ACCY305 Financial Accounting III: A Case Study of HIH Collapse

This essay provides an in-depth analysis of the HIH Insurance collapse, a significant event that exposed critical weaknesses in accounting practices and corporate governance. Established in 1968, HIH's insurance business commenced in 1998, quickly facing operational and policy issues, including weak due diligence. The company's failure to adequately plan for future claims, adapt to market changes, and address increasing liabilities contributed to its downfall. Rodney Alder's falsification of accounts further exacerbated the situation. The essay highlights the lack of regulatory oversight and the subsequent implementation of new rules by APRA to enhance liability valuation, capital adequacy, and risk management. The collapse had severe consequences, including loss of public trust, job losses, and disruptions to insurance coverage, impacting various sectors. The essay emphasizes the importance of ethical conduct, strong corporate governance, and proactive risk management in preventing similar crises. Desklib provides access to past papers and solved assignments for students.

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ACCOUNTING

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
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HIH
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).
• Lack of adequate planning
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
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HIH
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
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HIH
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).
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HIH
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
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HIH
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
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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.
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References
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Education, New Jersey: USA
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Livne, G. (2015) Threats to Auditor Independence and Possible Remedies [online].
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2018]
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