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Case Study Of HIH Insurance Limited

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Question:

Discuss about the Case Study of HIH Insurance Limited.
 
 

Answer:

Introduction:

The main theme of the case study on HIH Insurance limited mainly helps in the evaluation of the different types of misstatements and fraud conducted by the directors. The report further shows the effective application of the different types of the risk assessment of insurance company. The study also shows the effective details about the details of the risk inherited which contributed to the downfall of the company. In addition to this the study shows the various types of the crucial information related to the legal liabilities which may be applied to the given case for the purpose of investigating the unethical means adopted by the directors of the HIH Insurance. The final part of the  report suggests the various types of the ethical considerations which needs to be considered before increasing in risk exposure.

Business Risk Assessments along with Inherent risk

Assessment of the business risk of HIH insurance Limited:

The primary risk is associated with the overall operations of the HIH Insurance in the insolvency and the risk, associated to the organizational, structure. In general, the insurance companies are known for using lower profile for the risk assessment. In which the return is high and the risk of negative earnings is low. The overall assessment of the insurance business HIH is depicted below as follows:

Risk of Insolvency

The different types of the risk associated with the insolvency are mainly based on the risk associated to auditing by the designated auditor of the company. Moreover, as per the financial statement of the company, the main information in the financial data clearly suggest a reduction in the overall debt of the company. The several manipulations of the balance sheet shows the reduction in the debt ratio and showing a wrong valuation of the company. The financial statement further states the issues pertaining in the accounting practices and ability of drawing more investors (Arens et al. 2015).

Structural Risk:

The HIH insurance service provider has shown changes in the risk strategy by the inclusion of the risk areas related to film financing insurance, marine aviation and different types of the natural disasters. Moreover, the different types of the risky endeavours of the insurance company have shown exclusion in terms of paradigms which are not yet which are not yet aimed by HIH. The higher risk structure has resulted towards financial downturn as can be observed in case of investment in marine aviation that resulted in a negative return $ 60 million. It has been further observed that the insurance company did not adhere to the regulations laid down by the APRA (Bell and Griffin 2012).

 

Listing of the inherent risk, which affect in the reporting of the HIH and evaluation of the risk level:

As per the given case the various types of inherent factors related to the risk mostly comprised of the fraud and misstatement reported in the financial statement. It has been further seen that the different types of risk factors affect the authenticity of the report, which could have been used by the investors for evaluating the solvency status of an organization. With the help of auditors, companies are able to the liabilities in the financial statement which can further portray solvency. It should be further noted that the inherent risk of the insurance company should have been in compliance other companies however the auditors did not report the involvement of the company in any other sector of insurance which would have increased the overall risk factors (DeFond and Zhang 2014).

It should be further noted that risk factors related to control and detection lost the fiction that it used to have in the high-risk insurance areas. The control risk was useful in evaluating the inaccuracy in the financial statement. However the inclusion of the risky ventures reduced the efficiency of the inherent risk policies adopted by the auditors. The investigation of the risk was further seen decrease the implementation of green sharing policies used by HIH for providing higher risk schemes for insurance. In several cases it has been noticed that auditors use unethical measures is their personal income and access the companies in inflating their balance sheet (Eilifsen et al. 2013).

Legal Liability

Determination of relevant court cases that Andersen’s should refer in order to assess the likelihood of partnership

In the given case, the HIH scandal is relevant to various court cases which might be referred in order to analyze the likelihood of partnership of both clients and creditors. As per the given case, the court banned the directors for tenure of 10 years charges of fraud and arch to pay compensation amounting to $7m. Without the declaration of insolvency, it is a complex procedure to detect the fraud conducted by the company through their annual report (Hayes, Wallage and Gortemaker 2014).

Perspective of the client

The client of the HIH insurance, especially Mr. Brad Cooper was seen to be involved in unethical practices related to bribing the agent of the insurance company and insuring the high-risk assets. Moreover, it was all observed that HIH members litigating the case received more than $ 100,000 by direct or indirect means for allowing payment of $737,000. Hence these illegal activities conducted by HIH were brought forward in the court which assisted in proving the guilt.  Several incidences it was also seen that the company received unlawful sum of money as gifts to allow unjustified insurance claims of clients (Backof 2015).

From the perspective of creditor

It was all observed that an officer of “FAI General Insurance Company limited” named Mr. Stephen Burroughs was held for trial as he was unable to show honesty in depicting the unethical practices taken by the HIH Company. As per the given case study Terry Cassidy, Daniel Wilkie and Timothy Maxwell Mainprize where due to dishonesty and giving irregular statement of the financial data of the company (Koretz 2014).

 

Determination of the factors which may exist to uphold the negligence action

Reduced informational independence

The limited information determined by HIH insurance to its auditors and several other regulatory bodies can be held as an action of negligence against the company. Additionally, due to the limited information, the auditors were unable to comply with the changes of inherent risk factors of the company, this in turn increased the overall insolvency risk. In several cases it has been observed that the fear of termination of auditing license company the company’s to use ethical principles in disclosing the financial statements (Brochet and Srinivasan 2014).

