Maximize Audit Fees and Minimize Risk - Essay Example

Fraud is a common phenomenon that every business faces. The fraud that takes place in an organization has an impact on the stakeholders, the employees and the society at large, so business must develop ways to combat fradulent activities. This requires supervision and the development of rules meant to reduce such acts. This paper evaluates in detail the frauds committed by HIH Insurance, Australia and Bond Corp, Australia in which the organization manipulated the financial accounts. This mainpulation resulted in adverse effects which had social, political and economic consequences and prompted the development of policies through which fraud can be reduced. The fraud committed by the above mentioned companies was significant both in monetary value and in the involvement of a large number of people, indicating that it is an area to be monitored. In addition to analyzing the frauds commited by the two companies this paper evaluates the different parameters which led towards fraud and the manner in which fraud can be controlled in the future. This examination will thereby present a perspective through which better governance be possible and reduce such fraud in the future. The corporate failures of HIH Insurance, Australia and Bond Corp, Australia clearly highlight the auditor’s role in such a failure and show how the auditor could have distributed better information which would have helped to reduce the magnitude of the impact. In both thesecases fraud impacted the stakeholders and resulted in loss of millions of dollars and in turn made the society become poorer and even raised doubts regarding the manner in which the companies performed. HIH Insurance, which had an asset base of $939 million in 2000, was the second largest general insurance company based in Australia. The insurance company had to file for liquidation as the debts rose significantly to between $3.6 billion and $5.3 billion (Cagan, 2008). Some of the prime reasons for liquidation were identified as the lack of corporate governance, improper regulation and poor management which led to a series of fraudlent activities and finally caused organization to file for liquidity. The investigation into the collapse of HIH Insurance showed that business and accounting frauds led to its failure. Some of the business factors that were identified as leading to fraud were that the acquisitions were over priced and a lot of money was being spent on corporate extravagance. These findings revealed that the insurance company was not working within the prescribed code of conduct and according to the minimum solvency requirements determined by APRA and the Insurance Act, 1973 (Clarke & Dean, 2001). These failures cuased the funds to be misused and allowed people involved in ftaud to earn money for their own personal growth. The accounting fraud appeared in the form of complete negligence as the provisions which were determined for the insurance claims were not done in the correct manner and the past claims which the company had done was overstated. Negligence to estimate the correct value of the future forecast resulted in the future claims to be smaller and the past claims were bigeer than expected. The situation highlighted the manner in which the audit committee was involved in fraud and did not take the correct steps to determine the risk that the business was facing (Clarke & Dean, 2001). This was fuelled by the fact that the policies were aggressive and no due diligence process was considered. It ensured that frauds were committed in the presence of the management and finally led towards the collapse of the insurance giant. The fraud committed in HIH Insurance had a long history that began in 1992 when the auditor found out that the liabilities of CE Health International which was being purchased by HIH Insurance for $18 million and reserved by $41 million. This point marked the beginning of fraud. Becuase the auditors were able to ensure that the act was not detected, it continued in all the different mergers which took place. It is imperative that an insurance company has reserves of 20% more capital above the expected liabilities, but this requirement was completely ignored by the auditors for the prime purpose of highlighting the company in a good light and misappropriating the funds (Skyes, 2006). The entire process led to a series of steps where the accounting treatment of reserves was purposely distorted in the balance sheet. The fact that the management did not raise any questions because they and were involved in the fraud prevented the higher authorities from questioning the manner in which different treatments were done. The fraudulent practices clearly highlight the role of the auditor and the management which resulted in the misuse of funds. There was no formal process developed to identify the risk of the client, which resulted both in the lack of approvals from the top management and in situations where people who did not have sufficient backup were also provided the required financing (Cooper & Deo, 2006). Further, the lack of corporate governance procedure made it easy for the management and the auditors to carry out the activities as they desired and it finally led towards the collapse of HIH Insurance (Pass, 2004). Alan Bond was a successful business entrepreneur who shaped the performance of Australia by changing the momentum of the share market in the 1980s (Skyes, 2006). He built Australia’s largest media company and fifth largest brewery company. The management of the company indulged into improper activities which made the company filed for bankruptcy and had to write off $ 28 bilion in bad debts. Some of the reasons which behind the failure were the manner in which decisions were moulded for the benefit of third parties and the manner in which the auditors remained negligent and failed to highlight the actual matter to the public. This case was one where potential frauds arose from three angles: the opportunity which ensured fraud, rationalization of decisions which were incorrect and unethical, and socio-economic pressure which ensured that the auditors did not reveal the actual situation to the company. The pressure generated from a changing business environment resulted in a liquidity crunch and caused management to take decisions that were useless. Auditors had an option to use the reserves and fix the problem of liquidity crunch; however they instead decided to present the business in a good light and