Corporate Governance Assignment Essay
Added on - 29 Apr 2020
Running head: HIH Ltd ON CORPORATE GOVERNANCE1HIH Ltd on corporate governance practicesHung ToCanberra of Institute Technology10/11/2017IntroductionThe HIH Insurance Ltd received a provisional liquidation position in 2001, March 15th. Itwas liquidated due to its inability to pay debts amounting between the range of AU$3.6 billionand AU$5.3 billion(Parker, 2005).The collapse of HIH group came as a shock to the Australianpeople, and it was registered as the biggest financial collapse ever in the corporate history ofAustralia. The demise of HIH was primarily connected to inadequate and poor corporategovernance practices. Corporate governance usually involves a framework of rules, processes,systems, and relationships within as well as by which authority is controlled and exercised incorporations(Lipton, 2003).This paper discusses the HIH Insurance Ltd failure regarding thecorporate governance practices.HIH failure to adhere to the existing legal and accounting standardsDespite HIH having demonstrated a conservative corporate culture, it expressedgovernance deficiencies(Hill & Yablon, 2002)that saw it collapse to the surprise of many. Thecompany did not adhere fully to the set legal and accounting standards. Many of its directorswere banned from the company for significant terms, and some of them had to part with a
HIH Ltd ON CORPORATE GOVERNANCE2substantial financial penalty. They breached their duties and did not adhere to set out rules andregulations according to the Corporations Act(Allan, 2006).The company majored more atmaximizing profit at the expense of adhering and implementing the standard corporategovernance procedures. The company is known to dishonor the set-out procedures andimplemented the undesirable corporate governance practices which led to its collapse.The audit reportThe HIH audit analysis was characterized by a continual financial depressing scenario.The corporate governance model practice and setting implemented by the HIH was questionable(Jones, 2011). The Anderson Accounting Firm being the main auditor at the moment as well asthe external advisor, failed to obtain sufficient audit evidence. Considerable adjustments couldhave been made to the accounting process especially concerning a particular matter being thesubject of the inquiry. Poor cash auditing, inferior finance resource management, and pooroperational and financial activities played a huge role in the collapse of the HIH(Carnegie &O’Connell, 2014). The audit committee of the HIH was concerned mainly with financial affairsof the company such as the accounting policies, audit issues, and performance standards.However, their structure of the board of directors did not tally with the recommendation of theAustralian Security Exchange (ASX) best practice, and this made the corporate governance ofthe HIH to have some flaws.Internal organizational practicesThe HIH in its operations implemented the under-reserve policy in line with theestimated future claims. It failed to implement the prudent margin set by the AustralianPrudential Regulation Authority (APRA) which saw the company make continuous losses for
HIH Ltd ON CORPORATE GOVERNANCE3successive periods, especially regarding the underwriting process. The organization practices andsystems of the HIH were poor, and they lacked frequent monitoring(Leunget al., 2009). Thefailure was more related to such cases as compared to the widespread fraud. The managementfailed to disclose the financial position of the company, and therefore, the whole process ofmanaging the company was built on undesirable corporate governance practices. The internalsystems and processes of the company as well lacked integrity and accountability. The culture ofthe HIH Ltd as presented by the Royal Commission was that the decisions of the top leaderswere not to be questioned at any instance(Westfield, 2003). This affected largely theiroperations since even in those moments that their decisions and actions breached the law of thecommonwealth as well as other regulatory policies, they could not be questioned.Regulatory authoritiesThe main regulatory authority that was concerned with the working of HIH was the HIHRoyal Commission. It investigated the underwriting performance in relation to the risk pricingability. The HIH employed the under-reserve policy as directed by the CEO then, Ray Williams.They did not follow the APRA in setting the prudential margin(Psaros, 2008).The ASXCorporate Governance Council as well was concerned with how the HIH employed the corporategovernance practice. It gave the best practice recommendations which would increase integrity,efficiency, and quality of the company. The Board of Directors (BOD) structure of HIH was noteffective and therefore, by implementing the ASX rules and restructuring the BOD, then, morevalue would be added to the company’s activities, integrity in financial reporting enhanced aswell as balanced and accurate disclosures ensured(Clarke, 2007). Avoiding significantdisparities especially in control mechanisms and the quality of the managerial oversight inboardrooms, helps enhance implementation of the corporate governance practices.
HIH Ltd ON CORPORATE GOVERNANCE4Policies followed by the HIH group in relation to internal financial reportsThe accounting practices of the HIH was considered as aggressive and complex. Before itwas liquidated, it used to acquire several other companies which led it to the path of insolvency.In the year 2000, the Anderson report indicated the company had assets of $939 million inapproximation(Mirshekaryet al., 2005). However, the inadequacy of independence among thedirectors and auditors affected their operations immensely. The management as well did notenforce or monitor the due diligence practices effectively. For many times it implementedincorrect accounting policies, particularly for the financial reinsurance contracts. With manyunder-reserving liabilities especially in the operations of the United States and the UnitedKingdom as well as in the Fai, it’s clear the policies of HIH were not effective. Despite the factthat HIH employed the model of corporate governance, the board misunderstood the appropriatebusiness and long-term strategies that made them lose many opportunities(Clarkeet al., 2003).The HIH as well could not control the internal processes and systems and therefore, this lead tothe failure of the internal processes.Performance indicators signifying complianceThe HIH practice of corporate governance involved various old features. The dearth ofsome recorded and defined guidelines and policies, the absence of the independent criticalanalysis of the financial reports, and failure of resolving the conflict of interests among the BODare some of the policies the HIH employed in its operations(Buchananet al., 2003). The HIHhad a reputation of aggressive pricing in the market to win business. It wrote volatile classessuch as professional indemnity, inward treaty reinsurance, and public liability. It expanded toother unchartered areas like film financing, marine reinsurance, and Taiwanese military accidentcover and much more. HIH kept on expanding but it did not put into consideration the corporate