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Auditing HIH disaster - Essay Example

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Started in 1960s, HIH Insurance Ltd had been in general insurance business enjoying a celebrity status among the corporates of Australia with international presence .It became a listed company in early 1990s. Its premium income in 1999 was A$ 2 billion and was known for its aggressive pricing to win business and was specializing in volatile liability classes…
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Auditing HIH disaster
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Auditing HIH disaster

Download file to see previous pages... In spite of major events which took place in succession in the HIH, some thing was lurking behind. By January 1999, the HIH acquired FAI insurance for A$ 300 million which later turned out be worth onlyA$100 million though the external audit of Arthur Andersen for the year 2000 did not make any issue of it. On the other hand the company was lauded to be worth A$ 939 million. Soon after in September, it sold half of its profitable retail general insurance business for cash liquidity and as a result its share prices fell down from A$ 1.05 to A$ 0.45 when the company announced losses. Yet the regulatory authority did not think fit to inspect the accounts as it relied on the external audit report had painted a healthy picture. This was followed by the resignation of the CEO founder of the company for 30+ years, with a compensation of A$ 5 million in December 2000. As the company had not filled its December statements, when they became overdue by February 2001, the regulator APRA was concerned for the first time. Meanwhile on 27 February Australian Securities & Investments Commission (ASIC) took the initiative by suspending HIH's share trading soon followed by the APRA's fire fighting act of transferring the company's risk portfolio to other insurance companies to the extent possible. On 15 March 2001 HIH declared provisional liquidation with Government agencies covering some of its obligations which might cost the tax payer about A$ 1 billion to bail out policy holders. On 16 March, finally APRA started inspection of the HIH affairs. Government of Australia lost no time to set up an independent Royal Commission by August 2001 as already announced in May 2001 to investigate into the failure of the company. It took 6 months for the liquidator to arrive at the losses as between A$ 3.6 billion and A$ 5.3 billion. It has been stated that not only the settlement of policies and the company's creditors could not be made in full but also it would take ten years for disbursement which might be in the ratio of 1: 0.5.

This was how the second largest Australian insurer's corporate bubble burst representing the biggest collapse in the corporate history of Australia to date. The whole imbroglio was attributed to poor management by under pricing of policies and overestimation of its assets mostly non tangible rather than frauds. Soon after the company's fall, the premium market shot up steeply.
While the APRA conceded that it was because of not provisioning the company with sufficient capital to cover its risks for quite a number of years that this had happened, the Australian Prime Minister had to rebut the public accusations that political donations siphoned off the company's resources. (Sungard Banc ware Erisk). Actually the company had indulged in acquisition spree of more than 200 subsidiaries which only made the company's size unwieldy in an already overcrowded and competitive insurance market though the acquisitions accounted for 26% premium growth per annum for a decade. Most controversial of all was the acquisition of FAI insurance for A$ 300 million which was worth hardly A$ 100 million and that too the company had borrowed money for the settlement. Rodney Adler the major stock holder of FAI who also became a member of HIH Board however clarified "that the purchase price of his company was too high by stating that the price was set, by definition, ...Download file to see next pagesRead More
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