The Ethics in Finance - Report Example

Ethics in Finance Name Institution Course Tutor Date Ethics in finance Introduction Ethics are there to guide the correct judgments made by professionals whose implication affect many. The general principles of ethics propose to do what is right to the majority. Ethics have a major role in the business and scientific world. The implications related to the two disciplines may have great effects to the world. This article is business oriented seeking to identify the significance of ethics in certain business professions. In the financial department, the highlight is majorly on auditors. Auditors have a role to protect shareholders from the unscrupulous activities of company management. Their role is to independently investigate and publish authentic results to the public. The auditing profession has been on most occasions, blamed to be behind the fall of some of the largest corporate. Enron and HIH provide a good example to scrutinize and identify the roles that the auditing profession plays in such scandals. This article will base its discussion using the Australian based HIH and identify the roles played by the auditors in the collapsing of such a giant in the business world. The article will therefore describe the history of HIH from its formation to its demise. As this is described, the ethical credibility of the auditors involved will also be discussed. Their role in the collapse of HIH will also be described. This is simply because HIH had only one auditor since its inception to its fall. Other factors that may have led to its fall will also be highlighted in the discussion. Brief History and Background of HIH HIH insurance was formed by Ray Williams and Michael Payne in 1968. During its formation, its original name was M W Payne Underwriting Agency Pty Limited. Both of them were directors but Mr. Williams held the position of the Chief Executive Officer (CEO) (Mirshekary, Yaftian & Cross, 2005, p. 250). Their sole business at that particular time was to write compensation insurance for workers in the Victorian market. That business proved successful and gained them recognition across Australia. In 1971, the company was bought by a British insurer, CE Heath plc but retained Williams as the CEO and also a director. The year 1985 – 1986, the company experienced market instability which led them to diversify into properties and professional liability. The effects of their diversification enabled them to grow and extend their investment to overseas in Hong Kong (Mirshekary, Yaftian & Cross, 2005, p. 250). In 1992, the company initiated its first trade in the stock exchange market. The codename and initials HIH were first used at that particular time. In 1995, The Company acquired CIC Insurance Group. At that time, 48% percent that had remained in the CE Heath International Holdings were sold to another subsidiary company called CIC Holdings Limited. CIC holdings increased its shares to 50% percent where it was bought by Winterthur Swiss Insurance Company. In May 1996, the company officially adopted a new name, HIH Winterthur. Its overseas scope widened when it acquired a number of insurance holdings in Australia and New Zealand, Argentina and the United States. The most publicized one was when HIH Winterthur acquired FAI Insurance in Australia. This witnessed the CEO of FAI, Rodney Adler become HIH Winterthur’s director. In 1999, the name HIH insurance limited was adapted after Winterthur Swiss sold its shares to the public. With a net worth of $7.8 billion worth in assets, HIH was ranked as one of the largest insurance firm in Australia (Haines, 2007, p. 524). The assets were however, offset to cover for debts and possible insurance claims. At 31st June 2000, the total assets were at $ 939 million. The assets had started to dwindle. With duration of nine months down the line, the company was placed under provisional liquidation with debts that were projected to range from $ 3.6 billion to $ 5.3 billion (Anonymous 2002, p. 74). Top Management of HIH During its formation, the company was under the control of two directors. Williams, who was one of the founders served as the CEO of the company (Saville, 2003, p. 1). Ray Williams also served as the CEO when the parent company was bought by the British insurance company. He continued to act in that capacity until the moment the company acquired FAI insurance company. After Acquisition of FAI Insurance, the CEO became Rodney Adler. Rodney Adler was acting in the same capacity at FAI before it was bought by HIH. FAI was started by his father and was considered to be the major Australian rival to HIH. However matters changed the moment his father died. The events that took place led to acquisition of FAI by HIH but the deal saw Rodney Adler retained as the CEO. He was at the helm till the time the company completely crumbled down. Analysts indicate that the giant collapsed due to a number of factors. Several reports published after the turmoil do indicate that the leadership was to be held responsible for all the activities that led to the collapse of the insurance company. The top management of the company was therefore responsible for its rise and its downfall. The government only intervened after matters had become worse. The intervention was significant since the company was holding the overall housing industry in the country. Several issues and personal greed of the top management led to what happened to the company several months after it had hit its peak. Factors Leading to the Collapse of HIH A number of collective factors are said to have played part in the collapse of the Insurance giant. The case witnessed at HIH can be related to the similar situation to what happened at Enron Corporation. This is where the credibility of auditors is brought in to play. Financial analysts state that auditors played a major part in the fall of Enron. In the current case being discussed in this particular article, auditors are the first people that are supposed to shed light on the matter. This is because the company collapsed due to a financial crisis that was motivated by high debts and