Andersen's auditing and taxation divisions managed to account for the same transaction in opposite ways, providing a double financial benefit to HIH Insurance, the recently collapsed Australian insurer. (DCWorld, 15 February 2002).

The auditors' treatment of a letter of credit (L/C) backed deal with Hannover Re as true reinsurance enabled HIH to claim profits of A$92 million for its 1998-99 accounts.

Case background

The HIH case centres on claims that the insurance group overstated its profits in the two years before it collapsed last year. In 1999, two contracts that purported to be true reinsurance deals covered a sharp deterioration in undiscounted reserves and were used by HIH to book profits of more than A$92 million and A$108 million in 1999 and 2000 respectively. These amounts were sufficient to make it look like HIH had recorded an overall profit for each year.

A royal commission in Australia is currently hearing allegations that the contracts were not as they appeared to be legitimate reinsurance deals in which the reinsurer would take a significant risk, hence enabling the insured to use the amounts reinsured to bolster its profit and loss account. Rather, because the deals were structured with a L/C for the reinsurer to fall back on if things went wrong, Hannover Re had only taken a small risk in the deal.

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Andersen's tax specialists treated the Hannover Re funds as financial reinsurance. The tax specialists have told the royal commission that HIH urged them to treat the funds in this manner.

Paul Abela, Andersen's group tax counsel, has told the commission that by September 1999 he was aware of L/Cs in which HIH promised to "top up" an investment fund created as part of the transaction. The accountants recognised that this removed the risk of Hannover losing money.

The auditors claim however that they were not told about the L/Cs. Rather, they were "lied to" by Dominic Fodera, the HIH finance director - a former Andersen partner in charge of the HIH audits - when they asked if there were any attachments to the deal he had not told them about.

The HIH royal commission is ongoing.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.