The Liquidity Situation of the HIH Insurance Company - Assignment Example

UDIТING АND АSSURАNСЕ SЕRVIСЕS Table of Contents Table of Contents 2 Question One; Business Risk and Inherent Risk Assessments 3 The Liquidity Situation of the HIH Insurance Company 3 The business risk of HIH Insurance Limited 3 Profitability and structure of the industry 4 B. the Inherent risk 4 Question two; Legal Liability 5 A. the facts and findings of relevant court cases that Andersen’s should refer to in determining the likelihood of the partnership being held liable to: 5 1) Clients 5 2) Creditors. 6 What conditions need to exist for a negligence action to be upheld? 7 Disclaimer of opinion 7 Question 3 — Ethics 8 Why would HIH have wanted to hire prior members of its external audit team? 8 Advantages of having the same firm provide both the auditing and consulting services 8 Whether these circumstances represent a violation of ethical standards 8 The primary recommendations for audit reform proposed by the Ramsay Report and CLERP 9 9 Reference list 11 Question One; Business Risk and Inherent Risk Assessments The Liquidity Situation of the HIH Insurance Company It can be observed that the company is having an insurance debt level of 0.9. This is just a earning since of the company risk of insolvency but the signal was turn down. In taking into consideration the operational signs such as business overheating in terms of growth, strategy policy and lack of good governance, it was apparent that HIH insurance company was in serious business risk and sings of collapse. The company placed under influence on the reinsurance to comply with the obligation and gets on risky insurance services such as marine insurance entire. The risky investment in FAI was the decision that ought to be signal the direction of the company towards collapsing. Furthermore, it was evident that the company surpassed the least solvency requirement required under s29 of the insurance act of 1973 in which the asset of the insurance must be more that the value of liability by $2million (Arens, 2013). The business risk of HIH Insurance Limited It is evident that HIH is experience a serious business risk that leads to its collapse. One of the business risks is inability to pay the insurance policy holder their claims due to lack of cash as a result of poor cash control. The poor cash control was evident when the company involved Justin Garner who was one of the Audit committee for FAI a company that was acquired alter by HIH insurance company in 1998. The acquisition is deem one of the effect of the collapse of HIH insurance company since. The acquisition involved huge expense. The due diligence for study performed and the misinterpretation of the financial situation of FAI Company was the attributes of poor transactions. Justin Garner was to be an independent in the dealing between the FAI and HIH insurance company since, high presence lead to the conflict of interest (Reiner Quick, 2007). Profitability and structure of the industry There is high completion in the insurance industry with increase in the price completion hence there is significant transformation in the phases of the policy worldwide on insurance. The corporation Act 295(4) states that the directors of the company should state their opinion concerning the reasonable basis to assume that the business will be solvent at the time of director’s declaration. If not, they ought to issue the financial report that guarantee the company going concern as to whether the financial report need to be relied as true and fair view of the company state of financial situation which was not the case for HIH insurance company (Jeremy, 2011). B. the Inherent risk Inherent risk is risk of company’s financial report with material error after understanding the internal control of the company. For HIH insurance limited, the inherent risk were capability of the solvent ratio, adequacy of the insurance premiums, the threat of liquidity and the risk of insurance policy calculating. This inherent risk is the same risk experienced by other insurance companies across the globe. In determining the inherent risk for the company, the practitioners assumed the fact that HIH was re-insuring the ordinary policy and provision of marine and firm insurance which are some of the risk investment for an insurance company which was dissimilar with other insurance companies in Australia (Reiner Quick, 2007). Question two; Legal Liability A. the facts and findings of relevant court cases that Andersen’s should refer to in determining the likelihood of the partnership being held liable to: 1) Clients Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 In the case of Hedley Byrne, the plaintiff went loss as a result of neglectful misrepresentation. The court claimed dominance over the historic standing, in considering the liability for pure economic loss due to contractual link which create an idea of assumption of duty. Prior to the decision by the House of Lords, the notion that a party may owe another party a duty of care made in reliance was rejected with mere remedy for loss in the contract. Held; It was held that the link between the party was sufficient close to create a duty of care, it was reasonable to comprehend that the information provided may have been depended in entering into a contract which lead to creation of special association where the defendant may have assume sufficient care in the provision of advice to avoid the liability of negligence. From the case above, it is evident that auditors of a company cannot be held accountable for loss suffered. This can be applied to HIH insurance company since, the fact that Arthur Anderson issued an unqualified audit opinion merely eight months prior to the collapse of the company portray that the Audit risk was not managed precisely. The practitioners had limited information with regards to the operation of HIH insurance company and did not capitalize on the fact that the inherent risk had changed in the past years. The emphasis of matter paragraph provides that the audit report may identify that as much as the practitioners had serious concerns over the practice undertaken by HIH insurance company, they did not investigate entirely or made ware to the involved party. Matter such as the lack of auditors independence, Non audit work done by auditors of HIH insurance company and worldwide state of operation of HIH company lead to growth in business risk. This portrays that the audit process for the company must be well structured and planned (Whittington, 2012). 