Corporate Governance Deficiencies and the HIH Ltd Insurance Collapse

This report provides an in-depth analysis of the corporate governance failures that led to the collapse of HIH Insurance Ltd, the largest financial collapse in Australian corporate history. The report examines the company's deficiencies in adhering to legal and accounting standards, including issues with audit reports, internal organizational practices, and regulatory compliance. It highlights the under-reserve policy, poor risk management, and inadequate financial reporting as key contributing factors. The analysis covers the role of regulatory authorities like the HIH Royal Commission and the ASX Corporate Governance Council, along with an assessment of the impact of information technology and reporting plans. The report concludes by identifying the main failures, offering recommendations for improvement, and emphasizing the importance of effective corporate governance structures in preventing similar crises. The report references several academic sources to support its findings and recommendations.

Running head: HIH Ltd ON CORPORATE GOVERNANCE 1
HIH Ltd on corporate governance practices
Hung To
Canberra of Institute Technology
10/11/2017
Introduction
The HIH Insurance Ltd received a provisional liquidation position in 2001, March 15th. It
was liquidated due to its inability to pay debts amounting between the range of AU$3.6 billion
and AU$5.3 billion (Parker, 2005). The collapse of HIH group came as a shock to the Australian
people, and it was registered as the biggest financial collapse ever in the corporate history of
Australia. The demise of HIH was primarily connected to inadequate and poor corporate
governance practices. Corporate governance usually involves a framework of rules, processes,
systems, and relationships within as well as by which authority is controlled and exercised in
corporations (Lipton, 2003). This paper discusses the HIH Insurance Ltd failure regarding the
corporate governance practices.
HIH failure to adhere to the existing legal and accounting standards
Despite HIH having demonstrated a conservative corporate culture, it expressed
governance deficiencies (Hill & Yablon, 2002) that saw it collapse to the surprise of many. The
company did not adhere fully to the set legal and accounting standards. Many of its directors
were banned from the company for significant terms, and some of them had to part with a

HIH Ltd ON CORPORATE GOVERNANCE 2
substantial financial penalty. They breached their duties and did not adhere to set out rules and
regulations according to the Corporations Act (Allan, 2006). The company majored more at
maximizing profit at the expense of adhering and implementing the standard corporate
governance procedures. The company is known to dishonor the set-out procedures and
implemented the undesirable corporate governance practices which led to its collapse.
The audit report
The 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 as
the external advisor, failed to obtain sufficient audit evidence. Considerable adjustments could
have been made to the accounting process especially concerning a particular matter being the
subject of the inquiry. Poor cash auditing, inferior finance resource management, and poor
operational 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 affairs
of 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 the
Australian Security Exchange (ASX) best practice, and this made the corporate governance of
the HIH to have some flaws.
Internal organizational practices
The HIH in its operations implemented the under-reserve policy in line with the
estimated future claims. It failed to implement the prudent margin set by the Australian
Prudential Regulation Authority (APRA) which saw the company make continuous losses for

HIH Ltd ON CORPORATE GOVERNANCE 3
successive periods, especially regarding the underwriting process. The organization practices and
systems of the HIH were poor, and they lacked frequent monitoring (Leung et al., 2009). The
failure was more related to such cases as compared to the widespread fraud. The management
failed to disclose the financial position of the company, and therefore, the whole process of
managing the company was built on undesirable corporate governance practices. The internal
systems and processes of the company as well lacked integrity and accountability. The culture of
the HIH Ltd as presented by the Royal Commission was that the decisions of the top leaders
were not to be questioned at any instance (Westfield, 2003). This affected largely their
operations since even in those moments that their decisions and actions breached the law of the
commonwealth as well as other regulatory policies, they could not be questioned.
Regulatory authorities
The main regulatory authority that was concerned with the working of HIH was the HIH
Royal Commission. It investigated the underwriting performance in relation to the risk pricing
ability. 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 ASX
Corporate Governance Council as well was concerned with how the HIH employed the corporate
governance 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 not
effective and therefore, by implementing the ASX rules and restructuring the BOD, then, more
value would be added to the company’s activities, integrity in financial reporting enhanced as
well as balanced and accurate disclosures ensured (Clarke, 2007). Avoiding significant
disparities especially in control mechanisms and the quality of the managerial oversight in
boardrooms, helps enhance implementation of the corporate governance practices.

