One Tel Financial Crisis

Introduction: 

The role of perfect management control, audit and accounting control is a very well known subject for all industries, firms and companies or business institutions whatever the size may be big, medium or small and it is the common practice throughout the entire world. The telecommunication industry is no exception to the concept. The Australian corporate sector was shaken after fall of three major companies since 1999. The crisis of One Tel and the fall of the company was the most happening issue in 2001. One.Tel owed more than $600 million to 3000 creditors and $19 million of accrued entitlements. The fall of One Tel was the major talking point in the industry. 

The role of great management systems, solid accounting and internal & external audit system including right financial reporting systems that allows speculating upon opportunity of attractive business and resources and if any drawback lies in the business structure. The telecom companies generate most useful information for the telecom industry as a whole, all stakeholders and for the ultimate customers. The information can be used internally by the telecom companies, government to understand demand and supply format as also for spectrum distribution decisions to be taken as well as guide all telecom companies to take a particular step for accounting control and for internal and external audit including foolproof observation, scrutiny, and analysis methods followed by the Board and top management (Cook, 2001).

Statement of Problem: 

The role of Corporate Governance was not rightly followed by One-Tel. The fourth largest telecom company, One Tel in May, 2001 collapsed and left the telecommunication industry in Australia in deeper crisis. The company was having two million customer bases and operating in eight different countries during May, 2001. One-Tel’s fall shocked to Australian business community and the corporate world which recorded by Australian Broadcasting Corporation in 2001 and Cooke 2001. The major creators of the company were Cable & Wireless Optus group and Telstra. The aggressive marketing strategy and significant spending in advertisement is one of the reasons for the fall.  After starting operation in 1995, the company reached to an agreement for construct One.Tel's mobile network worth of $1.1 billion with Lucent Technologies. The target of the company was to charge lower cost from the customers while the actual operating cost per customer was high. Optus has an average cost $265 per customer but for One.Tel $416 per customer for. The faulty business strategy is the main reason for the crisis (Cpaaustralia, 2015). 

The main reason of this collapse is the weaknesses in corporate governances which was related to various areas like financial reporting system and quality, observational and detailed scrutiny methods followed by management, Board and general management interaction and communication, audit system and its quality and main reporting drawback, internal control system and the mostly important one is the pay of the senior executives vis-à-vis performance.

Literature Review: 

The general research paper on One-Tel’s great collapse is to be capped to be the only paper on the company. It is very rightly formulated and drafted by Mr.Reza Monem on One Tel collapse.  

The detailed analysis is based on quantitative data collected from various sources it is found that the One-Tel’s failure is called as failure in expectations, strategic mistakes and errors, wrong pricing of the product, lower than operating cost, failing growth path. The company’s great rise and the subsequent fall are mainly due to very immature approach and serious deficiencies in the corporate governance (Monem, 2012). 

According to David Avison and David Wilson in their research paper “IT FAILURE AND THE COLLAPSE OF ONE.TEL” stated that corporate collapses are mainly based on bankruptcy models which focused on testing and developing methods. The areas which are most important to these study is compensation for the higher management rank, structure of the corporate setup, value addition taken place in the business, performance of the business. 

The One-Tel collapse is studied in details in reference to its history in terms of business pattern it followed, different strategies and growth pattern it followed. According to Australian Financial Review, the demise mirrors trends for One Tel resulted into loss of USD 6.2 billion.  The financial performance, financial distress and collapse of One-Tel is very useful information for the entire telecommunications industry as a whole as well to the entire business community of Australia and the world (Avison & Wilson, 2016). 

The entire audited financial reports were studied from 1996-97 to 1999-2000 and its quantitative analysis was like longitudinal method and pattern as well as comparison of One-Tel with other competitors at that time. Both qualitative and quantitative data collected from different sources were analyzed and diagnosed from different sources from newspaper articles, legal judgment, company’s annual reports, published media reports from electronics format, etc. data were studied, interpreted, analyzed using textual analytic system. 

One-Tel was incorporated on 1^st May, 1995. One Tel signed reached to an understanding with Optus, second largest telecom company after Telstra in Australia. The agreement was mainly to receive call details of customers, network service, SIM cards. According to the agreement One-Tel agreed to pay Optus for call charges and access fees for its subscribers. The service charges paid to Optus were subsidized by One Tel to its subscribers and the company attracted the customers with cheap mobile calling rates for international call services and long distance calls (Elliott, 2010). 

The growth of One Tel was significant and reached to a subscriber based from only 1000  to 100000 within a span of one year and again to 160,000 as on 30^th June, 1997 and registered register sales revenue of AUD$ 148 million in FY 1996-97 and an operating profit of AUD$ 3.7 million.

