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Inherent and Business Risk Assessments

Discuss about the Business Risk for HIH Insurance Limited.

The overall study mainly helps in evaluating the case study of HIH Insurance limited and the fraud conducted by the director’s of the company. In addition, the study effectively depicts different types of risk that was associated with the business assessment of HIH insurance limited. Moreover, the novice effectively provides details about the inherent risk that contributed in the collapse of HIH Insurance Limited. In addition, the study provides details about the legal liabilities, which might be enforced on to the directors of HIH Insurance for purposely using unethical means in their organisations to support their activities. Lastly, the novice depicts the ethical considerations, which could be conducted by HIH Insurance before increasing its risk exposure.    

Assessing the business risk of HIH insurance Limited:

The main business risk that surrounded the overall operations of HIH Insurance is the insolvency and business structure risk. Sadgrove (2016) stated that insurance companies use low risk profile, where the return is high and risk of loss is relativity low. The assessment of HIH Insurance business risk is as follows.

Insolvency risk:

Moreover, the overall insolvency risk of HIH insurance company mainly relied on the auditing risk conducted by the auditor of the company. In addition, the balance sheet of the company mainly comprises of data, which reduces the overall debt of the company. In addition, the balance sheet manipulation reduced debt ratio and portrayed wrong valuation of the company. Michelacci and Schivardi (2013) stated the indentified loopholes in accounting are used by companies to inflate their balance sheet and attract potential investors.  

Organisational structure risk:

HIH Insurance mainly changed its risk by entering into the high-risk insurance arenas like marine aviation, natural disasters, and film financing insurance. In addition, the risky endeavours of HIH Insurance mainly increased their losses. In addition, the current organisational structure of the insurance sectors mainly excluded these arenas, which was targeted by HIH Insurance. Grant et al. (2014) argued that without attain risk high return from investment could not be achieved. In addition, the higher risk structure adopted by HIH Insurance mainly increased their overall loses to $100 million from film insurance. In addition, HIH insurance did not upheld the rules and regulation laid down by Australian Prudential Regulatory Authority (APRA) in commencing their business activities.

The overall inherent risk factors mainly comprises of the misstatement in financial report of the company. In addition, the inherent risk mainly reduces the authenticity of the financial report, which might be used by investors to evaluate the solvency status of the company. Fariña et al. (2013) argued that companies with the help of auditors are able to misstate or omit their liabilities in financial report, which in turn could portray solvency of the company. Moreover, the inherent risk of HIH insurance would be according to the relative insurance companies. However, the auditors did not address the involvement of the company in marine aviation, natural disasters, and film financing insurance, which might increase the overall inherent risk.

Depicting different inherent risk factors that affect HIH at financial report level and evaluating the increase or decrease in inherent risk

In addition, the control risk and risk detection of the company lost their friction used to the involvement of the company in higher risk insurance arenas. Moreover, the control risk mainly helps in depicting the inaccuracy conducted by the company in their financial statements. However, the accommodation of risky activities mainly decreased the efficiency of the inherent risk adopted by the auditors. Moreover, the risk detection method used by the auditors mainly decreased due to the implementation of reinsuring policies used by HIH for ordinary policies and providing higher risk insurance schemes. Mellichamp (2013) stated that auditors to increase their personal income use unethical measures and help companies to inflate their overall balance sheet.      

Evaluating the facts and findings of relevant court cases that might help Andersen to determine the likelihood of partnership for clients and creditors:

The case of HIH insurance scandal might be depicted an adequate relevant court case, which might be referred by Anderson in analysing the likelihood of partnership of Clients and creditors. Moreover, the court mainly banned the directors for 10 years on the ground off fraud and instructed to pay a compensation of $7 million. Arlen and Carney (2012) argued that without the insolvency declaration it is hard for investors to detect the fraud conducted by companies in their annual report.

Client’s perspective:

The clients of HIH Insurance mainly Mr. Brad Cooper was involved in unethical activities to bribe the agent of HIH for insuring higher risk assets. In addition, the HIH investigation member mainly received $124,000 indirectly or directly to allow the payment of $737,000. Moreover, these criminal activities conducted by the company were held in court, which helped in proving their guilt. Brochet and Srinivasan (2014) argued that unlawful sum of gifts are received by companies heads to allow unjustified insurance claims of their clients.   

