Discussing two major corporate collapses - HIH and Enron.

University Degree Business and Administrative studies

There are many views to the word “Corporate Governance”, from Solomon suggested that “corporate governance is the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity.”(Solomon, 2004) Corporate Governance is becoming more important in recent business world. Corporate Governance is not just leading direction of the company, it also maximise wealth. However, the recent corporate collapses in many countries around the world has raised the issue that well developed corporate governance would prevent the repeat of those corporate collapses in the future.

In the last decades, there are many corporate collapses demonstrating how corporate mechanisms are not well control and monitored. In this report will be discussed about two majors’ corporate collapses in the recent years. HIH and Enron, these two collapses will discuss about what constitute to the collapses and the issue of corporate governance and ethics in these two companies and the post development that derived to ensure and prevent collapses in the countries from two companies Australia and USA.

HIH insurance was one the Australia’s largest insure. It had all the apparent success – large and opulent corporate offices in every state, a fabulous programme of entertainment, gifts, donations and corporate sponsorship, its CEO was one of Australia’s most successful business men and it had a board of directors composed of highly regarded, senior and experiences representatives of the business, legal and accounting communities and audited by a highly respected accounting firm. But when HIH was put into liquidation on March 15, 2001, it represented one of the biggest collapses in Australia corporate history which resulted in a deficiency of up to $5.3 billion, thousands of jobs were lost immediately. The collapse of HIH made professional indemnity, public liability, home warranty and travel insurance policies worthless; placed retirees and disability people on social security; led to building industry insurance instability; and escalated public liability insurance.

The question is how could this have happened? The failure of HIH was due to the firm not providing adequately for future claims. This situation arose because the firm was mismanaged and failed to uphold many of the basic corporate governance principles. A lack of attention to detail, a lack of accountability for performance, a lack of sceptical questioning and analysis and a lack of any real corporate governance model combined with seriously flawed internal processes and systems all made the corporate collapse inevitable. Also there are four disastrous business ventures which contributed to the collapse of HIH. These instances of poor decision-making were caused by and reflect a poor corporate governance culture.

The decision to enter into and expand operations in the UK.

The UK operations were established in 1993. Poor quality management information and inadequate accounting systems impaired the Australian management’s ability to monitor and control the UK operations effectively. The resultant losses in the UK were estimated at $1.7 billion.

The decision to re-entering the US insurance market.

The acquisition of a US business was accepted by the board without analysis of management’s assertion that entry into the US market would be profitable. No due diligence was carried out and there appeared to be a complete failure to appreciate the level of risk involved. Losses attributable to the US acquisition were estimated at $620 million.

The decision to acquire of the already failing FAI Insurance Ltd.

With FAI, the major difficult was the inadequacy of the provisions made by that company for future claims. The transaction was undertaken on market without the benefit of any due diligence and at a substantial premium above market price and there was a general lack of knowledge about FAI and its financial position. The directors totally failed to consider the risks posed by the takeover. Estimated losses arising from the FAI takeover were $590 million.

Decision to enter a joint venture with Allianz Australia Ltd.

The Allianz joint venture came into operation in January 2001. It involved the sale of ...

This is a preview of the whole essay

Decision to enter a joint venture with Allianz Australia Ltd.

The Allianz joint venture came into operation in January 2001. It involved the sale of HIH’s profitable retail insurance business acquired from FAI in the joint venture. The result was chronic and persistent failure to adequately provide for the liabilities and an immediate cash flow crisis which hastened the end of HIH.

A major focus of the Commission’s inquiries was the question of just how such events came to pass having regard to the corporate governance systems that were in place. Firstly, is about the corporate governance module. The HIH had a corporate governance model and it was stated in the annual report. Its investment policies were clear and conservative, and it had an investment committee responsible for assessing and approving all major company investments. The problem was that the board did not periodically assess the effectiveness of the company’s corporate governance practices. There were relatively few clearly defined and recorded policies and guidelines. Secondly, is about the role of ethics in HIH. The directors of HIH claimed great surprise and presumed fraud on the part of management when debt appeared to balloon suddenly and the organization went into receivership. In this situation the directors are using an “I didn’t know the gun was loaded” version of trading while insolvent. Even the directors are not founded legally liable for infringements of the Corporations Law, surely they are ethically “liable” for not having informed themselves sufficiently of their industry practices and risks to perform their advisory role.

In reaction to HIH and similar sagas in Australia, there has been a raft of statutory changes encased in the Corporate Law Economic Reform Programme (CLERP 9) and other recent development. These changes include: continuous disclosure, including the introduction of personal liability for breach; auditor independence; accounting standards; expensing of options; compliance control; and encouragement of greater shareholder participation at meetings. The rules are far-reaching and they will change the way the law recognises the management and governance of companies and corporate groups. Together with recent amendment to the ASX Listing Rules, significant changes are being made to corporate governance disclosure and practice, all of these developments will lead to a decrease in future corporate collapses.

