Introduction

The collapse of the company was regarded as Australia’s largest business failure, prompting the Liberal Federal Government to create a Royal Commission to look into the many factors that led to HIH’s demise.

Collapse of the HIH Insurance

The collapse of the company was regarded as Australia’s largest business failure, prompting the Liberal Federal Government to create a Royal Commission to look into the many factors that led to HIH’s demise. Several proposals resulted in business regulation reforms. There were some policies and systems that failed spectacularly. It was brought to a close by the commissioner, Mr. Justice Owen. The HIH’s demise was caused by inflated egos, a lack of oversight, and inadequate processes (Clarke, Dean, Oliver and Oliver, 2003). It was discovered that several directors had violated their obligations under the corporation statute, and they were thus barred from participating in the company’s administration. It was discovered that HIH followed a conservative culture for its employees and many flaws that contributed to the company’s demise. The company’s CEO was a charismatic and domineering figure who participated in several high-risk business activities in a highly competitive industry. The Director Board of the company was no independent directors. several of the directors claimed they were unaware of the company’s real financial situation (Mirshekary, Yaftian and Cross, 2005). Many of HIH’s problems stemmed from its aggressive strategy of acquisition, a culture of avoiding reporting bad news, and a growth-at-all-costs mindset, which frequently resulted in a clash between corporate governance processes and profit maximization.

Causes of Collapse of the HIH Group

The failure of the HIH Business to satisfy the claims of the debtors and insurance policyholders was the major cause of the company’s collapse, according to the financial perspective of the company. The downfall of one of Australia’s second-largest companies was caused by its weak cash situation. Every business must adhere to its operational cycle to sustain cash flow and ensure long-term profitability. Thus, after evaluating the causes of the HIH’s demise, the attention cannot be limited to cash alone; rather, the study must be expanded to include the operational and financial activities that are the primary causes of the company’s insolvency (Clarke, Dean, Oliver and Oliver, 2003).

As a going concern problem, the insurance company deals with the high-risk situation. Outstanding claim provision, risk pricing ability, and investment choice are the three main vehicles of the insurance firm. The ability to price is taken into account first. Underwriting is a critical component of the insurance industry’s overall operations. According to the Royal Commission’s conclusions, HIH lost $73 million in underwriting losses in 1997, despite earning a premium of nearly $1550 million (Mirshekary, Yaftian and Cross, 2005).

Flawed Corporate Governance Practices

After further investigation, it was discovered that the major cause of HIH’s bankruptcy was an agency cost problem that emerged from a disagreement between the organization’s management, proprietors, and debtors. According to mainstream theory, the equilibrium between stakeholders and debtors can be vigorously achieved because if the interest of the company’s debtor will be harmed, the values of the company are automatically reduced, causing harm to the stakeholders’ interests.

It is critical to address the key aspect of corporate governance to preserve such equilibrium. As a result, it may be argued that the collapse of the company’s corporate governance was the primary cause of its bankruptcy. However, a review of the corporate governance report reveals that the firm has maintained a good corporate governance plan that adheres to the ASX requirements.

Lack of Independence of the Non-Executive Director

According to the research, the non-executive directors’ independence should be questioned, since it is not as flawless as it looks. The following facts support this conclusion:
During the issues, among five non-executive directors in the company’s board of directors, two directors are former partners of the HIH Company’s auditor’s Arthur Anderson. It is also worth noting that Arthur Limited made $8 million from auditing the HIH firm, compared to $7 million from other auditing services. It is a well-known truth that non-auditing services are considered as the primary source of distraction for auditors, jeopardizing their independence.

In the year 2000, the controlled entity of the company paid the insurance premium for protecting the company’s executives and directors. Justin Gardener, one of the audit committee’s auditors, was the FAI’s auditor from 1980 until 1998 when the company was sold to HIH. This was the primary cause of the HIH Company’s demise, as the takeover deal had a significant impact on the HIH Company.

Non-effective Risk Management

Risk management is seen as critical to the running of an insurance firm. The aforementioned three concerns clearly show that the company’s risk management has not been properly formed. The company’s directors were careless with the company’s choices.

Collapse of OneTel

OneTel’s collapse was caused by several flaws in its corporate governance processes. The firm already started its business operations in seven countries with yearly revenues of AU$653 million at the time of its demise. Even though the company’s financial situation was strong, its corporate governance framework was lacking. The company’s CEO wielded undue influence on the company’s directors, to the point where there was no chairman with the title at the time (Menom, 2010). Rather, the company’s CEO functioned on an ad hoc basis as head of the board of directors. The non-executive directors’ supervision was likewise poor, and the management’s oversight was dominated by CEOs and the executive directors, as seen by the audit and compensation committee compositions.

Causes of Collapse

The bankruptcy of the OneTel Company was caused by some corporate governance problems. The following were some of the contributing factors:

First, the CEO had undue influence on the Board of Directors, causing the board to become ineffective and reducing the ability for control and oversight.

Second, investors who were deceived by the company’s financial condition despite knowing they were being misled showed little interest in the company’s management and instead depended on the guidance of the CEO and executive directors (Menom, 2010).

Third, because the non-executive directors were so intimately linked with the CEO, there was no impact. Fourth, conflict of interest was another issue between the auditor and company, which was harmed as a result of the company’s non-audit services. Finally, the dependent boards of Directors were unable to adequately oversee management’s actions and regulate the board of directors’ agenda.

Conclusion

To promote effective financial performance and maximize shareholder earnings, it is important to have excellent corporate governance practices. Corporate governance is considerably more than simply ticking boxes, as the OneTel and HIH instances demonstrate. The HIH’s monitoring strategy was award-winning, yet it was ineffective, and OneTel flouted corporate governance regulations. Both companies were unable to gain regular access to corporate governance practices.

Several laws and changes were established as a result of the HIH and OneTel disasters, allowing the board to evaluate its activities. The study looked into a variety of commercial excesses as well as corporate governance. HIH’s business strategy is well-developed, but its corporate governance systems have been judged to be inadequate. The inadequacy of corporate governance systems poses a significant danger to the business.

References

Buchanan, B. (2004). AUSTRALIAN CORPORATE CASUALITIES, Hirschey, M., and, K.J. and Makhija, A.K. (Ed.) Corporate Governance (Advances in Financial Economics, Vol. 9), Emerald Group Publishing Limited, Bingley, pp. 55-79.
Menom, R. (2010). The One-Tel Collapse: Lessons for Corporate Governance . https://www.researchgate.net/publication/228273171_The_One-Tel_Collapse_Lessons_for_Corporate_Governance
Mirshekary, S., Yaftian, A. and Cross, D. (2005). Australian corporate collapse: The case of HIH Insurance.
Journal of Financial Services Marketing, 9(3), pp. 249-258.
Clarke, F., Dean, G., Oliver, K. and Oliver, K. (2003). Corporate Collapse: Accounting, Regulatory and Ethical Failure. Cambridge University Press.
Corporate Accounting in Australia
Dagwell,R., Wines, G. Cecilia Lambert
Publisher Pearson Higher Education AU, 2015