Letter from... Australia

The curtain is finally coming down on the long running drama involving Australia's largest corporate collapse, although its impact is likely to be felt for many years to come.

The saga of insurance group HIH - or Australia's Enron as it has been called - ended with the two key figures in the collapse, former CEO Ray Williams and former director Rodney Adler, receiving custodial sentences.

With more sentencing hearings still to come, the case is viewed as a major victory for the financial services regulator, the Australian Securities and Investments Commission (ASIC), which, like many regulators around the world, has struggled to make prosecutions for corporate crime stick.

The collapse of HIH was the biggest corporate failure in Australia's history, leaving thousands of policyholders without insurance cover and debts estimated at A$5.3bn.

The company's demise caused significant damage to the economy and public confidence, with the Australian Government forced to establish an 18-month Royal Commission to uncover details of the fiasco.

But, for many in corporate Australia, the real legacy of HIH is the changed environment within which they operate. In the past couple of years, Australia has seen the largest overhaul of its corporate law in decades, with many of the reforms introduced as part of the Corporate Law and Economic Reform Program (CLERP 9) being a direct response to problems identified by the HIH Royal Commission.

ASIC chairman, Jeffrey Lucy, claimed sentencing of the two central figures in the collapse sent a 'strong message' to corporate Australia.

'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.

Australian treasurer, Peter Costello, said the sentences were 'a very powerful signal to corporate Australia about the importance that the Government places on upholding corporate law and the sentences which the courts are prepared to impose where people are found guilty'.

But rather than the outright fraud that marked many other major corporate collapses, the Royal Commission found the HIH saga was marked more by 'poor leadership and inept management' (together with) an attitude of apparent indifference to, or deliberate disregard of, the company's underlying problems'.

Commissioner Justice Neville Owen noted in his report that it was 'not a case where wholesale fraud and embezzlement abounded'. Instead, the money was wasted on 'extravagance, largesse, paying too much for businesses acquired, and questionable transactions.'

Despite hearing tales over wild spending and executive indulgence, the Commission found the wrongdoing in relation to HIH mainly involved papering over 'the ever-widening cracks' in the company's accounts, with Williams signing off one company report overstating operating profits by A$92m.

The investigation also highlighted a number of questionable reinsurance deals in the years leading up to the collapse used to dress-up the accounts for one of the businesses HIH acquired. These saw losses on the transactions transformed into profits of up to A$40m.

Aside from the financial loss, the collapse also significantly disrupted Australia's insurance market, with premiums for categories like professional indemnity, home warranty and public liability rising significantly and, in some cases, becoming almost unobtainable. The Commission heard stories of personal hardship caused to individual policyholders, as well as the cancellation of community events due to the prohibitive cost of public liability protection.

The regulatory body overseeing the insurance sector, the Australian Prudential Regulatory Authority, also fell victim to the collapse. Its failure to act, despite warnings about HIH's financial position, forced the resignation of the board and CEO, and resulted in it now taking a much tougher regulatory stance.

While the custodial sentences bring some closure to the HIH saga, its ripples are still spreading.

The liquidator of HIH Insurance recently broadened its pursuit of potential creditors, turning its attention to those involved in the controversial reinsurance deals. Legal action is in train against National Indemnity, a subsidiary of US billionaire Warren Buffett's Berkshire Hathaway and another subsidiary, General Reinsurance, is also in the liquidator's sights.

With these cases still to unfold, the full story of HIH looks set to have many years to run.

Janine Mace is an Australian finance and business journalist.