ABSTRACT

The Australia corporate world has been shaken by the demise of another major

company, the third such collapse in a matter of weeks. One.Tel, the countrys fourth

largest tele communications company (telco), ceased trading on the Australian stock

market on May 28 and was put into the hands of an administrator after an investigation

of the companys financial situation showed it to be insolvent (Cook. T, 2001). The

One. Tel collapse has lay off its 1,400 workers and also impacting on a host of small

creditors owed thousands of dollars for goods and services. Many faced bankruptcy and,

according to the reports, will receive nothing from the company windup. The fact that

workers entitlements are under threat while the major creditors and company

executives are protected is a further embarrassment to the government which is trying to

overcome the hostility engendered by its big policies over the last five years (Cook. T,

2001).

This assignment embarks on the issues leading to the collapse of One.Tel; breaches of

the corporate governance and persons involved; and how the breaches could have been

avoided.

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1.0 Introduction

One.Tel is the generic term used to describe a group of Australian based tele

communications companies, including principally the publicly listed One.Tel Limited

(ACN 068 193 153) established in 1995 soon after deregulation of the Australian tele

communications industry (Media Coverage).The company was established by Jodee

Rich and Brad Keeling who had secured large investments from Murdoch and Packer

business empires (Media Coverage). One.Tel attempted to create a youth-oriented

image to sell their mobile phones and One.Net internet services, with a slogan Youll

tell your friends about One.Tel, to draw the connection between the brand and personal

communication.

One.Tel experienced huge trading losses and reductions in net realisable value in

2001 u pto 29 May 2001. During this period One.Tel incurred net trading loss of at least

$92million. In these months the liquidity position of One.Tel worsened by very large

amounts; from a deficiency of $24.5 million on February 2001 to a deficiency of

$98.7million on 29 May 2001. The deficiency in liquidity precipitated the failure of

One.Tels business. Facts were established on the deterioration which occurred in the

financial position and performance of One.Tel from 1 January 2001 onwards. By 28

February2001, One.Tel actually requires a cash injection at least$270 million to

continue its existing operations and meet current and reasonably foreseeable liabilities,

and the requirement for cash injection was at least $287 million by 31 March 2001.

One.Tel would also incur additional indebtedness to Lucent Technologies of

approximately $365million for capital works relating to the construction of the network

(NSW Supreme Court, 2003).

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2.0 Collapse of One.Tel and the Issues

The thread leading to the collapse of One.Tel including: inappropriate

management compensation; creative accounting; failure of directors and managers to

exercise due diligence; lack of adequate regulation; and lack of independence in audit

function(Leung, P., Cooper, B.J., 2003).The company was specifically geared to

making money through stock market speculation. Reports indicated the bonuses paid to

Rich and Keeling were specifically tied to the rise of the companys share rather than

profit or any other indicator of the overall viability of the company (Cook.T, 2001).

One.Tels rapid expansion was way beyond its financial capacity coupled with its

misguided management decision. It was also badly hit by the changes in the European

network providers and more generally, One.Tel was caught up in the international

collapse of dotcom ventures (Cook.T, 2001).The companys high risk, low yield

strategy, with generous incentives for new customers could not be sustained in the small

Australian market which had six mobile phone providers the second largest number of

any country in the world (Cook.T, 2001). The fatal flaw in the business model of the

company was that the telecom services were offered to subscribers at lower than the

price the company was paying for them itself. It could only survive as long as it could

raise new capital investment more rapidly than it was burning money (Parker, S., Peters,

G. and Turetsky, H.F., 2002).

Keeling and Rich used their marketing skills and unwavering positive public

statements to promote the company and made assurance that One.Tel would have

A$103 million at June 30 (Hopkins. N., 2001).Keeling did not fathom the true position

of One.Tel; he wholly misunderstood the facts One.Tels financial position and

performance. Rich, particularly, was misleading the market and shareholders by saying

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that the company is having big cash surpluses and heading to profits; and the company

was on target to meet its subscriber numbers and gross profit projections. Through the

last quarter of 2001, Rich gave the board and directors James Parker and Lachlan

Murdoch repeated upbeat assurances that the companys cash position and profitability

is improving (Lampe A.,2004). Rich and Keeling were very much running the show at

One.Tel, and they presented the accounts to Geoff Kleeman as they wanted him to see,

large sum of money were being moved around the group between the subsidiaries to

disguise the true situation.

In financial year ended 30 June 2000 One.Tel reported loss of $291 million. The

share price plummeted to below $1. Despite the loss, Rich and Keeling each received

a$560,000 basic salary and a $6.9 million bonus (Media Coverage).Avison. D, Wilson.

