The pilot was conducting a flight from Diamond Beach to Cooma. Approaching Hoskinstown the aircraft's rear engine suffered a loss of power and smoke appeared in the cabin. The pilot immediately shut down the rear engine and feathered the propeller. Because the symptoms indicated that a fire was burning in the rear engine compartment, the pilot decided to land as soon as possible, and prepared for an emergency landing into a paddock. During the approach the smoke disappeared from the cabin, so the pilot concluded that the fire had extinguished itself and discontinued the landing. He then diverted to Canberra, using the front engine only, where he landed safely. An examination of the rear engine compartment revealed that a large section of the left-hand exhaust stack had separated in flight. Hot exhaust gases, now directed into the rear engine compartment, burnt a hole through the lower cowl, distorted the firewall and burnt the insulation from electrical wires including the low tension ignition leads. The bare ignition leads then "shorted out" causing the engine to fail. The source of heat having been removed prevented the fire from becoming self-sustaining. Cracks of about 18 cm in length had occurred along either side of the lower welded seam from the muffler attachment flange. The forward crack propagated around the exhaust stack, through 180 degrees, and returned back to the muffler attachment flange, paralleling the lower seam. This allowed the section of exhaust stack to separate. Expert opinion suggests that the cracks should have been evident for a considerable period of time, having originated from normal thermal fatigue and exhaust gas flow erosion. The aircraft had been subject to a major inspection a short time prior to the flight. The organisation which performed this inspection advised that there had been no evidence of exhaust gas leakage, or cracks visible to the naked eye at that time.