HIH Insurance Company Risk - Assignment Example

HIH INSURANCE LIMITED By (Name of Student) Student ID Number Subject Code Due Date Q1 (a) HIH Insurance Company Risk Insurance companies are not in exemption of refunding claimants for incurred expenses and/ or loses. In the real life of insurance companies, clients of whom in this case are referred to as policy holders, are entitled to re-embossment in form of monetary value or in other case any form of refund that is deemed appropriate in case of any eventuality. In this particular case the study will review an incident of HIH verses the state George and Malane (2004). This report will focus on assessing the risks factorial impacts that HIH Insurance Company will face in case of any unforeseen eventuality. Q1 (b) Risk factors affecting HIH HIH Insurance Group is exposed to a couple of risks that include not only; other parties’ failures (for example reinsurer or brokers), fixed expenses recovery, value fall of assets, and finally, the cycle of insurance. Parker (2005) denoted risks as concepts that denote some possible negative impact to a given asset. Risk can as well be defined as characteristics of value that for a given course may arise due to future anticipation or present processes (Parker 2005). HIH insurance company can be liable to the following underlined types; (a) Underwriting risk This refers to a process whereby a big financial provider, for this case (HIH insurance Company) employs to assess the legibility of a client to get its products for example equity capital, insurance or credit. HIH insurance company engaged into high premium paying ventures like marine insurance. Market risk HIH Insurance Company faces the risk of decrease in value of the insured. This risk is measured in terms of potential gains or loss in a portfolio that is related to the price fluctuation of a certain probability in a given period of time. .Liquidity risk This is an anticipated risk to be incurred by HIH Insurance Company, this is due to the fact that the company is operating on unclear terms to its shareholders. HIH is likely to lose its liquidity since it is already experiencing a fall in its credit rating. HIH liquidity risk is exposed to loss in the event where liquid assets are available. Q2 (a) Legal Liabilities Borrowing from Partnership Act, section 12, a partnership is liable for any injury or loss caused to any individual who is part and parcel of Partner in the firm. In other words, a registered company is liable for any injury or losses causes by an employees who is acting on behalf of the company. Moreover, under partnership Act, section 13, every partner of a company is liable with other co-partners for any injury or losses caused to any individual who is not being part of the company. Therefore, in the case of HIH Insurance, the director is liable with other employees of the insurance company for any injury or loss incurred for any person who is not part and parcel of the company (Eslake 2005). Q2 (b) Negligence Negligence is considered to be the root course of the complainant’s damage. In the case of HIH verses the State, in order for the court to prove that HIH Insurance Company’s directors exercised some level of negligence, and that they are liable for damages, the court ought to prove that the company shareholders suffered some level of damages which can be injuries, loss and others. (a) Breach of duty HIH Insurance Company failed to honour its obligations to the plaintiff (clients). HIH failure to reasonably exercise care for its clients is termed as a breach of duty and it is a punishable offence by law. Therefore, it is upon the jury to determine whether HIH Insurance Company breached it duty to its client, and if so, the amount of compensation to be met by the company to its clients. (b) Cause in fact HIH clients have to prove to the court beyond reasonable doubt that the company’s (HIH) actions is the main foundation of their damages or “but-for” causation. HIH Insurance Company had purchased several insurance companies during its operational period, the companies had different shareholders who befell under Mr Williams as their core director. Mr Williams practiced unethical and misleading actions that led to losses to other directors. Moreover, were it not for Mr Williams, HIH Insurance Company could not have collapsed. Hence he should be held accountable for his negligent actions. (c) Proximate cause HIH Insurance Company is liable only if his actions were the proximate cause of clients’ damages, consequently, if the clients’ damages could not be reasonably foreseen, then it is stipulated that no liability exists for the damages caused through negligence. In reference to HIH Insurance Company, it is assumed that the company knew that it could not fulfil its clients insurance demands to the required standards but still went ahead to insure them. Therefore it is safe to indicate that liability exists. (d) Intervening Cause Intervening forces occur after negligence has been exercised. This forces play significant role in increasing the damages. This may relieve HIH Insurance Company if the intervention was unforeseen, though if it was foreseen, then liability will exist (Ali et al 2014). Q3 (b) Advantages