The Australia General Insurance Industry - Term Paper Example

HIH Insurance Limited vs. Shareholders, Creditors and Clients (Name) The Name of the Class Professor The Name of the School The City and State Table of Contents HIH Insurance Limited vs. Shareholders, Creditors and Clients 3 1. Introduction 3 2.0 Section 1: Business Risk and Inherent Risk Assessments 3 2.1 Business Risk Involved 3 2.2 Inherent risk factors 4 3. Section 2 Legal Liability 4 3.1 Facts and findings of relevant court cases 4 3.2 Cases 4 3.2.1 Cases by Creditors 4 3.2.2 Cases by Clients 5 3.3 Conditions for Negligence 6 3.3.1 Breach of Duty 6 3.3.2 Causation 7 4. Section 3: Ethics 8 4.1 Hire prior members of its external audit team 8 4.2 Same firm providing auditing and consulting services 8 4.3 Violation of ethical standards 9 4.4 Recommendations by Ramsay Report and CLERP 9 10 4.4.1 Impacts of CLERP 9 and Ramsey Report 11 5 Conclusion 11 Bibliography 12 HIH Insurance Limited vs. Shareholders, Creditors and Clients 1. Introduction Most insurance companies use a variety of skimming methods to increase shareholder confidence hence shareholder value. The goal is to create a buffer of excess revenue where the firm misappropriates information. Common misappropriation of information includes lapping, forgery, fictitious policies, skimming, churning and misappropriation of audit information. The incoming study focuses on the misappropriation of audit information, which involves altering reporting standards as provided by AASB or IFRS. The case company is HIH Insurance that was involved in the misappropriating information providing false figures on the firm's profitability. 2.0 Section 1: Business Risk and Inherent Risk Assessments 2.1 Business Risk Involved I would relate HIH Insurance Limited as a case of director’s negligence and poor follow-up and incompetence of the organization. In general, HIH ambitions and aggressive growth strategy, led to the company buying more assets hence having no enough liquidity to pay for future claims. After a series of audits done to the company, one audit revealed that the company had altered the sums of the real financial position of the company, deceiving its shareholders that it had a solid financial future, one that would take care of the future company assets. Such an approach shows the company was not considering the interests of shareholders who at various levels owned the company. In response, the Australia General Insurance Industry proposed stricter measures on reinsurance, risk management, liability valuation and capital adequacy. 2.2 Inherent risk factors There are risk factors that can be evidenced from HIH poor reporting level, which ultimately lead to the decrease in inherent risk assessment. The general problem is maintaining the required solvency margins, inability to charge sufficient premiums, companies in the insurance industry. The reduction in risk assessment is primary because of the inability to provide unqualified audit opinion, failure to emphasize the importance of the audit report process as well as issuing unqualified audit report where qualification is naturally justified. Others include failure to provide the appropriate opinion on the financial statement, without necessary clarifying why such an opinion might be important. 3. Section 2 Legal Liability 3.1 Facts and findings of relevant court cases To determine the likelihood being liable to shareholders, Dennis should guide other shareholders to show how Andersens is going to present finite audit statements. The audit statement should clarify in detail the likelihood to recover funds from HIH creditors 3.2 Cases 3.2.1 Cases by Creditors HIH Insurance vs. Creditors The case was held between HIH Insurance with the one particular Rodney Adler vs. Creditors. Adler was accused of providing misleading information concerning the company financial position as presented by R v Rinaldi & Kessey1 where directors fail to be accountable. Alder is alleged to have benefitted from $ 2 million dollars, and he was sentenced for obtaining bad financial information. In response to creditors, Bruce Dennis should show the difficulties that HIH experienced amounted to a poor computation of the prudential margins. He should as well explain that the insurance company failed to maintain for a financial buffer to cater for unpredictable claims, this was the same case in  R v Licardy (unrep, 28/09/94, NSWCCA) 2. Lastly, he should show that the insurance company was unable to focus on the ability to cover claims proportionally. 3.2.2 Cases by Clients HIH Insurance vs. Clients The case was held between HIH Insurance versus clients; precisely the court held that had broken the client trust by dishonestly failing to conduct his duties as a director in good faith as evidenced in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd (No 2) [1995] 1 3. In response, Bruce Dennis should explain that the risk of suffering reduction in shareholder value amounts to the poor performance of the balance sheet, ultimately leading to the fall in insurance claims. As well, HIH experiences difficulties results to poor financial margins amounted to the falling of confidence levels of clients. Hence, in response, Peat Marwick settlement funds provide recovery as presented by share value. Tony McGrath will be liable in examining and scheduling the settlement process by withholding the company assets. It becomes important to distribute share dividends based on the classes of shares presented. Peat Marwick combines current and previous settlements by improving the settlement allocations procedure. 