HIH Ltd ON CORPORATE GOVERNANCE 4
Policies followed by the HIH group in relation to internal financial reports
The accounting practices of the HIH was considered as aggressive and complex. Before it
was 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 in
approximation (Mirshekary et al., 2005). However, the inadequacy of independence among the
directors and auditors affected their operations immensely. The management as well did not
enforce or monitor the due diligence practices effectively. For many times it implemented
incorrect accounting policies, particularly for the financial reinsurance contracts. With many
under-reserving liabilities especially in the operations of the United States and the United
Kingdom as well as in the Fai, it’s clear the policies of HIH were not effective. Despite the fact
that HIH employed the model of corporate governance, the board misunderstood the appropriate
business and long-term strategies that made them lose many opportunities (Clarke et al., 2003).
The HIH as well could not control the internal processes and systems and therefore, this lead to
the failure of the internal processes.
Performance indicators signifying compliance
The HIH practice of corporate governance involved various old features. The dearth of
some recorded and defined guidelines and policies, the absence of the independent critical
analysis of the financial reports, and failure of resolving the conflict of interests among the BOD
are some of the policies the HIH employed in its operations (Buchanan et al., 2003). The HIH
had a reputation of aggressive pricing in the market to win business. It wrote volatile classes
such as professional indemnity, inward treaty reinsurance, and public liability. It expanded to
other unchartered areas like film financing, marine reinsurance, and Taiwanese military accident
cover and much more. HIH kept on expanding but it did not put into consideration the corporate

HIH Ltd ON CORPORATE GOVERNANCE 5
regulations and also it operated with limited financial due diligence. The company did not clearly
define the key performance indicators of the executives and the BOD (Kang et al., 2007). It did
not as well perform an independent review of the internal firm’s structure. For the company,
therefore, to improve its performance, it was necessary to stop overregulating responsibilities
using a compliance-driven approach as well as focus on the best practice framework and
compliance to achieve the best results.
Significance of information technology
Information technology plays a huge role in ensuring the success of a company. For
insurance companies, for instance, the effectiveness of the accounting and audit report will rely
on the information technology systems in use. Audit deficiencies that the HIH majorly faced can
be traced back to their technology systems (Ali & Green, 2009). Information technology, on the
other hand, can be used to facilitate frauds and override the management controls. Appropriate
information technology systems can enhance lack of accountability experienced by HIH and
which is key in corporate governance.
Reporting plans
The APRA sets out a prudential supervision framework for every insurance company. It
includes the improved disclosure of the financial reports, quarterly audit arrangements, covering
of the consolidated groups, and strengthening of the governance, supervisory, and actuarial
arrangements. HIH company did not follow these guidelines, and there were significant
breaches. The financial disclosure was not done in time and did not follow the ASX
recommendations (Mardjono, 2005). Also, the audit report focused more on the operational and
bottom line as opposed to risk management.

HIH Ltd ON CORPORATE GOVERNANCE 6
Main failures and recommendations
There were three main processes that aided the failure and collapse of HIH. Ineffective
corporate governance practice had the most weight in facilitating the collapse of the HIH group.
It is important to follow the set-out procedures by the corporate society and also the government.
The firm also had inferior risk management practices (Brown et al., 2009). For every firm to be
successful, it needs to put the appropriate strategies in place to deal with any unlikely outcome of
a risk. Risk management strategies are essential for the survival of a company in times of crises.
Lastly, the audit performed by the Anderson Accounting Firm was questionable. Proper auditing
is vital in ensuring all aspects of the business are taken care off. Failure to which the company
will encounter loses and eventually run bankrupt. Performing full audit of the company yearly
and in detail can help detect areas that need improvement and hence prevent any possible failure
(Council, 2007). It is also important to implement appropriate risk management strategies and
also comply with the corporate governance requirements.
Conclusion
Corporate governance influences how a company sets its objectives, monitors and assess
risks, and optimizes the performance. Effective structures for corporate governance normally
helps companies to create value through innovation, entrepreneurialism, exploration,
development, and accountability. HIH failure to adhere fully to the corporate governance
regulations affected its operations and eventually led to its demise (Clarke, 2004). It, therefore,
becomes crucial for every organization to comply with the corporate governance requirements
processes for corporate governance adherence and avoid conflict of interests.

HIH Ltd ON CORPORATE GOVERNANCE 7
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