Corrupted governance practice of HIH

The corruption in the corporate governance observed in HIH insurance was mainly due to the overall degradation of the company. In addition to this, the several changes in the exposure of flesh and introduction of high risk insurance the clients then not properly communicated to the respective authority for the management and the high risk projects taken up by the company (Fariña et al. 2013).

Determination of the factors which led to the appointment of prior members in the external auditing team of HIH

Several type of changing business perspective of the company needed the external auditors to support the same. In addition to this the inclusion of external auditors with the previous members of the company was considered to be helpful in keeping its confidential information. The external auditors were further observed to increase the wealth recommendation two different types of unethical means which led to nondisclosure of essential financial position of the company. With respect to this context the adequate formation required by the external auditors they are observed to be helpful for the purpose of authentication of the overall report of the auditors and reduction in the management relations conducted by the company. Several other reasons for appointment of the prior members as auditors are identified as:

  • Implementation of the previous members as external auditors, which may assist the company in reduction in misstatements through checking of the financial reports
  • It was further observed that the external auditors may be able to understand the operations and the requirements of the various types of strategies with respect to the experience in the organization.
  • It was further noticed that the involvement and the approval of the previous directors assisted the investors maintaining trust of the company.
  • The various types of non inclusion of external auditors was considered to be helpful to HIH in pursuing unethical practices which could help in retaining more profit for the members (Hay, Knechel and Willekens 2014)
 

Evaluation of the pros, which may be provided by the firm in evaluating both auditing and consulting services:

The overall audit process and consulting services primarily helps in improving the overall operations of the company. Moreover, it was found the collaboration of the services might have helped the company in identification of issues and loopholes. This stated to improve the overall operational capabilities of the company. Some of the advantages of using a form for auditing and consulting areas are observed as follows:

  • The advantages are seen in assisting the companies in identification of errors in the overall audit process which may reduce the authenticity of the financial statement.
  • Suggesting measures which can be implemented by an organization to keep in control the overall expenditure
  • It can be further helpful in confining the internal secrets of the company and safeguarding it from the competitors

The auditing in the consultancy firm I mainly found to be helpful for the identification of errors and misstatements in the annual report of the company, which can in turn hamper the authenticity of financial report. It is a further stated that the consultation phone is found to be helpful for the companies to reduce their taxes by providing of solutions for increasing the retained earnings (Helin and Babri 2015).

Rationale for violation of ethical standard by a company

For the purpose of effective evaluation of “HIH insurance company”, it needs to be understood that there were several types of ethical violations made by the directors, members of the company and the external auditors. Moreover, the main culprit identified for taking advantage of this circumstance was identified to be Arthur Anderson. It was identified that more than $1.7 m and $1.6 m was observed to be paid for the purpose of auditing and consultation fees. It was further argued that the different types of ethical violation only took place when the company was unable to manage the internal control leading to higher liquidity accumulation. It can be further observed that the external auditors, which did not comply with the AA the auditing rules, declined in its status. It was further noted that the auditors did not fulfil their duties as per the rules laid down by “Australian Accounting Standards Board” (Mellichamp 2013).

The various types of circumstances applied by the HIH insurance to examine the external audit and make changes in the regulations prescribed by the potential marching clearly stated that the extent not violations were carried out by its auditors and directors. The above-mentioned ethical violations were conducted for the increasing the overall personal income.

 

Recommendations that are provided by Ramsay report and CLERP 9

As per the CLERP 9 and the Ramsay report, the assistance was identified mainly in the identification of the policies that led to the usage in the ethical financial reporting and corporate governance. Some of the recommendations given in the report include:

  • Increment in the overall waiting time of the top management of retired personal redesign external audit team from a time span of two years to four years
  • The implementation of the auditing services for senior personnel and auditor’s report of the company
  • Increment in the rotation policy of members especially of the external auditors from two years to five years (Michelacci and Schivardi 2013)

Conclusion

The overall assignment clearly states in identifying different types of unethical measures conducted by the insurance company. The study further helps in the identification of insolvency and organizational structure related to risk structuring were identified as the major threat to the company. It was further identified that the inherent risk mainly reduces the fairness of audit report maintained by the company. This further depicts the legal liabilities, which might be relevant to Mr. Andersen for portraying the unethical measures in the audit report.

 

Reference List

Arens, A.A., Elder, R.J., Beasley, M.S. and Jones, J., 2015. Auditing: The Art and Science of Assurance Engagements. Pearson Canada.

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.

Bell, T.B. and Griffin, J.B., 2012. Commentary on auditing high-uncertainty fair value estimates. Auditing: A Journal of Practice & Theory, 31(1), pp.147-155.

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.

DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2), pp.275-326.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

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.

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

Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

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.

Koretz, D., 2014. Auditing for score inflation using self-monitoring assessments: Findings from three pilot studies (Doctoral dissertation, Harvard College).

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.

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