3.3 Conditions for Negligence To prove the negligence of shareholders, it is important to access the conditions that affect the shareholder. Remarkably, the damages that creditors and clients are forced to go through because their future claims cannot be allocated for are examples of the injuries that they incur. The creditors and the clients have distance from tort condition and predominantly focus on the criminal offence caused by the directors primarily caused by negligence (Nawfor, 2013). The jury compared factors, which amounted to the following conditions being presented, breach of duty, proximate cause, and damages involved, as noted from Summers v Fairclough Homes Ltd who noted that the directors were to be concerned with the conditions affecting their clients at any one particular time4. 3.3.1 Breach of Duty In response, to the jury, the outcome of the negligence situation depends on the defendant presentation of the plaintiff situation. Summers v Fairclough Homes Ltd [2012] UKSC 26, [2012] 1 WLR 2004 presented justifications HIH and Andersen were obliged to act in a manner where the jury determined whether the directors acted in negligence to the expectations of financial reporting. The directors can also be said to have breached the duty, based on the question whether the duty existed in a reliable manner (Wan, 2015, p. 71). In this case, the directors are required to prove whether they acted in decorum to ensure the appropriate reporting standards, incoherence with AASB or IFRS were adopted. 3.3.2 Causation There is also a condition of causation where the negligence situation caused injury. In this case, the plaintiff shows that the decline in share value caused the poor compensation of future claims. In this case, there are negligent situations that exist amicably. Firstly, the directors failed to create a fund to cater for the negligent claim, on the other hand, the director failed to present justifications that they were acting negligently in handling funds. Lastly, the condition of damage has to prove; that is the interrelationship between the injury and the plaintiffs is. The monetary compensation as presented indicates that the medical situation amounted to poor property repair. 4. Section 3: Ethics 4.1 Hire prior members of its external audit team HIH hired Andersen because the HIH board of directors included three former employees of Auditors. As such, it would be easy to cover for HIH corruption by circumventing the required reporting standards. Clearly, there lack a difference between HIH leadership and Andersens leadership. By working closely with Andersens, the organization would be able to convince creditors and clients that the firm is very responsible of the financial condition, whereas it was not. Wan (2015, p. 74) notes the Australian situation requires that that the corporation to determine circumstances that introduce the right information management, which involves listing status, board composition as well as the determination of stakeholders of the business. As such, Andersens would accept some misleading financial information and be ignoring the detection of deficiencies that were presented. Andersens would use the principle of the confidence of reliability to calculate the progress of financial statement. Andersens would as well not be independent in the decisions that it processed. Eventually, HIH directors knew that by hiring Andersens the firm would cover the total losses it incurred, by precisely not showing how the company could have lost an estimated 5 billion dollars. Hence, it is positive to concur with the jury assessment that Andersens should be part of that responsibility. 4.2 Same firm providing auditing and consulting services However, it could be important for the same firm to provide auditing and consulting. Although there could be a significant conflict of interests, it is clear that when one firm is providing consulting auditing and consulting, the auditing unit will understand the situation of the firm better hence avoid being manipulated by the client firm. Besides, such joints consultancy services and audits reduce the overall costs that the company incurs while hiring an outside firm. Hardy (2012, p. 246) notes that such joining consultancy and auditing process improves the performance procedures. The client company can, therefore, increase its profits by understanding the nature of the financial position affecting the firm. Likewise, if the same firm is providing consulting and auditing services, it is possible to avoid biased and incoherent audits. The auditors will be responsible for the firm financial future precisely considering the ability of genuine profits, for instance paying taxes (Brown and Klerman, 2012). The instant profits mind will be avoided if the firm focuses on the possibility of higher progressive returns. Moreover, if the auditors offer consultancy services, it will be possible to circumvent corrupt mentality of avoiding regulation. The company would want to be regulated providing more opportunities for genuine financial records. In particular, the firm will be capable of making appropriate decisions that involve determining the well-engineered decisions of experience. 