possible financial liabilities. The role of auditors in this scandal plays out to be the major factor that led to the collapse of the company (Westfield, 2003, p. 25). Arthur Anderson was the company that audited HIH from 1971 to the time it was on the receiving end. The role of the auditors was to publish statements that indicated how the company was fairing on. This was to be done in the best interest of the public shareholders and other private shareholders. Reports indicate that the auditing company was not acting morally. The reports that they provided were already mutilated by the top management of the company. According to the Australian Accounting and auditing standards, it is the duty of auditing firms to scrutinize a company and records how cash flows and how it is intended to be distributed to share holders. The standards were however not taken into any consideration when auditing was done at HIH. Arthur Anderson was responsible for internal non-official and external auditing. This therefore made its work hard and its credibility to deliver authentic report was also questioned (Sexton, 2001, p.62). The fact they were already involved in the internal transactions of the company and at the same time were supposed to interrogate them, questioned their independence. Reports directly implicate Arthur Anderson to have given tailored reports to the public. Suspicion over the reports could not have been realized until the time internal reports started to resurface to the public. Apart from the credibility and the role of Arthur Anderson auditing company, a number of factors including leadership still played a major part in the diminishing of the company. Leadership is tied to most of the factors that may have played part in the collapse of HIH. The two individuals who served as the chief executives of the company were convicted of embezzling funds of the company for their own personal luxuries. Loss of significant amount through poor leadership accounted for the most part of the debt that robbed off the company its assets. Acquisition of other insurance companies also cost the company a substantial amount of money. The acquisition of FAI Insurance Limited is reported to have been over estimated. The company in simple terms is said to have paid more for less (Westfield, 2003, p. 27). A lot of money was lost during the transaction. The gap in financial transactions was widening with time. HIH sold its new acquisition, FAI Insurance only after two years. Money was needed to cover for the already widened debt and the already increasing liabilities. The other factor related to the failure of the company is due to the failure to provide any evidence against future claims. Being an insurance company, it was impossible to avoid provision for future claims. Other problems that resulted from that factor played a major role in the downfall of the company. If the management could have been keen to handle those concerning issues, the crisis could not have been worse as it was witnessed. The management was also insensitive to some of the changing economic times (Mardjono, 2005, p. 272). The liabilities increased due to the failure to acknowledge of the changing economic environment. The company’s top management did not take extra care to address the issue. Changes in economy are always strategic, especially to insurance companies. The liabilities became unlimited due to the fact that the company was expanding internationally. The belief of the managers was based on the notion that the investments would take care of the unlimited liabilities. The investments indicated that the company was rapidly entering a new market that it had no much experience in. The changing conditions accompanied with unpredictable investments had a major role to play in the collapse (Westfield, 2003, p. 24). Basically, when all factors are considered, the integral component in the failure of the company is directly linked with leadership (Sexton, 2001, p.58). The crisis could have been averted if the management was honest and keen on particular investments. Certain sources indicated that Adler misled the company into investing in a company that had already his personal investments. Ray Williams was accused of receiving money of the company through wrong channels. The management also collaborated with the auditing company to pass wrong information to the public. In a nutshell, all the factors that led to the downfall of HIH include: rapid expansion strategy, unsupervised transfer of authority, false reports, poor management, fraud and greed (Westfield, 2003, p. 29). Groups of individuals that led to the collapse of HIH The factors that led to the downfall of HIH have vividly provided for the individuals that publicly strangled the company to its death. This paragraph therefore clarifies the role of each section or individuals in the failure of HIH. The first to be mentioned was the CEO, Rodney Adler. He was responsible for the most part of the collapse since being appointed. The first role to the collapse was to provide false financial statements to the public. He undervalued the values of the shares, information that was not supposed to be withheld from people. The second role was the fact that he was receiving money through deception. He was also accused of falsely persuading the company to making an investment that had huge impacts of benefiting him alone (Sexton, 2001, p.59). Ray Williams, the former CEO was also found guilty of embezzling company’s money. The fact that both of them were convicted directly indicates that they both pleaded guilty to the accusations. The other group responsible for the collapse includes the auditing firm. Arthur Anderson is accused of colluding with the management to hide significant information from the public (Mirshekary, Yaftian & Cross, 2005, p. 251). The last group is the remaining team of the board. They coincided with the misleading CEOs and failed to stop them when they had a clear chance to do so. Did Anderson Use Ethical Reasoning in their Auditing Duties? Many complex situations usually result from ethical dilemmas. Ethics as a discipline is used to