Question

Q. The unethical use of accounting information ABC Learning was Australia’s – and one of the world’s largest – providers of early childhood education services until it collapsed spectacularly in the late 2000s., when it came to light that its reported financial success was built on a number of questionable accounting practices. Required:

1. Search the internet for information about the ABC Learning corporate collapse and summarise the unethical accounting practices utilised by ABC Learning’s accountants.

2. Which of the principles set out in the Accounting Professional and Ethical Standards Board (APESB)’s Code of Ethics for Professional Accountants did these actions contravene?

Answer 1

1. Factors Contributing to the Collapse: ABC Learning Centres grew so exponentially within a span of 20 years that it was quite spectacular. However many internal faults within the company is what lead to the massive fall of this enormous organisation.    Manipulated Accounts & Lack of Transparency: It is without doubt that there were fundamental flaws in the accounting book keeping of the company and it was not well maintained. There seems to be significant discrepancies in the revenues, profits and figures stated in the company books. Many assets had to be written off, and pre‐tax earnings were inconclusive. When the company was handed over to the administrators during its receivership period, new auditors Ernst & Young informed stakeholders that the accounts of ABC Learning was highly manipulated and that the accounts would need to be re‐ instated.    Related Party Transactions: Following thorough investigation after appointment of the new auditors, it was revealed that the company CEO, Mr. Eddy Groves appointed Queensland Maintenance Services (QMS) belonging to his former brother in law Frank Zullo for maintenance works at ABC Centres. A total of $74 million was paid for those works.  Moreover the ‘Brisbane Bullets’ basketball team was sponsored by ABC, and it was owned by Mr. Groves.   Liquidated Damages: In addition to the above, ABC Learning had transactions relating to liquidated damages with 123 Global Group of Companies. ABC Learning would have 123 Global buy land, build centres, run them until occupancy rates were at a satisfactory level and then would finally buy the centres at a high price from 123 Global. Liquidated damages are the monetary compensations paid by a party if they fail to perform as per contract or there is breach of contract as per contract stipulation.

2. Fundamental ethics principle of APESB consists of 5 principles and they are Integrity, Objectivity, Professional competence and due care,Confidentiality and Professional behaviour. As per the standards of APESB A Member shall comply with the following fundamental principles: (a) Integrity – to be straightforward and honest in all professional and business relationships. (b) Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgments. (c) Professional competence and due care – to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent Professional Services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. 13 (d) Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the Member or third parties. (e) Professional behavior – to comply with relevant laws and regulations and avoid any action that discredits the profession.

During the collapse of ABC Learning these principles are contravened in various actions. When accounts are manipulated and it lost it's transparency principles of integrity , objectivity and professional competence and due care has been violated. There seems to be significant discrepancies in the revenues, profits and figures stated in the company books. Many assets had to be written off, and pre‐tax earnings were inconclusive. It shows that straight forwardness in professional actions and maintaining professional knowledge is not carried out there. Through related party transactions ABC Learning violated principles of Objectivity and professional behavior . Company CEO, Mr. Eddy Groves appointed Queensland Maintenance Services (QMS) belonging to his former brother in law Frank Zullo for maintenance works at ABC Centres. A total of $74 million was paid for those works.  Moreover the ‘Brisbane Bullets’ basketball team was sponsored by ABC, and it was owned by Mr. Groves. It shows that undue influence has occurred there and they didn't follow relevant laws and regulations. Also in the case of transactions relating to liquidated damages they didn't exhibit principles of professional competence and due care and integrity.