4.3 Violation of ethical standards However, the joint operations between Andersens and the HIH insurance presented a high degree of the violation of ethical standards. Coherent and error financial reporting are very important for the firm to express genuine financial future. This opens up more resources for shareholders, in HIH case, more opportunities for its clients, as well as creditors. However, the misguided figures that Andersens publishes primarily led to the loss of $ 800 million and damages of worth $ 5 billion meaning that the firm was not in a position to cater for its future claims. Ethics are considered as the good and moral choices that hasten the preparation, disclosure and presentation of financial information. However, avoiding such good and moral choices by presenting misguiding information cripples confidence levels as well as risks investors’ finances. HIH goals were to mislead investors to maintain a given share prices, whereas in the real case the company was making losses. The company inability to respond the ill conditions of the financial situation can be attributed to the presence of a myopic management. Furthermore, the absence of good and moral financial conditions amount to the misappropriation of assets, primarily redirect the company revenues for private expenditure. HIH hired Andersens knowing clearly that former Andersens employees were HIH directors hence, it clearly, intentionally and maliciously conducted a malicious financial reporting. 4.4 Recommendations by Ramsay Report and CLERP 9 Responsively, the Ramsay Report and the CLERP 9 provides the recommendation that would ultimately improve the audit process as shared between HIH and Andersen. In particular, the Ramsey Report presented the importance fo the independence of the external auditor (Ramsey, 2001, paragraph, 8.15) (Campbell, 2001). Ramsey also expressed significant interests in having the courts maintain a reliable financial position, primarily producing reports that expressed the practical conflict between duty and shareholders whose interests practically depended on the action that would be taken to oversee the reappointment and the relations of the works (Benson, Clarkson, Smith, & Tutticci, 2015). Finally, The Ramsey report provided provisions that would help take care of reforms in the relationship between an auditing firm and its clients CLERP 9 reforms provide statutory independence and the requirements for the auditors through a straightforward manner. Specifically, the CLERP 9 reforms provided reporting as well as account findings that would improve the independence that was more widely and expressed in detail (Haines, 2013, p. 31). The reforms would include an audit rotation and where the requirements would be expressed by the jointly organized committee. CLERP 9 further introduces reforms that would help to improve the involvement of the Corporation Act in the auditing process (Haines, 2013, p. 33). In particular, CLERP 9 provides a situation where the conflict of interest situation is avoided, however increasing the transparency levels by auditors. As such, it would be possible to avoid impartial judgements for instance, what Andersens assumed in the case of HIH insurance, but as well focus on the healthy relationship between the auditor and the client company (Haines, 2013, p. 31). Both Ramsey Report and CLERP provided for the healthy and relevant relationship, which would ultimately lead to the independence general. 4.4.1 Impacts of CLERP 9 and Ramsey Report Both CLERP 9 and Ramsey Report have a significant impact on the practice of auditing. Firstly, the two recommendations help an auditing company to avoid impartial judgements and specifically create a healthy relationship between auditor and the client company. Most importantly, the audit rotation helps to share audit results to other auditing firms; hence, not all firms can be corrupted. 5 Conclusion Clearly, HIH Insurance misappropriated information according to evidence provided in section 1 and section 2 of this report, to increase investors’ confidence, and better shareholder value, whereas the firm was making losses. Hence, in response, the third section has demarcated on the recommendations that can be adopted to limit such immoral corporate conduct. The recommendation has highlighted the adoption of the multiple audit mechanism where audit resulted are shared across many firms. Bibliography Benson, K., Clarkson, P., Smith, T., & Tutticci, I. (2015). A review of accounting research in the Asia Pacific region. Australian Journal Of Management, 40(1), 36-88. Brown, A. & Klerman, J. (2012). Independent Evaluation: Insights from Public Accounting.Evaluation Review, 36(3), 186-219. Campbell, T., & Houghton, K. A. (2005). Ethics and auditing. Canberra: ANU E Press. Haines, F. (2013). Corporate fraud as misplaced confidence? Exploring ambiguity in the accuracy of accounts and the materiality of money. Theoretical Criminology, 18(1), 20-37. HARDY, I. (2012). 'Managing' Managerialism: the impact of educational auditing on an academic 'specialist' school. European Educational Research Journal, 11(2), 274. Nwafor, A. (2013). Fraudulent Trading and the Protection of Company Creditors: the Current Trend in Company Legislation and Judicial Attitude. Common Law World Review, 42(4), 297-323. Wan, W. (2015). Directors' defence of reliance on professional advisers under Anglo-Australian law. Common Law World Review, 44(1), 71-93. Cases by Creditors R v Rinaldi & Kessey (1993) 30 NSWLR 605 R v Licardy (unrep, 28/09/94, NSWCCA) Cases by Clients Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd (No 2) [1995] 1 AC 501, 542A Summers v Fairclough Homes Ltd [2012] UKSC 26, [2012] 1 WLR 2004 Read More