Enron Corp. is one of the world's largest energy, commodities and services company. It marketed electricity and natural gas, delivered energy and other physical commodities, and provided financial and risk management services to customers worldwide. Based in Houston, Texas, Enron was formed in July 1985 by the merger of Houston Natural Gas and InterNorth of Omaha, Nebraska. Initially a natural gas pipeline company, Enron rapidly evolved from delivering energy to brokering energy futures as energy markets was deregulated. The company began marketing electricity in 1994 and entered the European energy market in 1995. In 1999, Enron launched a plan to buy and sell access to high-speed Internet bandwidth, and it launched EnronOnline, a Web-based commodity trading site, making it an e-commerce company. The company reported revenues of $101 billion in 2000. It has stakes in nearly 30,000 miles of gas pipeline, owns or has access to a 15,000-mile fiber optic network and has a stake in electricity generating operations around the world.

The question is that why company that running so well and expand so quick become just a history. Enron hay day, the shares price was as high as 90 dollars per share by the end of the year 2001 on the day Enron was filed for bankruptcy under chapter 11 of the US bankruptcy Code, the share price went down as less than a dollars.

Enron was weak in corporate governance where it manipulates the financial disclosure as creative accounting; the flexibility and subjectively within the rules of accounting enable manipulations, which provide opportunities for unscrupulous accountants to be creative and produce results that serve some particular interest or interests.(Dellaportas,2005). Enron engage in many of scandals where it has non-audit operations such special-purpose entities (SPEs) which hiding from US taxes. Enron also create the third party that contractually obliged to pay amount of losses which the party was part of the entity of Enron. Many of revenue were faulty record where it did not actually earn. These many SPE are non-consolidated, off-balance sheet where it create Enron to hide company’ liabilities. (Solomon, 2004)

Corporate governance model of Enron is the shareholder approach of corporate control/market based model, is model is focus on enhance shareholders wealths in the market capitalise expand and taking control of the market. With Enron stock option as compensation encourage management to commit fraud. Enron executive and employees are heavily invested in company share, as shareholders looking for maximise wealths the model becoming to enhance the manipulation of the company share.

The Audit in Enron is an issue from both internal audit and the accounting service audit which has disappear, Arthur Andersen. The internal audit committee in Enron was failed to detect fraud because of they are not independence where he/she involved in consulting or other interest in Enron. Arthur Andersen was auditing Enron in the same time it involves in accounting and consulting non-audit service to Enron. (Dellaportas,2005). These unethical issues create conflicts of interest where a relationship, an event or decision would compromise the objectivity to personal gains. (Francis, 2000)

Enron has become the biggest corporate collapse in the US history. US government has enacts the Sarbanes-Oxley Act which compulsory law to corporate governance to ensure and prevent collapses in the future and strengthen the confidence of the investors in the stock market the acts was to enhance accuracy and reliability of corporate disclosure, it covers the board of directors, financial disclosure to ensure the stability of company are transparent (Dellaportas,2005), establishing a public company accounting oversight board, auditor independences and corporate responsibility. This development is a mechanism to monitor and prevent fraud to protect collapse. However ethics are also important where company plays important part in promote ethics within company where they should be a code of ethics for directing and supporting company and employees to behave ethically.

From the two recently collapse in both HIH and Enron we can see that the corporate governance plays an important role. “Corporate governance” is the framework of roles, relationships, systems and processes by which authority within a corporation is exercised. Openness, integrity and accountability are the cornerstones of any governance framework. Both HIH and Enron were categorised by a failure of those processes.

So, good corporate governance, however, should be promoted without stifling entrepreneurial drive or impairing competitiveness. Management should have the freedom to drive the company forward, within a framework of effective accountability (Hermraj 2002). Also good corporate governance is desirable and important. It not only can reduce the risk of fraud, protect the corporate collapse, but also can creation wealth.

The collapse of HIH and Enron affected many lives and could, arguably, have been avoided. Accountability and disclosure, central to any corporate governance model, can ensure that those likely to be affected are aware of any failings much earlier in the game, and may prevent the widespread distress, loss, uncertainty and cost caused by these crashes.

Further Resources and Websites

HIH Insurance:

Related websites

Website of the : useful materials will gradually become available on this site from November 2001 onwards. Hearings begin on November 26.

