HIH Insurance Case Study


HIH Insurance was once Australia’s second-largest general insurer with net assets amounting 939 Australian Dollar. The company was placed into provisional liquidation with debts amount $3.6 billion to $5.3 billion. Failings in corporate governance, regulation and auditing and along with poor management decisions have been attributed to the cause of the collapse.

This analysis will discuss the collapse of the HIH and the activities undertaken which

led to the demise of the company. There will be an analysis of the auditor’s role in

the collapse and reasons as to why they may not have identified the fraud and finally.

Conclusions look to implications of these actions on the part of management, boards

and of course, the auditor.

3.1 Background: HIH Insurance

HIH Insurance was established in 1968, when Ray Williams and Michael Payne

incorporated MW Payne Liability Agencies Pty Ltd to the underwriting insurance


business in Australia. Williams and Payne were both directors of the company and

Williams held the position of CEO (Owen, 2003). The company’s sole business

activity was the writing of workers compensation insurance in the Victorian market

and, as this became a very successful business operation, it led to the expansion into

other states within Australia. In 1971, a British Insurer, CE Heath plc, acquired MW

Payne Liability Agencies Pty Ltd; however Williams continued to act as director and

chief executive (Figure 1).

In 1985 and 1986 legislative changes to workers compensation insurance in Victoria

and South Australia had dramatic effects on the insurance industry and resulted in

reduced business (Owen, 2003). The company reacted with a diversifi...

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... profession and recommended that the Corporations Act 2001

and the Australian Stock Exchange listing rules be amended (Mirshekary et al, 2005)..

Justice Owen presented his findings in the report to the Royal Commission regarding

the breech of independence and concluded that the combined effect of the features of

the relationship between Anderson and HIH gave rise (or would give rise to those


aware of the relevant facts) to a perception that Anderson was not independent of

HIH. While a close analysis of the conduct of the 1999 and 2000 audits reveals no

reason to conclude that Anderson’s independence was in fact compromised (Owen,

2003), their apparent lack may have affected the quality of the work performed on the

audit of HIH. This may have also contributed to HIH’s ability to carry out aggressive

accounting practices which lead to its demise.

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