HIH Case Study: Lessons In Corporate Governance And Risk Management

The Collapse of HIH: Reasons and Consequences

Discuss about the Lack of Adequate Planning of HIH.

HIH was established in the year 1968 and there were many questions about its operations from the very beginning. Despite formation, the insurance business commenced from the year 1998 and hence, there appeared a difference from the very beginning. The operations and policies lack in substance and due diligence was weak due to which it faced the immense problem. When the downfall was evident, the Winterthur Insurance Company withdrew the stake from HIH. The insurance business is exposed to risk and hence, risk orientation must be the sole requirement. Public money is being held by the insurance company thereby, the regulations must be framed in a manner that will provide an adequate safeguard in this regard. Lack of compliance and weak measures can lead to the liquidation of the company. HIH was one of the apt examples where the business was liquidated owing to the weak measures and falsification of the accounts.

Providing for the future claims was the top notch reason for the collapse of the HIH. This one factor gave rise to all the other secondary threats. Companies must have intelligently planned future claims because it is one of the most important pillars of survival. A negative deflection of just 1.7% led to the downfall of HIH because their planning for future claims was not up to the mark. HIH was not able to adapt to the changes going on in the market which was the fault of the company’s management. Due to this non-adaptation, the liabilities of the company sore new heights and despite of such a situation, nothing was done to control the downfall. Market will keep changing and will keep making alterations which will surely affect the management of the insurance companies, but it is also seen that approximately all the companies have plans and adapt to the changes to reduce the impact that the changes will cause on their assets (Vause, 2009). HIH was a competitive and dominating company in the market with race against time in order to grow successful which lead to its downfall by opening gates for multiple vulnerable threats (Livne, 2015).    

As mentioned earlier, the dominating and fast growing character of HIH led to its downfall. If this point is concerned then it would not be wrong to say that the company was growing and expanding its boundaries, but was also keeping its foot into the increased liability zone. Parametrical growth of the company overshadowed the management eye which thought that the increase in the liability is negligible as compared to its expansion which was not the practical result. Also, the company made no changes or adds extra provisions to adapt to the evolution of the market, which could have been undertaken well enough if the management was attentive (Saville, 2003). All this points to the direction that the management of the company was not at all concern with the fact that the company is following a negative deflected planning with respect to its financial condition. The company didn’t seem to require any set of operations or programs to be undertaken to check the same (Cappelleto, 2010).     

Lessons in Corporate Governance and Risk Management

It is obvious by now that much more security measures were required in the case of HIH. Though HIH was having a dominant run in the market but was unable to control and reduce its own liability which required a series of operative tasks. While entering the market in the early phase, the company had no idea or experience about it which cost it in bad way. Loopholes were made in the company when they did nothing to adapt to the alterations made in the market and to set a limit to their expansion plan. Faulty and lazy management can be given the blame for the downfall who was over-confident about their work during the dominant run of the company. Another foolish move was made by Rodney Alder when he tries to accumulate assets by delivering and presenting false statements in respect of the company.    

A chance to plan well and eliminate the liability existed with the company when it was first visible in the statements. This would have been a chance for the company to save their foundations and to recover in the future which would have surely taken time but was possible. But Rodney Alder thought of following a shortcut which was to deliver and represent false statements about the company and accumulating funds which he thought was a better way to safeguard the present and to better the future. These steps were taken to just hide the financial position of the company from the public. Alder thought that this would not only reduce the liability but would also stable the expansion program which was not the case as the plan backfired to multiply the troubles and add on some new threats (Gay & Simnet, 2015). Regulatory authorities were blank with no knowledge of what was going on in the company. This was obvious because when comes under the threat of being insolvent then they are bound to go beyond the rules and limits and do the needy (Saville, 2003). This can be an essential lesson to be learnt about the fact that Alder alone had enormous powers to change the company as and when he wanted. It is also seen that there are limits within which the regulatory authority can support the management of the company but it is also obvious that the company will follow miscalculated and manipulative tracks to save their company from being insolvent. The thing the authority can do is to set up punishments for Rodney Alder and other officials as well who took to manipulative tracks which would be warning to the other companies in the market also (Fazal, 2013).      

APRA has constructed a whole set of new rules for the insurance companies in Australia and this was done during the downfall of HIH. A total of six new rules were launched which also included:

• Liability Valuation – to forward the regulations that deals with the advice of actuarial to the board, as well as management.
• Capital Adequacy – to keep a certain level of capital that synchronizes with the risk profile.
• Risk Management – to enhance the effectiveness of corporate governance by having an access to the proper expertise that is independent in nature and helps in tracing the risks.

It was in the year 2002 that the Australian Securities Exchange Corporate Governance Council was established to construct a set of rules and regulation in the field of corporate governance which would be followed by all the Australian companies. In the year 2003, Elizabeth advocated that it is necessary for all the companies to represent their corporate governance plans in their reports as per the rulebook (Saville, 2003). As of now, it is necessary for the companies to have a plan to control a material business risk if the case arises and this plan should also be presented in the company policy book. It is advised that the company board should build up a management team to eliminate corporate risks by following a series of operative planned tasks (Elder et. al, 2010).  