D. & Hunt. S contended that, Rich concentrated very much on the big picture. Cadzow

(2001) suggested his attitude was why bother with petty concern like faulty billing

systemswhen you can be thinking about global expansion. Paul Budde,

communications analyst, put forward two failure of management as the reasons for the

collapse. Firstly, the decision to spend $1.2 billion building their own mobile network,

which Budde, argued was just ego and macho on Richs part. Secondly, the state of the

billing and debt-collection system caused the company to go to the wall (Cadzow,

2001).

Mark Silberman, the Finance Director did not exercise powers with respect to

the company with due care and diligence; alleging misled the board as to One.Tels true

financial position. One.Tels accounts were kept by juggling the creditors, deferring

payments of million dollars repatriating money from overseas subsidiaries. John

Greaves, the Chief Financial Officer failed to exercise his judgement with duty of care

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of an expert being a Chartered Accountant, with extensive background in finance

function of public company and as chief financial officer at One.Tel. As a Chartered

Accountant, he should be able to properly assess One.Tels financial performance and

spot the discrepancies in the books thus alerted the board. Rodney Adler, the Company

Director dumped One.Tels stock in the tumbling market. He is known to have sold off

6 million One.Tel shares raising $2.2m after directors meeting on May 17 (Cook.T,

2001). There was report shown that James Packer and Lachlan Murdoch who are the

Board Directors are responsible for approving the bonus deals and pumping in hundreds

of millions that triggered these very bonus payments which then helped destroy

confidence in the company.

3.0 Critical Reflection of the Collapse

Principle 1 states that lay solid foundations for management oversight. The

board has the primary responsibility for the oversight, management and performance of

the Company which includes compliance with the Companys corporate governance

objectives. Rodney Adler, the company director contravened his directorial duties as an

officer pursuant. He fails to ensure One.Tel make affordable expansion and loans and

fails to ensure the company has a proper system of controls and audits in its business to

avoid defalcations by other Officers and employees. Immediately after the directors

meeting on May 17 2001, he sold off 6 million One.Tel shares raising $2.2million. He

did not care for the benefits of shareholders, company and employees of One.Tel. He is

in for getting as much as he can before the company collapse. None of the Business

Judgement rule or acting in good faith matters to him. By selling his shares, he is using

his position as a director in One.Tel to gain advantage for himself by using the

information gained in the boards meeting. He is using privileged information gained at

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the board for trading in his own benefits and gains. It does not matter to him the

implications or consequences to the company by his act of dumping One.Tels share.

Principle 4 states that safeguard integrity in financial reporting. Companies

should have a structure to independently verify and safeguard the integrity of their

financial reporting. Mark Silberman, the Finance Director fails to supervise One.Tels

finances adequately and failed to keep the board informed and he might have fiddle with

the accounts by simply juggling the creditors, deferring payments and repatriating

money from overseas subsidiaries (Staciokas, R. and Rupsys, R., 2005). And this had

misled the board of the actual cash flow of One.Tel. John Greaves, the Chief Financial

Officer relied on the financial information supplied to him by others, including the

executing directors. The financial information supplied to Greaves was limited and

inaccurate in material respects. He fails to take reasonable steps to:

promptly ensure that he and the board were aware of certain financial

circumstances, including cash balances and the aging of debtors, in January, February

and March 2001;

monitor the management of One.Tel to properly assess the financial position

and performance and detect material adverse developments;

ensure that all material information was available to the board, particularly

concerning the adequacy of cash reserves, and the actual financial position of various

segments of the business (Okpara, J., 2011); and

ensure that systems (billing and accounting system) were maintained and

monitored which resulted in accurate and financial information flowing from

management to the board.

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Being a qualified Chartered Accountant and with his expertise he should not rely on the

information provided by others. He should take an active role in ensuring the accounts

of the company has been correctly reported and the accounting system is in place and

alert to Silbermans act of keeping the accounts simply by juggling the creditors,

deferring payments and repatriating money from overseas subsidiaries (Goodwin, J.,

2003).

Principle 7 states that recognise and manage risk. Companies should establish a

sound system of risk oversight and management and internal control (Karagiorgos, T.,

Drogalas, G., Eleftheriadis, . and Christodoulou, P., 2010). Both James Packer and

Lachlan Murdoch, the Board Directors being otherwise engaged in their other more

lucrative business empire. They did not monitor the business and left the running of the

business to Rich, Keeling and Silberman. They did not know the true financial position

of the company and make judgement according to information or promises made by

Rich. They further approved bonuses of $6.9 million to Rich and Keeling in financial

year ended 30 June 2000 despite reporting a loss of $291 million. Packer sacked PBL

chief executive Nick Fallon for questioning the One.Tel investment (Mayne S.). As a

director, he should have been alert when Fallon question One.Tels investment and

investigation should be carried out to verify the fact and financial status of the company.

