Discuss about the Essay for Business Risk HIH Insurance.
I would do the following to assess the business risk of HIH Insurance Limited;
First, I would obtain an understanding of the company and its environment. This will entail understanding the organization’s operations, services, investors, clients and managements. It is in this process I would have examined the quality of management of HIH insurance Limited. Also, I would have gone further to get good knowledge of the environment that the Company was operating in, its competitors and regulations to be met and observed in the industry. This way, I would have been able to get a clear understanding of the HIH Insurance Limited nature of operations and the likelihood of loopholes in the organization.
Second, I would be obtain an understanding of the internal controls in relation to financial reports. I would take an in depth scrutiny in the internal control to check if the financial reports are presented in the right manner and if the controls in the organization are functional in ensuring that the financial statements represent the true and fair state of organization financial position.
Thirdly, I would undertake an analytical procedures .This process would involve substantive analyses of the financial documents to get the true state of the organization financial position. This process would involve trend analysis, ratio analysis and reasonableness. This way, I would have known the business risk that HIH insurance limited was going through.
Fourth would be analyzing information from clients and observing client at work. this would involve have involved carrying out interviews and travelling to the business premises to observe client at work. Watching staff make account entries to observe if it done to professional standards.
The last way through which I would assess business risk would be taking to the audit committee. Inquiring from the audit committee and management would reveal the possible business risks that the organization was undergoing through. Audit committee has all the details and can be used to assess the business risks.
b) The list of inherent risk factors affecting HIH at the financial reports level are;
The purchase of FAI insurance at a premium Price. This factor led to organization using it finances inappropriately to acquire a company that was not worth the premium purchase granted. The company increased its inherent risk by purchasing FAI.
Venturing to high risk area such as aviation, firm financing insurance and natural disasters. These ventures led to high claims that the company could to manage to pay claims. They lead to increased inherent risk in the company’s financial statements
iii. Venturing to a high workers’ compensation market in California. After the industry deregulation of the in California, the court increased the cost of claims leading to great losses in the HIH Insurance Limited.
Facts and findings to be used By Anderson to determine partnerships liable to clients and creditors
Anderson will use the following court cases and rulings to determine the partnership liability to the clients;
Anderson can use the court case ruling on 15th December 2004 where Mr. Williams Howard pleaded guilty that he failed to exercise his powers and duties for proper purpose as a director of HIH Insurance Limited. This case will be used to prove that Mr. Howard is liable to clients for being reckless in discharging his duty of which a reasonable person would have done to increase the client’s benefits. The Second case that he pleaded guilty that he authorized issue prospectus on October 1998 that had material omissions .This shows that Mr. Howard will have to be responsible because he offered misleading information to clients.
Mr. Anderson can also use the court rulings on 16th February 2005 where Mr. Rodney Adler Pleaded guilty for disseminating false information that could induce clients to buy HIH shares. Mr. Adler induced shareholders to buy shares by using false and misleading information will lead to the partnership being liable to its clients.
Anderson will use the following rulings and court cases to determine the partnership liability to creditors.
Anderson can use the court case ruling held on December 15th 2004 where Mr. William Howard pleaded guilty for making and authorizing a false statement in the year 1998-1999 annual report. Mr. Howard knew that the statements were misleading and that there was overstating of the operating profit. This statement was misleading to creditors and the partnership should be liable.
Anderson can also use the 24th March 2005 case ruling where Mr. Terry Cassidy pleaded guilty for making false statements. These statements were misleading to creditors who relied on them to finance the Insurance Company.
b) Conditions needed to uphold Negligence
The first condition is the Duty of care. This refers to the responsibility of an individual to carry his/her operation in full care of the neighbor. It is the position of discharging duties responsibly without causing a disadvantage to an individual next to you or associated to you (Trebilcock, 1969). For example a manager has a duty to act to the best interests of a company.
The second condition is the breach of care. This refers to not upholding the duty of care of which a reasonable person in your position would otherwise uphold. For example, a manager being dishonest and reckless to authorize false financial statements which he is aware of.
The Third condition is the occurrence of damages. This refers to individuals having a duty of can and breaching it leading losses to claimer. For example shareholders losing money because managers acted recklessly by failing to uphold integrity in discharge of their duties.
Why HIH Insurance Limited wanted to hire prior members of its external audit team.
To cover the integrity of the auditors. HIH wanted to hire them so that they don’t expose the true state of the financial situation of the company. By being hired, the auditors would get compromised and would not report the true reflection of the business. Therefore losing integrity in their mandate and giving false information that HIH was riding on.
To obstruct objectivity of the auditors in execution of their work. HIH would hire their prior auditor to interfere with the objectivity of auditors in an organization of disclosing any fault to the shareholders, clients and creditor. Therefore HIH would continue with it operation despite the terrible financial performance.
To interfere with the independence of the Auditors and Auditing firms. HIH hired their external auditors so that the auditors cannot have the independence of reporting the true reflection of the financial reports. These auditors would have conflict of interest therefore failing to report to avoid collapse of the HIH which they are part of.
Advantages of having an one Auditor providing both auditing and consultation services
Auditors providing consultation services are able to give the most efficient services. Auditors have sufficient knowledge of the business because they will of the information they have acquired in the auditing process. For example, the financial state of the business (Bleibtreu & Stefani 2012).
Auditors are able to provide a dynamic and external perspective to the consultation services in an organization. Since auditors are independent parties in the business, they are able give useful practical advices from an external perspective that can facilitate good performance of the firm.
Auditors become part of the success of the business, therefore working harder by providing the best consultation services .The auditing firm will take more time to understand the business and getting the relevant useful information to enable the firm’s performance.
A circumstance where Auditors become partners in a firm is a violation of the ethics standard. First, it leads to conflict of interests. Auditors become part of the business, therefore acting in the best that best serve their interests. Second is that it leads to auditors compromising independence .Auditors are not able to discharge their mandate on an independent position since they are part of the business. And lastly is that the audit reports questioned on the basis of quality. The audit report is questionable when auditing firm is a partner to the business because the users of the report will have compromised the quality of being independent.
The Ramsay report primary recommendations was that the auditing firms should be independent because it a fundamental to credible and reliable auditors’ reports. The Report stated that audited financial statements played a key role in capital market efficiency and an independent auditor offered an external check on the integrity of financial statements.
I feel that these changes will have a positive impact on the practice of auditing. To begin with, it will improve the capital market effectiveness. This will be achieved by improving the decisions made by the users of the financial statements internally and externally. Second, the audit report will improve the reliability of the financial statements. This will be as a result of adding value to the financial statements by using an independent auditor. And lastly is the credibility of financial statements. Independence of the auditing practice will improve the credibility from the stakeholder by adding value to the financial statements (Ramsay, 2001). This will have a positive change as managers will be able to undertake informed decisions for the best interests of the company. In conclusion, the Ramsay report will yield improved performance of the audit work when the practices are observed and carried out by independent auditing firms.
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