Mr. Stephen Burroughs an office of the FAI General Insurance Company limited a creditor of HIH Insurance mainly was committed on trial charges falling to act honestly in portraying the unethical measures conducted by HIH insurance company. Mr. Daniel Wilkie, Mr Timothy Maxwell Mainprize, and Mr. Terry Cassidy was committed to trial charges as they were not doing their work honestly and stating the irregularities conducted by the company in their financial statement (Firth et al. 2016).

The overall negligence actions of HIH are mainly depicted as follows.

Reduction in information independence:

The limited knowledge depicted by HIH to its auditors and other regulatory authority could be helped as the negligence action against the company. Moreover, the auditors due to limited information were not able to comprehend the changing inherent risk of the company, which in turn increased its overall insolvency risk. Su (2015) stated that auditir5s in fear for the termination of their audit license mainly uses ethical principles in auditing companies’ financial statement. In addition, auditors and directors that knew about the misstatement conducted in the annual report could be upheld for negligence action in a court of law.

Legal Liability

Damaged governance practise of HIH:

Moreover, the damaged corporate governance and followed in HIH insurance was the main reason behind the overall decline of the company. In addition, changes in risk exposure and commencement of high-risk insurance to clients were not depicted to the relative authority. Moreover, employees and internal auditors did not report to relevant authorities regarding the mismanagement and high-risk endeavours taken up by the company (Backof 2015).  

Depicting the reason that led to the appointment of prior members as external audit team for HIH:

Due to the changing business perspective of HIH Insurance, it needed external auditors, which were the member of the company. In addition, inclusion of external auditors with prior member of the company might help in keeping its secret. Brown et al. (2013) argued that external auditors to increase their wealth accumulation mainly use unethical measures to hide the actual truth about the financial position of the company. In this context, Thomas (2012) mentioned that adequate permission needed by external auditors mainly helps in authenticating the overall auditor’s report and reduce manipulations conducted by the company. Moreover, the reasons for appointing prior members as auditors are as follows.

  • The implementation of prior members as external auditors might help HIH insurance to reduce through checks of their financial report.
  • Moreover, the external auditors might be able to understand the operations and requirements of different strategy due to their experience in the company.
  • In addition, involvement and approval of previous directors mainly help investors to maintain trust for the company.
  • Non-inclusion of different external auditors might help HIH to continue its unethical activities, which might help in retaining more profits for its members.   
Evaluating the advantages that might be provided by the firm depicting both auditing and consulting services:

The auditing report and consulting services both provided by the auditing firm mainly helps in improving the overall operations of the company. In addition, the combined services might help the company to identify loopholes, and improve their overall operational capability. In this context, Hay et al. (2014) argued that combined auditing and consulting services might help companies to identify loopholes, which might help in portraying inflated balance sheet. Moreover, the advantages of using one firm for auditing and consulting are as follows.

  • It could help the company identify errors in their audit process, which might help in reducing authenticity of their financial report.
  • It could help in suggesting measures, which could be implemented by the company to reduce their overall expenditure.
  • It could help in confining the internal secrets of the company and protect it from it competitors.

The consultation and auditing firm are mainly helps in identifying errors and misstatements in the financials report, which could in turn hamper authenticity of the financial report. Helin and Babri (2015) stated that consultation firm mainly helps companies to reduce their tax by providing suggestions, which in turn increases their retained profits.

After the effective evaluation of the HIH insurance company case it could be found that there were many ethical violations conducted by directors, external auditors and other members of the company. In addition, Arthur Anderson is mainly identified as the mainly culprit for taking advantage of the circumstance used by HIH Insurance. Moreover, around $1.7 million and $1.6 million was paid for auditing and consulting fees. Zadek et al. (2013) argued that ethical violation only takes place when the internal control of the company weakens, which leads to higher liquidity accumulation. The external auditors did not follows the auditing rules laid down by AASB and decreased. Moreover, the auditors did not complete their duties according to their rules laid down by AASB and helped HIH Insurance in inflating their financial report.

Depicting the condition that might exists for a negligence action to be upheld

The circumstance used by HIH Insurance to conduct external audit and change regulations laid down by prudential margin mainly states the ethical violation candied by its directors and auditors. Theses ethical violations were only conducted to increase their overall personal wealth (Pitt 2014).   

