Reference no: EM13953124

The largest fraud ever to be perpetrated in Australia was HIH, a fraud that was discovered in 2002. The HIH fraud was concealed for years by an executive who changed his behaviour to intimidate other so that they did exactly what he wanted. By becoming almost totalitarian, he was able to do anything he wanted Here is the case story.

HIH was one of Australia's biggest home building market insurers. HIH was the underwriter for thousands of professional indemnity, public liability, home warranty, and travel insurance policy. HIH was started in 1968 by Raymond Williams and Michael Payne. Michael Payne was chief executive of the UK operation until 1997, when health problems forced hi to limit his activities in the company. He became chairman of the main UK entity in 1999. He was an executive director of the holding company from 1992 until June 1998 and nonexecutive director from July 1998 until September 2000.

Raymond Williams was the chief executive for HIH from its inception in 1968 until October 2000. Other key employees were George Sturesteps and Terrence Cassidy, who became members of senior management in 1969 and 1970, respectively. They both held their position until September 2000 and March 2001, respectively.

Williams was the dominant member of management at HIH. Although man close members of upper management had been with him for over 25 years, they were reluctant to tell him how to run the business, give suggestion, or question Williams' motive and business decision. The Royal Commission report, which summarizes the Australian government's investigation of HIH, suggested that a lack of strategic direction and questioning authority set the stage for the eventual downfall of the HIH insurance group. If asked about the strategic goal or mission of HIH, the report states that neither Williams nor the board of directors would have been able to explain them. Although HIH was a public company that had grown quickly, the report states that Williams continued to run HIH much like the small company it had been when it first started. That is, he made most of the decisions, used business accounts as personal accounts, overrode internal controls, and so forth.

Within an environment dominated by a larger than life CEO, Ray Williams, the board presided over a string of ill fated expansions- costing HIH more than $3 billion- without ever analysing the group's strategy or assessing its risks. Although the Royal Commission report points to many different ancillary reasons for the HIH downfall, they summed up the main problem as follows. HIH did not provide properly for future claims and the failure of all involved to understand the degree of the shortfall. Apparently, HIH's financial statements were misstated because of inflated profits, overstated accounts, and understand liabilities. According to the report, all other problems were supportive in nature and helped to promote HIH's downfall.

It has been argued that HIH didn't fail because of any systemic fraud but because of two influences. First, HIH had a flawed business model which consistently underprovided for its claims. Second, HIH's governance structure, including board and senior management, were ineffective since they allowed Williams to dominate their decision.

HIH's dysfunctional governance structure led to several factors that are common in organizations that are perpetrating massive fraud. First, an insufficient independence of mind to see what had to be done and what had to be stopped or avoided. Also, risk were not properly identified and managed. Unpleasant information was hidden, filtered or sanitized. Finally there was lack of sceptical questioning and analysis when and where it mattered.

This case brought the effectiveness of regulatory organizations into serious questioning. Virtually no one who had any involvement with HIH escaped unscathed. HIH experience an near total breakdown of governance and supervisory structures. None of the checks and balance within the systems functioned. The people involved failed to meet their responsibility.

(Source: Albrecht, W S, Albrecht CC, Albrecht, CO & Zimbelman, MF 2009, Fraud Examination, South Western Cengage Learning, Mason, USA)

Requirement

You are required to prepare your suggestion and recommendation report on the ground of HIH case to ensure that such a collapse cannot happen again if the organization systematically maintain and implement internal control procedure. You have to also explore using the given reference or your own effort that what were other some possible gaps in the internal control procedure in case of HIH.

Procedure

Word limits 2000 words without reference.

In the process of preparation of this assignment, you can use the following links for knowledge and reference.

Reference should be in Harvard style.

https://webcache.googleusercontent.com/search?q=cache:-ucvKmrJ5C8J:https://ojs.deakin.edu.au/index.php/dlr/article/download/239/245+&cd=10&hl=en&ct=clnk&gl=au

https://www.aic.gov.au/media_library/conferences/2005-cp/young.pdf

https://www.longdog.com.au/be-daring-not-risky/corporate-governance-and/collapse-corporate-governan.pdf

https://law.unimelb.edu.au/files/dmfile/Report_on_Governance_at_5_Failed_Companies_0310281.pdf

https://en.wikipedia.org/wiki/HIH_Insurance

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance

https://www.seiofbluemountain.com/upload/product/201010/2010jjfzh05a8.pdf

In your report, take into consideration factors such as:

1. Corporate governance requirement including: common law, delegated authorities, legislation such as corporate law, tax law, reporting periods and taxation payment timing.

2. Authoritative and recognized sources which may have impacted on HIH such as:

Assets register, AASB, AUSAB, ASIC, ATO, APRA, financial information system, Law and regulation, personal information systems, professional association, pronouncement.

3. Internal control procedure such as:

Accuracy in valuation, adequate disclosure in financial reporting, decision making authorities, electronic commerce security, identification, measurement and recording of income, assets, expenditure, liabilities, equity, risk management strategies, safeguard and insurance of assets.

4. Financial delegation and accountabilities such as corporate governance requirement, employment delegations, expenditure and investment approvals, loan and lending approval, sign-off authorities.

5. In your recommendation and suggestion you should detail and document internal control procedure that you would following including:
Corporate governance requirements, performance indicators to evaluate compliance with internal control procedure.