The companies Optus and One-Tel had a continues dispute from July, 1996 which were related to

1. Optus was in full fledged competition with One-Tel for subscribers directly.
2. A doubt was there if One-Tel’s subscribers were allowed to use the Optus’s reduced price or rate offers, for which a reference can be made to Australian Securities and Investment Commission (ASIC). 

Another agreement was signed on July, 1997 between One-Tel and Global One for highly discounted international and national calls to its subscribers based on Global One’s network to One-Tel’s subscribers. 

On November, 1997, One-Tel got listed at Australian Stock Exchange (ASX) at as issue price of AUD$2. And One-Tel achieved to gain 200,000 subscribers and more than 400 dealers throughout Australia as on December, 1997.

The company started its Global Strategy to make its inroads in United States of America (USA) on January, 1998. Entire year of 1998 was used to open its offices in various international locations including London, Los Angeles, Paris, Hong Kong, and Amsterdam with a purpose of selling fixed wire services. It spent AUD$ 9.5 million for 2.5 MHz spectrum in both cities of Melbourne and Sydney and also 5 MHz of spectrum for Perth, Adelaide, and Brisbane (BBC, 2016). 

The share prices of the company increased continuously from January, 1988 till it reached AUD $9.8.A brilliant approach was taken by One-Tel by making offer of investment of 40% to News Ltd and PBL by an complex agreement for an investment of AUD$430 million each immediately and later on AUD$ 280 million each. The main motto of this agreement was to work together for building mobile phone network for existing 2 million subscribers by December, 2004. 

It worked miraculously and share prices raised from AUD$9.8 on 14^th February, 1999 to AUD$ 12.63 on 16^th February, 1999 after the investors responded with high expectations which is the one of main reason or drawback that started to take place for the failure or the collapse of One-Tel. The new setup would be One-Tel’s next generation mobile network for internet business, and fixed line business in Hong Kong, Europe, acting as reseller of against Telstra fixed wire business.     

In late 1999, the company introduced local call product targeting a rate of 17.5 cents making a bundle of fixed calls, mobile calls, and ISD calls for all subscribers availing the bundle service. This service was a loss making venture but it was done to gain customer base and was planned to cover this loss from the profit made from relatively high margin other product bundled and result in net profit margin. 

One-Tel signed an agreement with another tech company, Lucent Technologies in September, 1999 to build national mobile network. The agreement was valued at AUD$1.15 billion. In between both companies were in fighting for various reasons including delay in building the network. On the basis of the agreement, in 1999 Lucent Technologies agreed to build, manage and also finance European mobile network and the total deal value was of USD 20 billion on behalf of One-Tel for service to its European subscribers. 

In the short span of time, by   November, 1999 One-Tel became 30^th largest company listed in ASX with market capitalization of AUD$3.8 billion and share price jumped to AUD$2.84 and helped it to reach a market cap of AUD$5.3 billion. The company’s growth plan was very ambitious and this was the nail in its coffin too making it to engage huge fund in its various sections like employees and suppliers. 

The entire expense base to its employees and suppliers grew in such a phenomenal manner that shows that fund will be a real problem in very near future. In 1996 AUD$98.71 million was the employee and suppliers expenses which grew to AUD$193.35 million in 1997-98 and again grew to AUD$328.11 million in 1998-99 and grew to AUD$648.80 million in 1999-2000 (Theage, 2003). 

The cash outflow for gaining access to non-current assets also grew to AUD$ 4.9 million in 1996-97, which grew to AUD$ 10.8 million in 1997-98, grew more to AUD$32.2 million in 1998-99 and grew again to AUD$614.9 million in 1999-2000. The entire expense category in 1999-2000 included AUD$523 million for making purchases of telecommunications licenses in 2000, March and this amount was more than ten times the amount spent by its nearest rivals and first, second and third largest Australian telecommunications company namely Telstra, Optus and Vodafone who had also paid during the same very period for purchasing same licenses. 

The company’s death stories have already been scripted and the coffin is being readied. The company have registered operating loss of AUD$291 million for FY 1999-2000 with sales revenue doubled to AUD$ 654 million from the last year. The Merrill Lynch has warned the One-Tel that it will run out of cash and this will pose grave danger for the company. 

The cost per customer was AUD$350 while the margin was only AUD$50 which means that when a subscriber takes a plan it takes 7 months just to recover the customer acquisition cost and from eight month onwards it will be in profit margin. By January, 2001 all State capitals in Australia had One-Tel service except Melbourne. 

The largest share holders News Ltd and PBL refused to put in more additional capital. Auditor Ernst and Young estimated a liquid cash requirement of AUD$240 to AUD$370 million to keep the company live for next six months as on 29^th May, 2001. The company was registered as receivership on 30^th May, 2001. One-Tel recorded a share price of 16 cents only as on 25^th May, 2001, the last trading day. Later on 24^th July, 2001, the creditor’s of the company opened vote in favour of the closure and winding up of the company’s operations (Monem, 2012). 

