[A-List] Australian legitimation crisis: HIH

["Michael Keaney" <michael.keaney@xxxxxx>]

HIH collapse inquiry spreads to engulf elite
By Virginia Marsh in Sydney
Financial Times: January 17 2003

Not since the freewheeling 1980s has corporate Australia had so much to
gossip about. From the treasurer of the governing Liberal party to A-list
socialites and industry regulators - few corners of the country's business
and political elite have been untouched by an inquiry into the collapse of
the insurance group HIH.

The 15-month royal commission probe into Australia's biggest business
collapse has even touched John Howard, the prime minister, who in 1978 as
federal treasurer was instrumental in overriding regulators' objections and
allowing FAI, a troubled HIH subsidiary, to continue operating.

As well as extending its tentacles into the upper echelons of Australian
public life, the inquiry has distinguished itself by its scope.

This week counsel to the commission, after sifting through 1.7m pages of
documents provided by 122 witnesses in some 200 days of sittings, gave their
assessment of why the insurer failed nearly two years ago with debts of
A$5.3bn ($3.1bn).

What will stick in the public's mind, however, will be the lurid
descriptions of HIH's culture of largesse - the lavish parties thrown by Ray
Williams, the group's former chief executive, and the A$340,000 he spent on
gold watches in a single year - as well as the multiple breaches of
corporate governance allegedly committed by its directors and the failings
of regulators and advisers.

The counsel - the commission's equivalent of a prosecution team - detailed
more than 1,000 adverse findings and has recommended criminal and civil
charges against several former HIH and FAI directors, notably Mr Williams
and Rodney Adler.

HIH's auditor, Arthur Andersen, the now defunct accounting group, has been
accused of professional incompetence as has the Australian Prudential
Regulation Authority, while some of the actions of Goldman Sachs, in its
role as adviser to FAI, have also been criticised.

Those implicated will have the opportunity to respond in coming days. Then
it will be over to Justice Neville Owen, the inquiry's head, to weigh up the
evidence and report back by February 28.

The judge has stressed that his counsel's findings should be taken for what
they are - submissions that he may or may not accept. Nevertheless
irreparable damage has already been done to the reputations of several of
corporate Australia's senior figures and organisations.

The debts at HIH far exceed those run up by Christopher Skase or Alan Bond,
in Australia's most prominent white collar scandals of recent decades. Even
if Justice Owen decides against recommending that the potential charges be
pursued, there are others working on multi-million dollar lawsuits on behalf
of the failed group's shareholders and creditors.

Chief among these are the proceedings initiated by Tony McGrath, HIH's
liquidator, against the federal government, Arthur Andersen, and David Slee,
the insurer's actuary. In the government's case, it is alleged that it
failed in its statutory role as the insurance industry's regulator.

Put simply the counsel's conclusion is that HIH failed because it
consistently underestimated its claims liabilities. Counsel also alleged
that HIH was weakened by disastrous forays into the US and UK markets and
its acquisition of FAI, a rival insurer that may have been insolvent at the
time.

Yet, while HIH's demise has had significant implications for the insurance
sector, commentators regard the group as a special case.

Peter Hendy, chief executive of the Australian Chamber of Commerce and
Industry, says Australia does not have systemic problems regarding
accounting standards. Nevertheless, he says HIH's failure, as well as that
of One.Tel, the discount telecoms company that also went under in 2001,
focused attention in Australia on corporate governance - a focus
subsequently sharpened by the collapse of Enron and the other corporate
scandals that hit the US.

As a result, professional bodies, including the Australian Stock Exchange
reviewed guidelines while the government last year brought forward a planned
review of accounting and auditing standards.

As for the insurance industry, while the HIH debacle has undermined public
confidence, analysts say that fits collapse has, in many ways, been positive
for the group's rivals.

The group, once Australia's second largest general insurer, was overly
aggressive, they say, undercutting rivals to build market share, thereby
depressing prices. Its demise has seen premiums rise.

For the insuring public, the outcome has been less positive with premiums in
basic lines such as home and motor rising by 10 to 15 per cent in the past
two years.

In areas such as professional indemnity where HIH was the market leader,
however, the fallout has been far more serious. Some in high risk
occupations such as obstetricians and other medical practitioners have seen
insurance bills double or treble, forcing many into early retirement.

As Wayne Martin, the commission's senior counsel, said this week: "The
repercussions of the collapse of HIH are continuing and will likely continue
for some years to come."