Governance and Ethics Leading to Financial Distress of Companies

Question: Describe about the Governance and Ethics Leading to Financial Distress of Companies. Answer: Introduction: The liquidation of One teal company, ABC learning and the HIH insurance is mainly due to the unethical process and the discussion is about the identification of the unethical process responsible for the companies downfall. These companies conducted unethical measures and novice depicted this. The study conducted helped in evaluating the relevant facts that led to the liquidation. The selected companies had gone into liquidation because flaws in the corporate governance. Furthermore, the recommendation is also provided by the novice, which the companies might inculcate in its culture so that they are able to reduce the unethical process in carrying out their operations. Ethics and corporate governance is very significant due to the success of the company, while if it is ignored can have detrimental effect on the company's health. The corporate governance weakness can result in financial crisis (Murphy 2012). The companies discussed below had the same scenario, where the company misled the stakeholders, which consequently led to the downfall. The business model of the company was unsuitable and this contributed because of the unethical measures incorporated that compelled them to increase huge amount of debts, consequently unable to clear it off and liquidation call. One Tel Phone Company: The collapse of One Tel Company is the classic case of the failed expectations, strategic mistakes, and the wrong pricing policy. One Tel company was the largest telecommunication company in Australia. The practice of the corporate governance was suffering from defects and the fall of the company was mainly attributable to this factor. Weak internal control, poor communication of the board with the management, poor quality of audit, and the board scrutiny relating to the management were the main reasons that led to the collapse of the One Tel phone. The failure of the company provided the lesson on the relevance of the corporate governance (McGarty 2010). Events that led to the liquidation of company: The company followed the strategy of high risks and low yield and this led to the collapse in the market of Australia. The company had deficit in the operating cash and suffered from the low quality of earning the income that was mainly due to the high proportion of accruals and the manipulation by the management. The practice of the corporate governance and the misguided decision of the management in the financial decisions led to the collapse of the company. The directors and the managers failed to exercise their power with due diligence, inadequate independence in the functioning of audit, inappropriate compensation of the management, and creative accounting was some of the reasons associated with the failure of the corporate governance practices. The managing director of the company was giving the repeated assurance about the cash positions and the profitability of the company and he was misleading the market and the shareholders about the cash position of the company by giving t he wrong statement that the company has substantial amount of cash and profits available. The accounts of the company were presented the way he wanted it to be. The directors of the company were receiving the bonus and their basic salary despite the fact that the company reported a loss of $ 291 million (Monem 2011). Role of ethics and governance in analyzing financial distress: The directors mislead the board on the matter of the financial position of the company. The state of billing and the system of collecting the debt was the reason and it accelerated its failure. They used the privilege information gained by the directors at the board meeting for the trading for his own personal gains. The discrepancies in the books of account could not be accounted by the CFO of the company and they have little concern for their employees and the shareholders and the stakeholders. The cash position and the financial performance of the company was not properly assessed and this lead to not able to detect the material misstatement. The financial information available which flows form management to the board was inaccurate as the system was not monitored properly (Revan 2011). Rationale for stating liability as a major factor for liquidation: The executive directors of the company have a choice over the judgment, so that the board of directors favors the deciding and it was manipulated. The public statement made by the directors of the company did not have any factual basis. In order to ensure the liquidity, the management needs to maintain the cash reserve. The accurate and the reliable information would be produced if the system were established that way. The failure of the management on these concerned parts was also the reason behind the failure. The directors of the company had acted in their own personal interest by breaching the rules of the corporate governance and there was active participation by the management seeking the benefits for the shareholders. The directors did not employ their expertise and they did not take any effort in appraising the accounting system, which were needed to collect the payment (Clarke et al. 2003). HIH Insurance Company: One of the biggest financial collapses in the history of the corporate of the Australia was the collapse of the HIH insurance. The risk management system, ineffective corporate governance practices were mainly the factors attributable to the collapse of the company. The auditing and the inferior risk management system of the company were put into question. The poor cash position and the inferior finance resource management were mainly responsible for the collapse as the company was unable to pay the claim to the policyholders of the insurance and the amount of debt it owed (Murphy 2012). The major investment failures of HIH insurance were in the market of UK and US. Events that led to the liquidation of company: The flawed corporate governance leading to HIH collapse: Failure of the corporate governance is the reason behind the corporate bankruptcy as the corporate governance is considered to be of the critical importance. Some of the odd features were presented by the corporate governance practices in the insurance industry. The odd features included the conflict of interest that could not be recognized, the policies concerned were not defined and recorded properly and the management proposals could not be critically analyzed due to the lack of independence (Mak et al.2005). This can be understood by an example; the CEO authorities were not clearly defined in some virtually important areas. The CEO was exercising the control over the management and the board and this was done by the manipulation of the evaluation of the senior executives and the board meetings agenda. The company was not running at the interest of the shareholders rather it was running at the interest of the senior managers. Therefore, the model of the corporate governance was at threat. The strategy concerning the investment decision were neglected by the directors and the another reason which led to the collapse of the HIH insurance was the risk management failure (Mak et al. 2005). Role of ethics and governance in analyzing financial distress: Accounting system is regarded as the element of the corporate governance practices. The accounting system was designed and directed by the management and this was a major contribution to the inherent risks. The Board or the audit committee of the company was comprised of the five non-executive directors. These non-executives director could not examine the judgment independently despite the majority of the directors being independent (Cheng and Seeger 2012). Some of the requirement that the HIH insurance fallen short of was the assurance that the independent directors are directly and properly informed and the assurance of the independence and effectiveness of the audit committee. The audit committee functions were doubtful as the independence of the non-executive directors forming the part of the audit committee suffered from defects. The independent directors could not fulfill their responsibilities with due diligence. The company went into the liquidity position and was unable to clear off its debts. The company had an estimated deficiency of $ 5.3 billion. This was mainly attributable to the flawed and inadequate corporate governance (Allan 2006). Rationale for stating liability as a major factor for liquidation: The companies that collapsed and went into liquidation generally suffered from the defected corporate governance practices. The companies discussed above that is the One Tel company, ABC learning and the HIH Insurance has something in common and the common factor which was responsible for their collapse is the inadequate corporate governance practices which is one of the important determinant in the attaining the success of the companies. However, the liquidity factor cannot be solely regarded as the factor that contributed to the liquidation of the company. However, the companies has good amount of debt to be paid off. The other factors contributed to the collapse were the malpractice by the management and the flaws in the accounting system of the company was the reason and this form the element of the corporate governance (Mirshekary et al. 2005). ABC Learning Company: One of the largest world's childcare providers was ABC learning, and the negligence of fundamental sound accounting resulted in the spectacular downfall. Due to this, the creditors decided wound up the company in the year 2010 and because the company was delisted from the stock exchange. The profits, which the company earned, were it posing a question to the practices, which it followed in accounting. The company left a debt of $2 million dollar when it collapsed, other acquisitions were that it misleads the share market regarding the revenue, which was booked, and used cheap debt facility to create a rapid expansion in Australia, UKand Newzealand. Events that led to the liquidation of company: It suffered from the problem in imparting education in the centre beside it had the problem of acquiring the entire market. The poor educational facilities were because of the inappropriate staffs. Additionallythe percentage of the revenue attributable to the staffs, being 56.7% was less than the nonprofit organization, which had 80% of the revenue attribution to the staffs (McRobert 2009). Role of ethics and governance in analyzing financial distress: The company also suffered illogical ideas. The financial mismanagement including acquiring more debt than the normal acquisition. The financial information given by the company was quiet illogical, there were malpractices used in business by the company for attaining more gain. 72% to 81% of intangible assets comprised the asset section of the balance sheet and those intangible assets comprised ofseveral operating licenses whereas this license did not make any trading sense (Sumsion 2012). Rationale for stating liability as a major factor for liquidation: Moreover, the traders and the investors in the market were drawn by the valuation of operating issues, thereby resulting in increasing the high value and the company was found making fake claims on such licenses. The ABC was using malpractices in maintenance of the accounts , which reduced its share values considerably .Every year the company revaluated the assets , did not cause any material effect of the financial performance of the company . The asset revaluation and its raised amount misled the investors as well. The ABCCompany failed to create enough amount of cash flow for paying the shareholders, dividends and intereststo the shareholders Recommendations: The rules and regulation relating to the practices of the corporate governance would be of great contribution in reducing the unethical measures adopted by the company. Another measures which can be taken by the company to reduce the unethical practices is the monitoring the audit report in a very effective way. The overall corruption in the company has to be reduced by involving the appropriate authorities who would implement the stringent rules to penalize the members involved. One of the ways for the companies to deal with their business, which suffers from the inadequate practices of the corporate governance, is to change their approach and the company needs to care about the shareholders as they have their money invested in the business and should not focus on gaining the market share. Another structural tool to measure the effectiveness of the Board would be to create the board with the support of the independent people. The nomination of the board of directors should be made b y including the shareholders and their appointment should be enhanced. Conclusion: The overall discussion has been made about the unethical practices of the corporate and this was done to boost their share price. The novice effectively analyzes the case of the companies provided here. The facts disclosed leading to their collapse provides the appropriate authorities with the new ideas, which might be incorporated in their governance practices. The conclusion can be made concerning the downfall and collapse of the three chosen companies that inadequate and inappropriate practices of corporate governance led to their collapse. Therefore, the ethics and corporate governance is of critical importance to the success of the company. The liability factor being held responsible for the One Tel Company, HIH Insurance and ABC learning collapse would be partially incorrect. However, managing liability is an important component of the corporate governance practice. Therefore, it can be concluded that the major factors leading to the financial distress of these companies would be the ethics and corporate governance of the concerned entity. Reference: Allan, G., 2006. HIH Collapse: A Costly Catalyst for Reform, The.Deakin L. Rev.,11, p.137. Calomiris, C.W., 1989. Deposit insurance: lessons from the record.Economic Perspectives,13(3), pp.10-30. Cheng, S.S. and Seeger, M.W., 2012. Lessons learned from organizational crisis: Business ethics and corporate communication.International Journal of Business and Management,7(12), p.74. Clarke, F., Dean, G. and Oliver, K., 2003.Corporate collapse: accounting, regulatory and ethical failure. Cambridge University Press. Governanceforstakeholders.com. 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