Depicting the recommendations that are provided by Ramsay report and CLERP 9, which might help in evaluating the impacts on auditing practise:

Ramsay report and CLERP 9 mainly helped in identifying policies, which could be used in ethical financial reporting and governance. Moreover, the recommendation of th CLERP 9 and Ramsay report are as follows.

  • To increase the overall wait time of the retied top management personal to join the external audit team from 2 to 4 years.
  • To implement the auditing companies senior personnel involvement audit report of the company.
  • To increase the rotation of members of external auditors to five years

With the help of theses indentified policies the overall unethical measure could be reduced, which in turn might help in improving the overall authenticity of the financial report. Baker et al. (2014) stated that implementation of strict rules and regulation might help in igniting fear among unethical practitioners and increase authenticity of the financial report. On the other hand, William et al. (2016) criticises that due to greed, auditors mainly identifies different loopholes in new rules, which in turn reduces authenticity of the financial report.

Conclusion:

The overall assignment mainly helps in depicting the unethical measures conducted by HIH Insurance Company to inflate their financial statement. Moreover, the study also helps in identifying the insolvency and organisational structure risk identified as the main business risk for HIH Insurance Company. Moreover, the unidentified inherent risk mainly reduces the overall authenticity of the audit report prepared for HIH Insurance. Moreover, the novice effectively depicts legal liabilities that might be portrayed to Mr. Andersen for his unethical measures conducted in portraying the audit report. Moreover, with the help of Ramsay report and CLERP 9 ethical auditing could be conducted in business, which might help in authenticating their financial report.

Reference:

Arlen, J. and Carney, W.J., 2012. Vicarious liability for fraud on securities markets: Theory and evidence.

Backof, A.G., 2015. The impact of audit evidence documentation on jurors' negligence verdicts and damage awards. The Accounting Review, 90(6), pp.2177-2204.

Baker, C.R., Bédard, J. and Prat dit Hauret, C., 2014. The regulation of statutory auditing: an institutional theory approach. Managerial Auditing Journal, 29(5), pp.371-394.

Brochet, F. and Srinivasan, S., 2014. Accountability of independent directors: Evidence from firms subject to securities litigation. Journal of Financial Economics, 111(2), pp.430-449.

Brown-Liburd, H.L., Cohen, J. and Trompeter, G., 2013. Effects of earnings forecasts and heightened professional skepticism on the outcomes of client–auditor negotiation. Journal of business ethics, 116(2), pp.311-325.

Fariña, S.R., Alford, A., Garcia, S.C. and Fulkerson, W.J., 2013. An integrated assessment of business risk for pasture-based dairy farm systems intensification. Agricultural Systems, 115, pp.10-20.

Firth, M., Wong, S., Xin, Q. and Yick, H.Y., 2016. Regulatory sanctions on independent directors and their consequences to the director labor market: Evidence from China. Journal of Business Ethics, 134(4), pp.693-708.

Grant, K., Edgar, D., Sukumar, A. and Meyer, M., 2014. ‘Risky business’: Perceptions of e-business risk by UK small and medium sized enterprises (SMEs). International Journal of Information Management, 34(2), pp.99-122.

Hay, D., Knechel, W.R. and Willekens, M., 2014. The Routledge Companion to Auditing. Routledge.

Helin, S. and Babri, M., 2015. Travelling with a code of ethics: a contextual study of a Swedish MNC auditing a Chinese supplier. Journal of Cleaner Production, 107, pp.41-53.

Mellichamp, D.A., 2013. New discounted cash flow method: estimating plant profitability at the conceptual design level while compensating for business risk/uncertainty. Computers & Chemical Engineering, 48, pp.251-263.

Michelacci, C. and Schivardi, F., 2013. Does Idiosyncratic Business Risk Matter for Growth?. Journal of the European Economic Association, 11(2), pp.343-368.

Pitt, S.A., 2014. International standards for the professional practice of internal auditing.

Sadgrove, K., 2016. The complete guide to business risk management. Routledge.

Su, L., 2015. Do the auditors bear the consequences of corporate failures? The case of failed New Zealand finance companies.

Thomas, S., 2012. Ethics and accounting education. Issues in Accounting Education, 27(2), pp.399-418.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and Assurance Services: A Systematic Approach. Auditing and Assurance Services: A Systematic Approach.

Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.

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