Jodee Rich and Brad Keeling, as the Founder & Joint Managing Director, failed

to manage their responsibilities including responsibility to properly assess the financial

position and performance of the group and detect and assess any material adverse

development; and taking reasonable steps in ensuring that the directors are fully

informed of all material financial information about the adequacy of cash reserves and

One.Tels actual financial position and performance. One Senior accountant suggested

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that `The place was a joke. There are no structures, no accounting systems, no processes

and no control` (Barry, 2002,p185). David Barnes, the group financial controller, finally

resigned stating he was not prepared to do what his bosses were asking, and that he

considered it completely unethical (Barry, 2002,p.255). They did not take steps to either

to apprise themselves of the financial situation and the deterioration from about the end

of January until about the end of April 2001, or to ensure that the board was aware of

them. Failures to ensure the establishment of proper system to produce accurate and

reliable financial information, failure to maintain cash reserves at a level which ensured

liquidity and failure to employ an appropriately qualified finance director.

4.0 Conclusion

The board has the primary responsibility for the oversight, management and

performance of the Company which includes compliance with the Companys corporate

governance objectives. Adler, Silberman, Greaves, Packer, Murdoch, Rich and Keeling

have all failed to carry out their fiduciary duties by acting in their own interest which do

not include taking any active participation or interest in caring for the benefit of the

company and shareholders interest. Besides, they should have a structure to

independently verify and safeguard the integrity of their financial reporting. They are

not interested to investigate on the actual financial performance and ensure the correct

accounting reporting of One.Tels accounts. They failed to employ their expertise to the

management of the company and failed to carry out the fiduciary duties as company

director: to act in bona fide in the best interest of the company; to exercise powers for

their proper purposes; to avoid conflicts of interests and to act with care, skill and

diligence.

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 It is obvious from the analysis above that Rich and Keeling pursued their self-

interest or obsession in building their own mobile network by expanding too fast and

investing all the cash in One.Tel without having a thought for maintaining cash reserves

at a level which ensured liquidity. They should establish a sound system of risk

oversight and management and internal control. As a director, they are expected to run a

business aimed at making a profit with calculated risk instead they keep expanding

beyond One.Tels financial capability. They also help themselves to hefty bonuses when

the company is at the eve of collapsing.

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REFERENCES

Barry, P (2002) Rich kids, Bantam, Sydney.

Cadzow,J. (2001) That Rich Bloke, The Australian, 4 August.

Cook. T. (2001) Collapse of Australia's fourth largest telco adds to growing list of

corporate failures. World Socialist Web Site. Retrieved from:

https://www.wsws.org/en/articles/2001/06/onte-j08.html

Goodwin, J. (2003) The relationship between the audit committee and the internal

audit function: evidence from Australia and New Zealand, International Journal of

Auditing, 7(3), pp. 263-278.

Hopkins. N. (2001) One.Tel's fate in the balance as funds dwindle. CNN. Retrieved

from: http://edition.cnn.com/2001/WORLD/asiapcf/auspac/05/29/onetel.statement/

Karagiorgos, T., Drogalas, G., Eleftheriadis, . and Christodoulou, P. (2010) Internal

audit contribution to efficient risk management, Journal of Business Management,

2(1), International Science Press, pp. 1-14.

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Lampe A. (2004) One.Tel man ordered to pay $20m, The Age, Australia. Retrieved

from:

http://fddp.theage.com.au/articles/2004/09/06/1094322714285.html?from=storylhs

Leung, P., Cooper, B.J. and Robertson, P. (2004) The Role of Internal Audit in

Corporate Governance and Management, RMIT Publishing, Melbourne.

NSW Supreme Court. (2003) Supreme Court Rules (Amendment No 373) 2003. New

South Wales, Supreme Court Act 1970.

Okpara, J. (2011) Corporate governance in a developing economy: barriers, issues, and

implications for firms, Corporate governance, 11(2), pp. 184-199.

Parker, S., Peters, G. and Turetsky, H.F. (2002) Corporate governance and corporate

failure: a survival analysis, Corporate governance, 2(2), pp. 4-12.

Staciokas, R. and Rupsys, R. (2005) Internal Audit and its Role in Organizational

Government, Organizaciju Vadyba, ISSN 1392-1142, 33, pp. 169-180.

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TABLE OF CONTENTS

ABSTRACT . 1

1.0 Introduction ... 3

2.0 Collapse of One.Tel and the Issues .. 4

3.0 Critical Reflection of the Collapse ... 6

4.0 Conclusion ..9

REFERENCES ... 11

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