Collapse of HIH Insurance

Was it the Auditor?

Corporate Governance Model

Must maintain ethical standards while working in the best interests of

shareholders.

• Founded in 1968 (MW Payne Underwriting Agency Pty Ltd)
• Australia’s 2nd largest insurance company
• Liquidation position on 15 March 2001 with deficiency amount of $5.3 billion
• Biggest financial collapse in Australia’s history

Mirshekary, S, Yaftian, AM & Cross, D 2005, ‘Australian corporate collapse: The case of HIH Insurance’, Journal of Financial Services Marketing, vol. 9, pp. 249–258.

Westfield, M 2003, HIH: The Inside Story of Australia’s Biggest Corporate Collapse, John Wiley & Sons, Sydney.

Arguden, Y 2010, 'A Corporate Governance Model: Building Responsible Boards and Sustainable Businesses', Global Corporate Governance Forum, vol. 17, pp. 1-16.

Case Study Issues

• To study the cause behind the collapse of HIH Insurance.

• To analyze the lessons learnt from HIH.

• To make suggestions in an attempt to prevent future corporate failures.

• The 1973 Insurance Act was "so outdated that it was completely incompetent for regulating in the 1990s," says APRA.

• Insurance Council of Australia (headed by HIH chief executive Ray Williams then) lobbied to prevent any reforms from being implemented.

Did HIH's auditor carry out work ethically & responsibly?

Sydney, MH 2002, Australia’s regulator turns over a new leaf after the HIH debacle, Insurance Day, viewed 10 November 2013, <http://www.insurancedayjobs.com/recruitment/default.jsp?zone=public_zone&area=news_area&page=newsdetail_page_1&news_id=20000058039>.

Was HIH responsible towards all stakeholder?

Sydney, MH 2002, Australia’s regulator turns over a new leaf after the HIH debacle, Insurance Day, viewed 10 November 2013, <http://www.insurancedayjobs.com/recruitment/default.jsp?zone=public_zone&area=news_area&page=newsdetail_page_1&news_id=20000058039>.

"An antiquated Insurance Act meant that even if we had been a fully geared-up regulator, the collapse of HIH is inevitable because of deception and lying, as well as collusion by auditors and reinsurers"

(APRA's spokesperson)

Mirshekary, S, Yaftian, AM & Cross, D 2005, ‘Australian corporate collapse: The case of HIH Insurance’, Journal of Financial Services Marketing, vol. 9, pp. 249–258.

• APRA should set in-place regulatories in the field of actuaries for better estimates of claim liabilities and governance.
• System improvement should be continuously enhanced.
• Review accounting standards&practices.
• Mandatory rotation of auditors

Tricker, RI 1994, International Corporate Governance: Text Readings and Cases, Prentice Hall, New York.

Was the Board of Directors effective?

Is the Government accountable?

• Australian Prudential Regulation Authority (APRA)
• Company Act 2001
• Insurance Act 1973
• Financial Management & Accountability Act 1997
• Commonwealth Authorities & Companies Act 1997

1.Legal issues

2.Over statement of oil reserves controversy

3.Ambiguous corporate communications affected marketing

4.Human Rights and environmental issues degraded image

Who is responsible for HIH's collapse?

1.Government regulations

2.High Competition

3.Environmental laws

4.Economic instability

• Board of Directors
• Company Secretary

1.One of the biggest names in the field of energy

2.Strong brand equity

3.High financial growth

4.Latest technology

5.Co-branding with Ferrari

6.Operations in over 90 countries having 44,000 stations

• Auditor
• CEO
• Government

1.Acquisitions by buying out competition

2.Increasing demand for fuel

Mak, T, Cooper, K, Deo, H & Funnell, W 2005, ‘Audit, accountability and an auditor's ethical dilemma: A case study of HIH Insurance’, Asian Review of Accounting, vol. 13, no. 2, p. 25.

The HIH Royal Commission

Ray Williams contributed to the collapse of HIH through:

• Gross mismanagement
• Decision to enter US & UK insurance markets
• Uncontrolled expansion

• To inquire into the circumstances surrounding the failure of the HIH Insurance Group.

• PM of Australia, John Howard, tasked Justice Neville Owen of the Supreme Court of Western Australia to be the Royal Commissioner.

John, RS 2001, The HIH Royal Commission, Commonwealth of Australia, viewed 10 November 2013, <http://www.hihroyalcom.gov.au/About/index.asp>.

Did the CEO fulfill his role?

"The Board is the mind...the management team its hands!"

Dennings

Mills Oakley Lawyers 2012, Company Secretaries – Know Your Obligations, Mills Oakley Lawyers, viewed 10 November 2013, <http://www.millsoakley.com.au/company-secretaries-know-your-obligations/>

• Board papers - financial & non-financial
• Custody and use of company seal

Allan, G 2006, ‘The HIH Collapse: A Costly Catalyst for Reform’, Deakin Law Review, vol. 11, no. 2, pp. 137-159.

• HIH goes into provisional liquidation

• Federal government ordered Royal Commission

Is the Company Secretary to be blamed?

Mervyn King

• Rodney Adler was not only a director at HIH but also one at FAI.

• Three former partners from Arthur Anderson sat on HIH board.

Zehnwirth, B 2002, 'HIH debacle reveals monitoring flaws', Australian Financial Review, November 15.

Two experienced and reputable actuaries, Richard Wilkinson (liquidator) & David Slee (HIH), gave differing estimates of outstanding claims liabilities, $9.7 billion and $4.4 billion respectively, just 12 months apart, based on the same data.

Were the Regulators at fault?

2001

King, M 2009, 'The King Report on Corporate Governance for South Africa (The Institute of Directors in Southern Africa)'.

“You cannot legislate good behaviour.”

"Organisations need to practice qualitative corporate governance rather than quantitative governance thereby ensuring it is properly run.”

Westfield, M 2003, HIH: The Inside Story of Australia’s Biggest Corporate Collapse, John Wiley & Sons, Sydney.

• HIH sells part of its domestic business to Allianz

• HIH shares tumble to an all-time low

Did the regulators fulfill their responsibilities and roles?

Conclusion

2000

• Wrong business decisions can be costly and even fatal.
• A sound system of risk management and internal control is required for identification and effective management of risk in any corporation.

• HIH wins takeover bid for FAI

• HIH posts 39% fall in profit

1999

hank

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HIH Insurance

by the J.A.C.

Janice Soon Jia Yang

Agnes Hii Wee Teen

Colin Yong Sheng Shieng