HIH collapse new pain for Andersen

WHEN insurer HIH collapsed a year ago, it was Australia's biggest corporate failure. But the shock waves were felt in London, where many Lloyd's syndicates reinsured risks with it and were left to pick up the tab. Now, embattled accountancy firm Andersen has become embroiled in the HIH affair.

Already in merger talks with rivals as it struggles to survive, Andersen could face legal action over the collapse of HIH. Australian law firm Dennis, representing 1,000 HIH shareholders, has drafted a claim to be put to Andersen when the firm gives evidence next month to the Australian Royal Commission into last year's A$5bn (£1.8bn) collapse of HIH. A further 2,000 claimants are expected to join the class action.

Solicitor Bruce Dennis said Andersen could face a claim of between A$500m and A$700m over its role as HIH auditor, tapping into indemnity insurance written for Andersen by a Lloyd's syndicate. He declined to name the syndicate but said it often wrote policies for the big five accounting firms.

The HIH inquiry heard earlier this year that Andersen 'must or ought to have been aware' of the falsification of HIH accounts in the months before its collapse. Counsel assisting the Royal Commission, Wayne Martin, told the inquiry: 'The auditors may have knowingly involved themselves in verifying accounts which they knew to be false and, to that extent, have acted in conjunction with that company and lent their aid to a quite deliberate deception.'

The HIH claims relate to the accounting treatment of a capital injection of A$200m into Australian insurer FAI, a lossmaking subsidiary that HIH bought in 1999. Martin outlined documentary evidence which appeared to show that HIH paid the A$200m to FAI for redeemable shares, but that the transaction was 'backdated' to convey the impression that FAI remained solvent for the financial year ending June 2000. Andersen in Australia declined to comment on its insurance arrangements and denied it was facing legal action over HIH.

In the US, meanwhile, Andersen is reportedly holding merger talks with rivals Deloitte Touche Tohmatsu and Ernst & Young as criminal investigations into its role in the Enron scandal draw to a close. Under this merger scenario, Andersen would file for Chapter 11 bankruptcy protection and the merger partner would then buy the company.

Andersen confirmed in January its staff had destroyed thousands of records relating to its audits of failed energy group Enron. US reports claim Andersen's liability in the Enron saga could be as much as US$1bn (£715m).