The objective of this assignment is to provide a general idea about the managerial governance and ethics related to the financially distress companies. According to a recent survey and study, it came to light that the failure to achieve and monitor the duties of the management of the may be one of the reasons for the financial distress and bankruptcy of the companies across the globe. This essay includes the reasons, objectives and recommendation related to such financial distress and bankruptcy of these companies.
Analysis of a recent study conducted in Lebanon revealed that the boards that have higher proportion of the outside directors have fewer chances to financial distress as compared the companies who have lower proportion of the outside directors. The study of this analysis consists a sample of 178 non-listed companies. From this, it can be concluded that the financial distress and size of the board are inter related. The financial distress is mainly highlighted in the European countries. The need of corporate governance is necessary to overcome the financial distress. It overcome this problem the it provides the education to the investors on the short term returns and help the management in making the policies and guidelines on the corporate governance.
Let's take an example of the company to understand the topic in a particular way. One-Tel was one of the largest telecommunication companies in Australia which collapsed in the year 2001. The said company had its operational activities in more than 8 countries with a consumer of more than 2 Millions.
Analysis of the aforesaid companies revealed that the company collapsed due to the wrong policy system, less growth, overrated expectation and improper strategic planning. However, it was later realized that the collapse occurred due the negligence of the corporate governance of the company which includes negligence and wrong planning in financial analysis, reporting of the management, weakness in quality of the audit, wrong management for internal control, communication system of the management etc.
Apart from the aforesaid company a few other companies operating in Australia collapsed due to the poor management of the corporate governance and financial distress. However, no academic researches were conducted to find out the exact reason for such financial distress and collapse. The evidences show that weakness in the corporate governance and ethics are one of the main reasons for collapse.
Due to the collapse these companies the concept of the corporate governance are being focused by the other companies. The companies are focusing on the development of the corporate governance structure and ethics and making strategies for developing new bankruptcy policies and models. In the recent days, every business is making strategies for implementation of the corporate governance and ethics in an appropriate manner to make their business healthier in terms of business value, the compensation of the officials of the business, corporate performance and corporate structure of the business.
Here, lets the case study of One-Tel which was already mentioned in the aforesaid essay above. According the Annual report of the One-Tel for the financial year 1998, the company was financially strong and the growth of the business was on its peak as the number of the consumers of the company was increasing day by day. Despite the fact that the company was in profitable position, the financial performance and growth of customers is different factors to be considered for the financial distress. Analysis of the past data of the company revealed that the sales turnover the company in the year 2000 was $653.4 which is a ten times higher amount as compared to its sales turnover in the year 1996. According to the data published in the Australian Securities and Investment Commission, the turnover of the company was increased by;
127% in the year 1997
40% in the year 1998
57% in the year 1999
100% in the year 2000
As explained above the corporate governance played an important role in the financial distress and collapse of the aforesaid company. The term corporate governance can be defined as “the manner in which suppliers of finance to the corporate assure themselves on getting returns from their investments.” The proper and effective corporate governance of a business depends on the working style of the directors, executives and non-executives of the company. The application of the good standard of corporate governance is one of the important things that have to be maintained in every organization. The collapse of the company One-Tel was due to the wrong application of the corporate governance. The failure in corporate governance ultimately leads to the failure of the company as a whole which led to its collision.
The quality of the financial reports presented must be of accurate financial data according to the current economic condition of the business. A faithful representation must be made. A faithful representation includes complete, accurate and free from error financial data. This data reflects the earning quality and capacity of the organization. The earning capacity of an organization shows the features of a company how it is developing towards growth. In this case, One- Tel did not have a faithful representation for the economic performance and growth of the company.
Analysis of the facts of the data of the company, it can be concluded that the financial data of the company presented must have some discrepancy and error. The analysis shows that there were a lot of errors in the financial statements of the company such as trial balance, account receivables, outstanding balances etc. These types of discrepancy in the financial statements indicates that the weakness of internal control of the company. These types of issues are related to the failure of the corporate governance and ethics of an organization. In the aforesaid case there is a lot of flak and weaknesses in the internal management and earning capacity of the company One-Tel. The manipulation of the management of the company indicates the low earning quality of the company.
Likewise, one of the other financial companies of Australia collapsed in the year 2001 due to the same reason. The company was in insurance business and was a trading company with a track of rapidly growing company in Australia. The reason of its collapse was due to the acquisition of the company by another insurance company and the wrong accounting practices followed by the company. These are two reasons which are considered as the main reasons for the collapse of that insurance company. However, despite the collision of the company the Chief Executive Officer of the company had received a multimillion dollar package from the company after resigning form that company which was hardly a year after its collision. The collapse of the said company impacted a lot in the insurance business not only in Australia but also across the globe. The impact of the collapse was also felt by the construction companies operating in Australia.
The corporate governance system of Australia includes both internal and external control of the company. The corporate governance structure of Australia mainly contains hybrid system of working. Many Australian companies have a single board of directors which consists of both inside and outside members. In Australian companies, directors are classified under three broad category such as Executive, Non-Independent Non-Executive and Independent Non-Executives. The directors of the company play an important role in the day to day management of the company whether it may be Executive, Non-Independent Non-Executive or Independent Non-Executives. The directors are considered independent if they have a past relation with the company which may be in terms of employee, advisor etc.
The Australian Accounting Standards Board (AASB) is the authorized body in Australia to set accounting standards for the Australian companies. According to provisions and guidelines of the Australian Accounting Standards Board, Companies operating in Australia are expected to provide the financial statements of the company such as profit and loss statement, cash flow statements, trial balance, trading account details, balance sheet etc. The standards also say that the financial statements must indicate the faithful representation on the financial performance, profitability and growth of the company.
As explained above in the essay, it can be concluded that the liquidation process of the insurance company and One-Tel was occurred due to the failure of the corporate governance system, This indicates that the failure of corporate governance systems depends on the corporate governance models followed by the companies. The collisions of the aforesaid companies are considered as one of the major collapses in the history of Australia. The reasons for such collision and financial distress are fraudulent accounting practices, acquisition process, inflation in accounting data, lack of communication between the board of directors and auditors, wrong auditing practices etc. To overcome these type of financial stress and collision every organization operating in Australia should follow the guidelines and policies provided in the Australian Accounting Standards Board (AASB) and run their business according to its prescribed provisions.
From the above discussion and explanation it can be concluded that every company operating in Australia must have a standard code of conduct that has to be followed during the day to day operation of the business. The collision and financial distress are considered was one of the reasons for the weakness of corporate governance and ethics of a company. The company must follow the guidelines of Australian Accounting Standards Board, Companies which expects every organization to provide the financial statements of the company such as profit and loss statement, cash flow statements, trial balance, trading account details, balance sheet etc. in appropriate time so that there will be smooth flow of work in the organization. The aforesaid guidelines helps the company to avoid any type of financial distress and collision. Analysis of the case of One-Tel also revealed that the company faced collision due the poor and weak management of the corporate governance of the company.
From the above explanation and discussion it can be said that it is necessary for every company operating in Australia to maintain a proper code of conduct to implement the corporate governance and ethics of the company. The failure or success of every business depends upon the running and planning strategies of the management of the company. The collision and financial distress are considered was one of the reasons for the weakness of corporate governance and ethics of a company.
To overcome such type of issue, the companies must maintain their books of accounts and financial statements according to the provisions of the Australian Accounting Standards Board (AASB). The company also must focus on the financial analysis, reporting of the management, audit quality, internal control, management communication, fair presentation of financial data etc.
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