Australian Securities and Investments Commission (ASIC)
Media and information releases
05-94 Ray Williams sentenced to four-and-a-half years` jail Friday 15 April 2005
Mr Jeffrey Lucy, Chairman of the Australian Securities and Investments Commission (ASIC), today announced that Mr Ray Williams, the former Chief Executive Officer of HIH Insurance Limited (HIH), has been sentenced to four-and-a-half years` jail with a non-parole period of two years and nine months. Mr Williams was today convicted and sentenced on three criminal charges arising from his management of the HIH group of companies in the three-year period 1998 to 2000. `ASIC welcomes the strong message that today`s sentencing sends to corporate Australia`, Mr Lucy said. `ASIC, the courts and the community will not tolerate company directors who do not act honestly and in the best interests of shareholders`, he said. Mr Williams was sentenced in relation to offences concerning three substantial transactions, which significantly distorted the true financial position of HIH. These matters involved hundreds of millions of dollars and Mr Williams` criminal conduct occurred over an extensive period. Mr William`s sentencing today on the three criminal charges follows ASIC`s successful civil penalty proceedings (commenced in 2001) that resulted in him being:
• banned from acting as a director of any company for 10 years
• ordered to pay compensation jointly with Mr Rodney Adler and Adler Corporation Pty Limited of approximately $7 million, and
• ordered to pay a pecuniary penalty of $250,000.
`Today`s sentencing brings to a close ASIC`s proceedings against Mr Williams concerning the collapse of HIH`, Mr Lucy said. ASIC`s investigation into the matters surrounding the collapse of the HIH Insurance group of companies is continuing.
Mr Williams was sentenced after pleading guilty on 15 December 2004 to three criminal charges:
• that he was reckless and failed to properly exercise his powers and discharge his duties for a proper purpose as a director of HIH Insurance Limited when, on 19 October 2000, he signed a letter that was misleading
• that he authorised the issue of a prospectus by HIH on 26 October 1998 that contained a material omission
• that he made or authorised a statement in the 1998-99 Annual Report, which he knew to be misleading, that overstated the operating profit before abnormal items and income tax by $92.4 million.
ASIC`s HIH investigation has already led to criminal prosecutions of 9 former senior executives, including directors, of FAI, HIH and associated entities on 31 Corporations and Crimes Act charges. These criminal prosecutions include:
• On 23 December 2003, Mr William Howard, a former General Manager of HIH Insurance Limited, was sentenced to three years imprisonment, fully suspended on the basis of on-going assistance to the HIH investigation. Mr Howard had pleaded guilty to two counts of criminal misconduct, namely that he dishonestly received from Mr Brad Cooper approximately $124,000 in return for facilitating payments by HIH directly or indirectly in favour of Mr Cooper. Mr Howard also admitted facilitating a payment of $737,000 to a company associated with Mr Cooper knowing that the payment obligation had already been discharged.
• On 22 October 2004, Mr Bradley Cooper was committed for trial on six charges of corruptly giving a cash benefit to influence an agent of HIH Insurance Limited, namely Mr Howard, and seven charges of publishing a false or misleading statement with intent to obtain financial advantage. The trial is set down to commence on 1 August 2005.
• On 20 April 2004, Mr Charles Abbott, the former Deputy Chairman of HIH Insurance Limited, was charged with dishonestly using his position as a company director. The committal hearing is set down to commence on 30 May 2005.
• On 19 July 2004, Mr Timothy Maxwell Mainprize was committed for trial on charges of failing to act honestly in the exercise of his powers and discharge of
his duties as an officer of FAI General Insurance Company Limited. He was also committed on one count of providing false and misleading information. His trial is set down to commence on 5 September 2005.
• On 19 July 2004, Mr Daniel Wilkie was committed for trial on charges of failing to act honestly in the exercise of his powers and discharge of his duties as an officer of FAI General Insurance Company Limited. He was also committed on one count of providing false and misleading information. His trial is set down to commence on 5 September 2005.
• On 19 July 2004, Mr Stephen Burroughs was committed for trial on charges of failing to act honestly in the exercise of his powers and discharge of his duties as an officer of FAI General Insurance Company Limited.
• On 16 February 2005, Mr Rodney Adler pleaded guilty to four charges, two of disseminating false information that was likely to induce people to buy HIH shares, one of making and publishing false statements and one of being intentionally dishonest and failing to discharge his duties in good faith. Mr Adler was sentenced on 14 April 2005 to four-and-half years` jail with a non-parole period of two-and-a-half years.
• On 24 March 2005 Mr Terry Cassidy pleaded guilty to two charges of recklessly making false statements and one charge of recklessly failing to discharge his duties as a director for a proper purpose. There will be a sentencing hearing commencing on 19 April 2005.
Question 1 —Business Risk and Inherent Risk Assessments
"It is difficult for an insurance company to go broke in the space of a year, let alone a few months" Sydney Morning Herald, May 19–20, 2001.
a) How would you assess the business risk of HIH Insurance Limited?
b) List several inherent risk factors effecting HIH at the financial report level and whether they would have contributed to an increase or decrease in the inherent risk assessment.
Question 2— Legal Liability
Sydney solicitor Bruce Dennis will be coordinating a class action for some 600 HIH shareholders against the auditors — Andersens (as the firm is now known). In addition, HIH`s liquidator, Tony McGrath of KPMG Peat Marwick is also likely to seek to recover funds for HIH creditors.
a) Discuss the facts and findings of relevant court cases that Andersens should refer to in determining the likelihood of the partnership being held liable to:
b) What conditions need to exist for a negligence action to be upheld?
Question 3 — Ethics
The HIH board of directors includes three former partners of the audit firm Arthur Andersen. In the past decade, Andersens has earned more than $8 million from auditing HIH books and $7 million for other services.
a) Why would HIH have wanted to hire prior members of its external audit team?
b) What are the advantages of having the same firm provide both the auditing and consulting services?
c) Indicate whether these circumstances represent a violation of ethical standards and give reasons for your answer.
d) Outline the primary recommendations for audit reform proposed by the Ramsay Report and CLERP 9. What impacts do you feel these changes will have on the practice of auditing?