The standards that was to be followed by One-Tel management was actually not done and due to which the collapse took place despite the company rose to such a great height despite having stiff competition from Telstra, Optus, and Vodafone. The three most important areas were Board composition and its activities, salary benefits for senior executives and management personnel, financial reporting standards and rules due to which the company collapsed. 

The financial reports including Trial Balance, Spreadsheets containing important data, monthly board reports, ageing analysis of debtors and creditors, billing pending status, cheques uncleared, funds not yet collected were the few areas which should have been checked by higher management or the finance director but not done (Holdingredlich, 2010).

Hypothesis: 

The research paper will highlight different area of corporate governance and management control and its role in strengthening of the telecommunication industry as a whole. The hypothesis will look in the fact that;

• Whether the management control, proper audit system, proper accounting ad reporting system has strengthened the telecom company’s overall structure especially to guard the failure mechanism?
• Whether the over emphasis of management control, audit system and accounting had a negative impact on the telecom company’s especially guard the failure mechanism?

Innovative Aspect of the Research: 

The research is mainly done with an aim to locate the deficiencies of the entire company in vivid manner so that the entire telecommunications industry is greatly benefited and such occasion of Telecom Company’s failure do not take place in future and in other industries also. This research topic focused insight the financials and operational deficiencies of the company. There was a discrepancy in accounting records also including accounts receivables data, outstanding accounts receivable, EBITDA (Holdingredlich, 2010). 

There were no real time figures for debtors, risk of debtors or ageing analysis. The entire financial record keeping and reporting did not received proper attention from higher management and Board in specific hence this resulted in slow death. The conservative nature of accounting followed and also the non creation of any intangibles in comparison with other telecommunications company were reported in annual reports of 1998 but no corrective measures were implemented to make rectifications.

Methodology: 

The main idea of the company like One-Tel should and all telecommunication company should follow a right method to manage its financials in the best possible manner and particularly by not making hasty and foolish investments which makes no sense and in the long run it makes the company to start losing and in the way its winding up becomes inevitable. Many large companies just got wiped out by not following proper financial control and management and its timely review with guided rectifications and introduction of continuous observations system.

Conclusion: 

The story of the One-Tel shows us that the Rise and Fall are very relative and we need to take care of the entire process very seriously. We need to understand from One-Tel story that nothing is permanent on this earth but change is inevitable. But there instances of companies who are still surviving for more than 100 years and still growing in very healthy manner and planning process. The cost cutting is a god ploy to enter into a new market but actually that has not resulted into profit for One Tel. the company could not survive the higher cost and lower margins. The Australian telecom market was already saturated enough to fit for a new entrant. Despite that it could have been avoided, if the company took the path or merger and acquisition and cost control. The role of the regulator becomes important avert such situations (Avison & Wilson, 2016).

References: 

Avison, D. & Wilson, D., 2016. It Failure and the Collapse of One.Tel. [Online] ink.springer.com Available at: http://link.springer.com/chapter/10.1007%2F978-0-387-35604-4_3 [Accessed 12 September 2016].

BBC, 2016. One.Tel collapse angers magnates. [Online] news.bbc.co.uk Available at: http://news.bbc.co.uk/2/hi/business/1360346.stm [Accessed 12 September 2016].

Cook, T., 2001. Collapse of Australia's fourth largest telco adds to growing list of corporate failures. [Online] www.wsws.org Available at: https://www.wsws.org/en/articles/2001/06/onte-j08.html [Accessed 12 September 2016].

Cpaaustralia, 2015. An insight into the One.Tel collapse. [Online] www.cpaaustralia.com.au Available at: https://www.cpaaustralia.com.au/professional-resources/education/onetel-collapse-case-study [Accessed 12 September 2016].

Elliott, T., 2010. OneTel.one big debacle. [Online] ABC Available at: http://www.abc.net.au/news/2009-11-20/28324 [Accessed 12 September 2016].

Holdingredlich, 2010. The One.Tel case and developments in Directors and Officers’ duties. [Online] www.holdingredlich.com Available at: http://www.holdingredlich.com/corporate-commercial/insight-corporate-a-commercial-sp-1124261267 [Accessed 10 September 2016].

Monem, R., 2012. The One-Tel Collapse: Lessons for Corporate Governance. [Online] www98.griffith.edu.au Available at: http://www98.griffith.edu.au/dspace/bitstream/handle/10072/42673/74746_1.pdf [Accessed 12 September 2016].

Theage, 2003. Keeling admits guilt over One.Tel collapse . [Online] www.theage.com.au Available at: http://www.theage.com.au/articles/2003/03/21/1047749927414.html [Accessed 12 September 2016].

 

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