took steps that eventually resulted in failure. The auditors and others within the management allowed frauds to be committed and did not attempt to control the fraudlent activities (Fritzsche, 2005). They seemed to believe that the assets belonged to them and the shareholders had no role; because of this belief, they made decisions that would enhance their public image and help them to earn extra money. Both the cases were unique in their own dimension and showed different factors that resulted in the failure of each. In the case of HIH Insurance, the prime reason for failure the lack of corporate governance, improper regulation and poor management which led to a series of frauds and finally caused the organization to file for liquidity. In the case of Alan Bond, some of the reasons for the failure were the manner in which party related decisions were moulded towards the benefit of third parties and how the auditors remained negligent and failed to highlight the actual matter to the public. The cases further throw light on the effects of negligence on the part of the auditor and how the improper use of accounting standards results in the misappropriation of funds. Both the cases show that the role of the auditor was ignored as the auditors committed fraud by focusing on their own benefits instead of the benefit of the stakeholders (Cannarella & Piccioni, 2005). An additional similarity between the two cases is that both companies misappropriated funds. Instead of focusing on using funds in the most productive manner both companies manipulated information so that a better picture could be portrayed. This is backed by the facts decisions were taken for their own benefit and believed that their fraudlent activities would not be uncovered. The auditors were further looking to consolidate their position and left limited roles for other authorities, which thereby had an impact on decision-making and resulted in failures. The fraudulent activities in both cases could have been stopped if the auditors would have acted according to the requirements of the professional body of conduct. Instead of adhering to the professional code of conduct the auditors made decisions that either would ensure that the company was projected in good shape or would otherwise result in increasing their value in monetary and non-monetary terms. The lack of proper supervision could be one factor which allowed such acts to happen (Fisher & Lovell, 2006). In both the organizations had increased supervision, ensured that all operations were watched, and provided information to the shareholders; the impact could have been controlled. These activities would have ensured that the actual situation was portrated and the stakeholders were in a position to demand the required changes. Both incidents clearly highlights that there were no agents who worked on behalf of the stakeholders to ensure that all of the business’s activities were monitored. The Agency theory in this place would have ensured that such frauds could not have been committed. According to the agency throry, it is imperative that shareholders appoint agents who act on behalf of the stakeholders and are paid a certain compensation for their role in the organization. This theory requires that a business moves away from the perspective of profit and look towards customer satisfaction and acting in the fair interest of the society (Nicholson, 2008, p. 1). This change will prompt the organization to take decisions that focus on the large picture and ensure that the organization remains fair. Consequently, it will ensure that the organizations are able to provide the required service that they have promised to deliver. In turn businesses will be able to take decisions which are morally correct improve the entire process of monitoring activities. Stakeholders as a result will develop the the required confidence and the chances of misappropriation of funds will be reduced. As a results sililat acts will be controlled in the future Another important step in the attempt to reduce fraud will require organizations to stress the importance of corporate governance. Consequently, it will help the organizational leaders to make decisions which are morally correct and will ensure that the business looks towards being ethical. The process will entail the development of a code of conduct which every employee within the organization has to follow. If employees deviate from the corporate code of conduct then they will be punished severely. It will help to create guidelines by which the performance will be monitored, which will increase the overall efficiency. Fraudlent activities as a result will reduce and help to maximize productivity for the organization. This paper has examined the frauds that took place in HIH Insurance, Australia and Bond Corp, Australia and highlighted the different factors that contributed to those frauds. In both cases, the auditors failed to act in a fair manner which resulted in frauds and highlighted the need for proper corporate governance norms and supervision to ensure proper monitoring so that such acts are reduced. Overall, organizations must to improve the entire process through which they conduct business and must develop ways to improve their overall efficiency. References Cagan, P. (2008). HIH Case Study. Retrieved Mar 19, 2013 from www.erisk.com Clarke, F. & Dean, G. (2001). Collapse Introduced. Tales, Safeguards & Responsibilities of Corporate Australia, Australia. Sydney, CCH Australia Cooper, K. & Deo, H. (2006). Maximize Audit Fees & Minimize Risk: A Recipe for Auditing Success or Failure. Journal of American Academy of Business, 8 (2), 201-215 Cannarella, C., & Piccioni, V. (2005). Public organizations and local rural development: An empirical analysis, Journal of Business Ethics and Organizational Studies, 10 (2), 16-23. Fritzsche, D. (2005). Business ethics: A global and managerial perspective. New York: McGraw Hill. Fisher, C., & Lovell, A. (2006). Business ethics and values: Individual, corporate and international perspectives (2nd ed.). Harlow UK: Prentice Hall Nicholson, M. (2008). Applying Agency Theory and the concept of corporate governance. Retrieved Mar 19, 2013 from http://www.lotsofessays.com/viewpaper/1706098.html Pass, C. (2004). Corporate Governance & the Role of Non Executive Director in large UK Companies: An empirical study. Corporate Governance, 4 (2), 52-63 Skyes, T. (2006). The Bold Riders: Behind Australia’s Corporate Collapse, 2nd ed., Sydney: Allen & Unwin Read More