HIH Ltd On Corporate Governance Practices †MyAssignmenthelp.com

Question: Discuss about the HIH Ltd On Corporate Governance Practices. Answer: 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 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 OConnell, 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 corpora te 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 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 thei r 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 companys 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 overs ight in boardrooms, helps enhance implementation of the corporate governance practices. 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, its 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 opportuniti es (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 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 firms 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. 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 importa nt 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. References Ali, S., Green, P. (2009). IT governance mechanisms in public sector organizations: An Australian context. Handbook of Research on Information Management and the Global Landscape, 458-478. https://scholar.google.com/scholar?hl=enas_sdt=0%2C5q=hih+collapse+corporate+governanceoq=HIH++collapse Allan, G. (2006). The HIH collapse: A costly catalyst for reform. Deakin L. 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