, or fraudulent financial practices or the location is not right or the working capital is not adequate for the business to operate (Bizfluent, 2017). Non-compliance with the law and following unethical ways of doing business can also be one of the reasons. The same has been explained below with the help of examples. The case of liquidation: ABC learning, One Tel Phone company and HIH Insurance ABC learning was known for providing quality child education in Australia in the recent past. It has a number of primary and secondary education centres across cities of Australia and was earning with good profit margins. The company also got listed on the Australian Stock Exchange in the year 2000 with the market capitalization of 2.5 billion dollars which was staggering at that point of time. The new auditor took over in 2000 and it was discovered that the company was involved in a number of malpractices and ethical issues due to which it had to liquidate (Bromwich Scapens, 2016). The company has huge debt and wasnt able to pay the same on time due to which investors went into widespread losses. Auditors were held responsible as they didnt highlight the accounting discrepancies to the investors and ultimately the company had to liquidate in 2008. In 2009, it was taken over by Goodyear Early Leaning which is now operating in Australia with 650 centres. Liquidation happened as the c ompany was not able to pay off its debt to creditors and in the presence of material misstatements the auditors denied signing the audit report of the company and demanded the recasting / re-preparation of the same (Chron, 2017). The company expanded heavily in 2000s so much so that 2300 centres were opened and it acquired almost 1% of the US market, made some major acquisitions and profit shoot to 15-20% in 2004. However, besides this the debts of company also increased to all time high which company could never pay and thereby its share prices crashed by more than 40% in 2007. This also resulted in SP removing the listing status of the company (Defond Lennox, 2017). Many reasons cumulatively were responsible for the collapse and liquidation of ABC learning but some of the major reasons include incorrect valuation in the balance sheet, disclosure of price sensitive information, wrong and unethical practices being followed and corporate governance being overturned. Poor internal control and lack of due diligence by the internal management on the acquisitions being made also resulted in outflows of million dollars which should never have been in actual scenario (Dichev, 2017). All this proved that the acquisitions were never analysed from future economic benefit scenario and was just a rubber and stamping activity on the legal papers. One such example was payment of $ 70 Mn for an acquisition whose actual worth was about $ 30 Mn which shows excessive payment made in various scenarios by the company. One another company is One tel which is widely known in Australia for the telecommunication services being offered including the mobile, internet services, and other information system services. It is famous amongst the youth and serves 2 million people across 8 nations (Farmer, 2018). This company was again liquidated due to non-competitive management who did not showed the true position of the profit and loss in its financial statements and was also involved in the unethical practices. The company also had weak internal control and thereby the liquidation was effected due to wrong flow of information with respect to expected profits in the future, thereby overstating the profit figures. The company was in the booming mode from 1997 to 2000 having a rise in the sales by 127% , 40%, 57% and 100% respectively due to which the company gave false expectations. But in reality it couldnt achieve that much and ended with having huge debts and payables on the balance sheet. It also purchase d additional spectrum licenses which were not required and it was out of funding from public and government. It then suffered heavily and incurred losses of $ 291 Mn due to which share prices fell below $ 1 (Flix, 2017). In spite of losses, the directors of the company were paid huge bonus and salaries which had put additional pressure on cash reserves and hence cash balances became negative and to pay off its debts, the company had to close its operations, sell off its assets and lay off employees ultimately leading to liquidation in 2001. Two major reasons of liquidation was corporate governance regulations not being followed and overstating of the profit and loss account which even the auditors of the company missed out. The 3rd major case of liquidation happened with HIH insurance company which was the 2nd largest in Australia at that time when it had to liquidate because of the huge losses that it incurred. The loss amounted to $ 5.3 Bn which is still one of the largest in Australia. The major reason of liquidation is supposed to be inflated valuation of the acquisition (FAI) made by the company due to aggressive accounting techniques being followed in the company (Goldmann, 2016). Besides this the company also paid a huge amount to its CEO as the severance package when he decided to quit the company an year ago before liquidation. All this impacted the construction and housing industry which was multiplied due to the wrong accounting techniques and wrong disclosures of the facts and figures by the company in the financial statements (Sithole, et al., 2017). For example, in case of acquisition of CE Health international, the liabilities and reserves were shown to be understated and later it resulte d in destruction of wealth rather than creation of the same. Here also, acquisitions were made without proper due diligence and same resulted in increasing the quantum of losses from $ 100 MN to $ 300 MN, which were later on not disclosed to the public. Hence, it can be said that here too non-compliance of corporate governance resulted in liquidation (Linden Freeman, 2017). Conclusion From the above discussion and examples, various reasons of liquidation could be established, the major of which was company not being able to manage its operation properly, wrong reporting of the facts and figures in the financial statements, non-compliance of corporate governance, fraudulent accounting techniques and over inflated valuations and acquisitions without due diligence. ABC learning liquidated because a loss making company was being casted as a profit making through falsified means and the management as well as the auditors were not efficient enough to identify the frauds and errors and thereby projecting the same before public and investors. In view of all this, regulatory authorities have provided for strict laws and rules for liquidation so as to avoid false and unethical means by the company where the investors would be on the losing side. From all the above cases, it can be seen how important the role of auditor is in giving the reasonable assurance to the investors regarding the true and fair view of accounts. Recommendations The companies which are being liquidated are not small ones but multinationals and they need to understand that there are major impacts of liquidations, not only the company is closing but people are losing jobs, investors are losing funds and above all, country is losing a major share of GDP and growth. To avoid this, government has come out with the number of laws and regulations so that the stakeholders are not impacted much due to the liquidation of the company. To improve the situation and avoid liquidation, the management should assume responsibility and should take the ownership of the accounts, they need to ethical and practice corporate governance in the work done. This will contribute to the development of the company as well the global growth. References Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431. Bizfluent, 2017. Advantages Disadvantages of Internal Control. [Online] Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html [Accessed 07 december 2017]. Bromwich, M. Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9. Chron, 2017. five-common-features-internal-control-system-business. [Online] Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html [Accessed 07 december 2017]. Defond, M. Lennox, C., 2017. 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