asses certain situations. Professional editors must therefore consider viable ethical reasons to guide them in disseminating their duties well (Mirshekary, Yaftian & Cross, 2005, p. 252). The scenario that Arthur Anderson was presented with was very tricky. Arthur Anderson has been delivering auditing services for HIH Company since 1971. The time the two companies have been together is enough for their employees to develop personal relations. That is what exactly happened between the two companies. The auditing firm had developed a close relationship with the top management of HIH that they could not implicate them negatively. To cover up for their mandate, they first presented the report to the top management. The tailored report from the management was the one being released to the public. In simple terms, Arthur Anderson could not work independent or freely from the top management. Ethically, the fact that Arthur Anderson was unable to deliver its mandate fully is unjustifiable. Their inability to publish the truth was one of the factors that led to the collapse of HIH. Most people and firms suffered due to the collapse of HIH. Ethically, Arthur Anderson should have considered the implications to all shareholders and customers before they decided to coincide with the top management and hide the truth from the public. The fact that Arthur Anderson made no effort to state that the results were mutilated indicates that they were part of the scandal. It is therefore justifiable to state that the auditing company acted irresponsible and unethical, a factor that led to the collapse of HIH (Mirshekary, Yaftian & Cross, 2005, p. 253). Risks that proved to be most material in HIH’s downfall The most important risk that the company decided to undertake was expansion on international investments. The company risked to invest fully on the international front despite the fact that economy was fast changing. The calculated risk was that the investment would cover for the liabilities that the company was already battling with. The fact that matters only got worse meant that the downfall was inevitable. The top management had decided to take a risk and dive in a new market that they had no experience in. The results are what shocked everybody throughout Australia (Kehl , 2001, p. 1). Measures that would have helped HIH avoid its downfall The first measure was to hire different auditing firms after a span of five years. This would have ensured that professionalism exists between the auditing firms and HIH (Mirshekary, Yaftian & Cross, 2005, p. 252). The second remedy was to change the board of directors every ten years. The existing board of directors was unable to hold responsible the top management of their wrong doings. Limited investment on the international front would have done the company more good in terms of controlling their limited liabilities. A vetting process that would have been responsible for vetting all personnel in the management position would also have done something to preventing the downfall. The significant events after the downfall of HIH A number of events took place after the downfall of one of the largest insurance companies in Australia. The government reacted first by forming the Royal Commission to investigate into the events that happened (McCarthy, 2001, p.110). This was followed by court cases that witnessed the conviction of some of the top managers and business men connected to the insurance firm ( Bailey, 2003, p. 1). The collapse of the firm also served as a wakeup call to the body formulating rules that govern the stock market. After the exposed manipulations of figures by HIH’s manager, rules were tightened by the Australian Securities and Investments Commission (ASIC). This was done to avoid any future repetition of what had happened. Conclusion The article discusses all possible factors related to the rise and downfall of HIH Insurance Company. The discussion covers when and how the company was formed to the period when it became successful. Of great significance to this particular discussion, are the factors that led to the downfall of the company. The article scrutinizes the role that Anderson’s auditing firm played in this particular saga and the possible ethical implications. Events that took place after the downfall are also highlighted in the article. It is therefore significant to carry out more case studies related to the failure of large corporations and determine the significance of auditors and what ethical implications can be analyzed from the studies. Most of the downfalls involving larger companies are usually due to financial implications. It is therefore significant to determine the ethical implications such cases present in relation to financial careers. \ References Anonymous, 2002, ‘Finance and Economics: The Enron down bunder; Australian Insuarance,’ The Economist London, vol. 363, no. 8274, pp74-75. Bailey, B, 2003, Report of the Royal Commission into HIH Insurance, Viewed February 20,2015, < http://www.aph.gov.au/library/Pubs/RN/2002-03/03rn32.htm >. Haines, F 2007, ‘Crime? What Crime? Tales of the Collapse of HIH,’ In International Handbook of White-Collar and Corporate Crime, pp. 523-539. Springer US. Kehl, D, 2001, HIH Insurance Group Collapse, viewed February 2, 2015, < http://www.aph.gov.au/library/INTGUIDE/econ/hih_insurance.htm >. Mardjono, A, 2005, ‘A tale of corporate governance: lessons why firms fail’ Managerial Auditing Jornal, vol. 20, no. 3, pp272-273. McCarthy, G 2001, ‘The HIH Royal Commission and the tangled web of truth,’ Australian Journal of Public Administration, vol. 60, no. 3, pp. 110-112. Mirshekary, S, Yaftian, A, M, & Cross, D, 2005, ‘Australian corporate collapse: The case of HIH Insurance,’ Journal of Financial Services Marketing, vol. 9, no. 3, pp249-258. Saville, M, 2003, HIH : The Inside Story Of Australia's Biggest Corporate Collapse, viewed February 20, 2015, < http://www.smh.com.au/articles/2003/03/14/1047583693489.html> Sexton, T, 2001, ‘Corporate Collapse,’ Australian CPA, December, pp.58-63. Westfield, M, 2003, ‘Why did HIH Collapse?’ CA Charter, vol. 74, no. 3, pp24-29. Read More