The main focus of the report of HIH was on the middle management failure. It was even stated by Justice Own that the failure was due to the unethical manner of the HIH middle managers and their concept of not accepting the responsibility for various practices.  It was spotted that the problems faced by the Royal Commission was due to the middle level managers because they failed to take appropriate steps when it came to corporation account falsification. Further, some laws failed to come up with the concept of application. There were many situation when the report were prepared but was not signed (Baldwin, 2010). When those reports were signed the onus was transferred to other employees and then the act was constituted a breach leading to miserable results.

Though HIH collapsed, it left back a number of serious consequences in the Australian market. The most defying consequence was that the people were shocked and had lost faith to invest in an insurance company (Geoffrey et. al, 2016). Secondly, all the professionals and workers working for HIH lost their jobs and all the shareholders of the company were left with equity which has no value (Saville, 2003). There were also questions about the fact that the people who had their policies going on with the companies were still to be continued to not.

People also suffered a lot through personal problems after the downfall of HIH. People who were sick or disabled and had their salary continuance policies with HIH were no longer getting any payments. In Queensland, the victims of accidents who had their insurance done by HIH also received a set back with no operation being done and all this was worth $190 million (Saville, 2003). The Australian Rugby Union also received a set back without the support of HIH and it had to decline games all over the country till date they got their replacements done. It was also seen that the injured players of the Union were left suffering as the company had collapsed and they received zero compensation.   

The collapse of HIH had a major bearing upon the services of the professional services. The services of the service provider were suspended because the professional indemnity insurance was under the scanner. Various other professionals like accountant and engineer were disturbed by the loss. In the absence of public liability cover, the councils and other not-for-profit organization were not ready to hold community and other sports events.

Professional indemnity and public liability were the two sectors that saw a rapid rise in the premium with the downfall of HIH. For example, it was seen that accounting professional had been sending infromati0on that without a representative and dominant insurance company, the premiums were increased by 1000% in a year as compared to the previous one. Tourism and tram services also had to face public liability (Wood, 2011).

The above case of HIH is a clear-cut indication that the business can liquidate if it does not perform with the ethical bent of mind. Further, the auditors and other officials of the company needs to act in the best interest of the company meaning the company should have the strong ethical background and corporate governance (Saville, 2003). Moreover, it was seen that the middle-level managers were engaged in false practices that attracted the downfall. Such phenomenon should be examined in the accounting education as such happenings have eroded huge sum of money for the investors and led to bankruptcy. The regulations must be stern enough that would not allow any false practices (Lapsley, 2012). The professional accountants should come to the forefront and act in the best interest of the company. The future accountants should place examples of the way in which any crisis can be averted. Crisis does not happen on a sole authority rather it is an activity that is present in a chain manner (Mock et. al, 2013). Hence, it is essential for the accountant to have an in-depth knowledge on the same and to ascertain all the details while discharging the duty. Any false practice or differences must be reported to the top officials and justification should be demanded the same. This way the problem will be settled at the very earliest and a grave crisis can be averted. Overall, the accountants must act in a dynamic manner and must have the essential knowledge of the past crisis so that a better view can be attained. Further, it helps in averting any possible situation.

References

Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.

Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne

Elder, J. R, Beasley S. M. and Arens A. A. (2010) Auditing and Assurance Services. Person Education, New Jersey: USA

Fazal, H. (2013) What is Intimidation threat in auditing?.[online]. Available from: https://pakaccountants.com/what-is-intimidation-threat-in-auditing/  [Accessed 26 April 2018]

Gay, G. and Simnet, R. (2015)  Auditing and Assurance Services. McGraw Hill

Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons. [online] 30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309  [Accessed 26 April 2018]

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Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management. [online]. 9(3), pp. 291-292. Available from https://doi.org/10.1111/1468-0408.00081 [Accessed 26 April 2018]

Livne, G. (2015)  Threats to Auditor Independence and Possible Remedies [online]. Available from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full [Accessed 26 April 2018]

Mock, T. J., Bédard, J., Coram, P., Davis, S., Espahbodi, R. and Warne, R. (2013). The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice and Theory. [online]. 32, p. 323-351. Available from:
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Saville, M. (2003) HIH : The Inside Story Of Australia’s Biggest Corporate Collapse [online].  Available from: https://www.smh.com.au/articles/2003/03/14/1047583693489.html  [Accessed 26 April 2018]

Vause, B. (2009). Guide to Analysing Companies, Bloomberg Press

Wood, D A. (2011) The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision. The Accounting Review. 9online]. 86(6), p. 39-56. Available from: https://doi.org/10.2308/accr-10136 [Accessed 26 April 2018]