Analysis Of The Collapse Of Forge Group

Collapse of Forge Group Limited

Forge group limited was established as Clampter Pty Ltd on 30 June, 1994. It became an unlisted public company in June 2005.then it changed its name to Forge Group Limited on 5 June, 2007 and finally got listed on ASX on 26 June, 2007. It has four key divisions power, asset management, construction, minerals and resources. It emerged from a small business and managed to capture a significant market presence in past years but it failed to continue its presence and put itself in voluntary administration as on 11 Feb, 2014 sacking about 1500 employees without pay and $500 Million in debts. (ASX)

Here is a detailed analysis of the failure of the Forge group

Major reasons of collapse:

From the analysis of the financial statements and the administrator’s report by Ferrior Hodgson, it is clear that major reasons of the downfall were:

• The forge group had a debt focused capital structure and the market conditions were not supportive for such capital rising so it resulted in high leverage. Due to debt focused structure, management failed to take restructuring initiatives and the risks relating to the business structure had materialized. (Hodgson, 2014)

• It lacked the diversification and risk control measures. It made investments on low margins and failed to control the cost which resultantly consumed the profits.

• General market downturn in mining industry over the last 18 to 24 months is also a reason of the failure

• Cost escalations in relation to a number of construction projects including DPS and WAPS were identified in September 2013 (Smith, 2013)

• Directors tried to take restructuring initiatives to raise capital despite of being aware of group’s inability to pay its debts.

• Group ignored advi...

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...y Act 2002, auditor is required to adopt a broad perspective and have to report on the management’s assessment of internal controls which actually promotes risk management and governance process within the organization.

In my opinion, the main reason of the corporate collapses is the absence of internal control and internal check. Unless the management doesn’t recognize its responsibility towards the organization, the collapses can’t be controlled. There must be a proper system of internal control. Management should develop accounting controls to assure the asset safeguard and reliability of accounting records. There must be administrative controls as well to assure transparent and prudent decision making. Internal audit, internal check, work standards, quality controls etc all must be adopted in order to reduce the failure chances and to make the company efficient.