2) Creditors. Practitioner gathers proof relating to reliability of the information in the company financial statements. As a results, a practitioner will not be responsible for loss suffers because, he depended the financial reports provided and as well trusted the internal control system of the company in forming an audit opinion that depict the companies state of financial situation. The Auditors of HIH insurance company is not accountable for the creditor’s loss as a result of the company’s collapse. This is due to the fact that the practitioners placed more reliance on reliability of the financial statement of HIH that intends to information provided to the users of the financial statement. In this regards, a prisoners will gather information for the audit and forming an audit opinion based on information gathered and he will be held responsible for the information provided in the audit report since, biased information is deceptive and illegal to financial reporting. What conditions need to exist for a negligence action to be upheld? An auditor is an expert and the audit standard provides that auditor must observe due diligence in his audit work and ensures that the audit report depict a true and fair view of the company financial situation that is not misleading. When a party suffers loss as a result of placing reliance on the audited financial report, an action might be taken against the auditor for negligence that lead to loss. An audit report provided by an auditor is considered as the work provided by an expert hence, the profession code of conduct was undertaken in the audit process. The folllw9ing are some of the condition that give rise to negligence and make the audits accountable. Disclaimer of opinion This issues when an auditor is not independent in his audit work. Or when an auditor experiences a conflict on interest in his audit work. When the limitation for the scope of audit is inflicted by the client, due to incapacity of an auditor in obtaining enough audit proof In this regards, where an auditor doesn’t add a disclaimer of opinion in his audit work, he will be exposing himself to liability for his audit report hence, a disclaimer of opinion act as a warning signs to those who intend to use the audit report for decision making. The disclaimer of opinion will not avoid 3rd party but will reduce the scope of liability to an auditor. Also, an auditor will held accountable where loss suffered is reasonably expected impact of the code of conduct of an auditor during high audit work such as conflict of interest and high audit fees. Also, the presence of sufficient proximity of relationship engaging the practitioner and the users of the audit report that is fair and justifiable to impose liability to a practitioner (Robert, 2009). Question 3 — Ethics Why would HIH have wanted to hire prior members of its external audit team? The company believes that hiring the past auditors will best provide a reliable audit report since, they are well conversant with the company operations and also they are expert in financial matters since, the company must have had good working experience with the audit team in the past. Advantages of having the same firm provide both the auditing and consulting services The benefit of same audit firm auditing the company as well as providing non audit services is that the company will take advantage of efficient methodology in term of detailed expertise and aptitude of the current auditors since practitioners experienced comprehensive thoughts of the business situations and are well equipped with the operations of the company externally. Whether these circumstances represent a violation of ethical standards The provision of non audit services by the same auditors of the company doesn’t necessary lead top violation of ethics and code of conduct given the fact that the audit company is in full compliance with audit guidelines and at the same observing the ethics of integrity and competency in their work. The institution moral conduct does not allow practitioners to provide non audit services to customers where it may lead to a threat to the independence where there is no enough safety that exist. As a result, the auditors must leave the job as an audit of the company and continue to provide non audit services to avoid the conflict of interest (Adelopo, 2016). The existence of expert on audit services leads to the growth in the need for expert advice within the business in order to support the business advantage in a competitive business environment. The benefit of non audit services is that auditors have wide knowledge and expertise in audit and business operations because, audits are trained to understand the complexity of business dynamics in all perspectives of business operations and because the independence point of view may explore the problems that may be a hindrance to the business. The standards on the combined code of conduct of corporate governance provides that audit committee is required to manage the links with the practitioners and guarantees that the state of non audit services is under review. The audit committee must approve to ensure that the independence and impracticality of the practitioners is not compromised. The primary recommendations for audit reform proposed by the Ramsay Report and CLERP 9 The Ramsay Report recommends the envisage of comprehensive legislative plans of auditors independence in the corporation Act which may be supplemented by the independence of auditors policy in the expert code of ethics. The bill addresses the need by guaranteeing that the broad regulatory structure controlling the audit oversight and independence plan. The bill maintains the co-authoritarian approach to audit sovereignty. While the corporation Act comprises of some provision directed at some employment and financial links, the specialist rules issued by the accounting standards com price of the detailed requirements. The bill hence incorporates the recommendation of the Ramsay report with the objectives of establishing the best practices that is required by Auditor’s independence in Australia. The effect that the change will have on the auditing practices is that it will lead to accountability and enhanced responsibility because, practitioners independence will be improved which is an implication that the an audit report is free of material statement as well leads to collapse of the business like the HIH insurance company (Singleton, 2007). Reference list Adelopo, I. (2016) Auditor Independence: Auditing, Corporate Governance and Market, New York: London. Arens, A. (2013) Auditing and Assurance Services, London. Gay, G. (2012) Auditing and Assurance Services in Australia, Sydney : Springer. Jeremy, L. (2011) Performance Auditing: Contributing to Accountability, Sydney : Springer. Reiner Quick (2007) Auditing, Trust and Governance: Developing Regulation in Europe, New York. Robert, M. (2009) Brink's Modern Internal Auditing: A Common Body of Knowledge, New York: Cingage Learning. Singleton, T. (2007) Fraud Auditing and Forensic Accounting - Page 75, Sydney: Springer. Whittington, R. (2012) Principles of Auditing and Other Assurance Services, London : Cingage learning. . Read More