The Age.com, , ongoing collection of Age.com coverage of HIH

Australian Securities and Investments Commission, , ongoing

The Association of Risk and Insurance Managers Australia:

The Australian Institute of Risk Management:

The Global Risk Management Network:

Documents on the Web

AIG Group, , AIG group note, undated

ASIC, , ASIC News, June 2001

Australian Broadcasting Corporation, , transcript of World Today broadcast, April 23, 2001

APRA media release, , November 5, 2001

APRA media release, , April 20, 2001

APRA, , with response to criticisms of APRAs actions

, press release, March 30, 2001

David Elias, , The Age.com, September 1, 2001

HIH Insurance Limited & Controlled Entities, , including independent audit report note and Directors Declaration

Prime Minister Howard and Minister Joe Hockey, , May 2001

Sharon Kemp, , May 29, 2001, The Age.com

Sharon Kemp, , The Age.com, May 15, 2001

Michael Rice, , undated

David Robertson, , Far Eastern Economic Review, June 2001

Moody's, , Special Report, October 2001

Selected newspaper references (by date)

Dow Jones International, Losses from Australia's HIH Insurance may have ballooned, 27 August, 2001

Reuters, Australia's HIH wound up, losses up to A$5.3 billion, 27 August, 2001

Asia Money, Untangling the HIH disaster, July 2001.

Business Insurance, UK sets precedent for bond insurance. June 11, 2001

Dow Jones, HIH Insurance was in trouble five years ago, June 14, 2001

Far Eastern Economic Review, The Australian government was warned about problems at HIH, 6 July, 2001

Australian Financial Review, New audit board sets bar on ethics, October 5, 2001.

Australian Financial Review, Big five back two-year board wait, October 5, 2001.

Dow Jones, Australia HIH Insurance losses may reach A$4B, May 25,2001

Australian Financial Review, HIH Insurance: A disaster in just four easy stages, March 24, 2001

Sydney Morning Herald, HIH Insurance in liquidation, March 16, 2001

Dow Jones, Three banks have exposure to HIH Insurance, March 15, 2001

This case study was contributed by Penny Cagan at Zurich IC Squared

Enron:

A useful discussion of the Enron collapse which includes transcripts of interviews and commentary is contained in "" on the PBS website.

Recent developments in the US have been very important in influencing corporate governance practice and regulation in Australia and throughout the world. These US developments occurred as a result of several corporate collapses of which the best known was Enron in December 2001, then the seventh largest US corporation. A US Senate subcommittee issued a report on (July 2002).

Coffee "" (2002) on the Social Science Research Network Electronic Library website.

Coffee "" (2003) on the Social Science Research Network Electronic Library website.

Branson "" (2002) on the Social Science Research Network Electronic Library website.

Gordon "" (2002) on the Social Science Research Network Electronic Library website.

Solomon, J, Solomon A, 2004,Corporate Governance and Acountability, Wiley, England.

Commonwealth of Australia 2003, HIH Royal Commission Report, Vols I-1, Canberra, viewed 5April 2005, www.hihroyalcom.gov.au.

Commonwealth of Australia 2003, The failure of HIH insurance: a concept collapse and its lessons, 3 vols, Commonwealth of Australia, Canberra.

Chapman Tripp Sheffield Young, 1 December 2003, Counsel: Corporate governance – should it be this hard, p.1., Barristers & Solicitors NEW Zeland.

Phillip Lipton, June 2003, The Demise of HIH: Corporate Governance Lessons, Vol 55 No 5, Chartered Secretaries Australia Ltd.

Chapman Tripp Sheffield Young, 1 December 2003, Counsel: Corporate governance – should it be this hard, p.2., Barristers & Solicitors NEW Zeland.

Alice Amott Oppen, Ethics: for real or for show, viewed 20 March 2005, www.camagazine.com/index.cfm/ci_id/1/6733/la_id/1/camagazine/...

Allens Arthur Robinson, May 2003, HIH Report and CLERP 9, pp.1-2., viewed 12 April 2005, www.aar.com.au

17 January 2002, Enron Timeline, viewed 7 April 2005, http://www.chron.com/cs/CDA/story.hts/special/enron/1127125.

Dellaportas, S, Gibson, K, Alagiah, R, Hutchinson, M, Leung, P and Homrigh, 2005, Ethics, Governance & Accountability: a professional perspective, Wiley, Australia.

Solomon, J, Solomon A, 2004,Corporate Governance and Acountability, Wiley, England.

Dellaportas, S, Gibson, K, Alagiah, R, Hutchinson, M, Leung, P and Homrigh, 2005, Ethics, Governance & Accountability: a professional perspective, Wiley, Australia.

Francis, R, Etics & Corporate governance, UNSW Press, Sydney.

Dellaportas, S, Gibson, K, Alagiah, R, Hutchinson, M, Leung, P and Homrigh, 2005, Ethics, Governance & Accountability: a professional perspective, Wiley, Australia.

Hermraj, M 2002, ‘preventing corporate failure: the Cadbury committee’s corporate governance report’, Journal of Financial Crime, Vol.10, no.2, pp.141-45.

Henry Bosh, ‘The changing Face of Corporate Governance’, 2002, Vol.25, University of New South Wales Law Journal, p.27