of auditing and consulting a single company. Consultancy and auditing being conducted by one company promotes independence of the auditors. Independence of auditors means that auditing services be carried out with subjectivity of bias and to confirm that their client’s financial reports have been prepared in line with generally accepted accounting principle. Independence of auditors is important to all stakeholders such as strategic partners, employees, lenders, and investors who greatly depend on audited financial report for accurate data regarding a company’s financial position to make appropriate decisions. Proponents of accounting firms providing non-auditing services to their auditing client at the same time argue that such services build a deeper understanding of the audited firm, including competitive position, risk, strategy, and business model. All non-auditing services provided by accounting firms should be disclosed to shareholders and should be approved by audit committee (Mardjono 2005) Variety of non-auditing services are provided by an accounting firm to its clients. Auditing firms are allowed to provide certain non-auditing services to their auditing client long as these services do not conflict the independency of the auditors. Some of the non-auditing services prohibited in Japan include investment advisory services, security brokerage services, actuary services, design of accounting or financial information systems, and services associated with accounting books, financial documents, and bookkeeping. Reduction in agency fee is also another point of interest for clients. The use of a single company for auditing and consultancy can save substantial amount of money for a client as opposed to using different auditing companies (Tepalagul and Lin 2015). Q3 (a) External audit team HIH Insurance Company faced several challenges. This included incompetence, unethical and “corrupt” directorial leadership. Mismanaged of HIH affaires were aggravated by the lack of adequate attention to details, poor and unaccountable performance and absence of integrity, In reference to the case study, HIH Insurance Company wanted to hire pervious members of its external auditing tem for the specific reasons that include; first and foremost, so that the accounting firm may compromise the objectivity of their reports and in return present reports that could favour the director’s actions. Secondly, by the fact that Mr Williams was the director, he could use his powers and position to influence the auditor’s independence. HIH insurance Company on the other hand could like to hire its members of the external audit team for the fact that they were members who were conversant with the operations and activities of the company therefore it was easier for them to manipulate events to suit HIH Insurance Company operations against the insured (Allan 2006). Q3 (b) Advantages of same firm Auditing and consultancy Auditing companies quite often provide auditing and non-auditing services including; tax advice, management consultancy and/or human resource consultancy. However, the particular auditing company may compromise the intended objective of the report. This may arise due to fact like the auditing firm having interests in the company. Advantages that come along in the using the same company for both consultancy and audit include the following; a) Identification of internal controls weaknesses Auditing standards 2 which was issued by the “Public Company Accounting Oversight Board (2014)” identifies material weaknesses in the internal control as “significant deficiency” that increases the possibility of material misrepresentation in regard to financial information of a company. The use of both auditing and consultancy services from one company eradicates these challenges since the auditing firm covers both internal and external aspects of financial information hence there is a likelihood of correct and accurate present of financial information (Iskra 2016). (b) Enhances credibility to financial statements Company’s financial statements that have been audited and represented by a single firm are regarded more credible than the once from different firms. This reports are availed and elaborated by the same firm to shareholders, potential clients and investors. This enhances financial report clarification and or elaboration. (c) Unbiased and expert recommendation The use of same company for auditing and consultancy promotes and tightens business processes. It also reduces the risk of incorrect reporting of financial information. Issues of individual like and dislike among competing firms is eradicated. Therefore, this audit report that is presented is considered unbiased and of good faith (Coghill 2005). Q3 (c) Ethical issues In the process of non-auditing service provision, it is notable that most auditors may be more interested with the financial benefits they receive by offering non-auditing services to their auditing client and as such, they may be reluctant to give accurate financial positions of their client’s firm. Furthermore, such services threaten auditor objectivity, and independence (Deegan and Rankin 1996). Australian, accountings firms are prohibited from providing non-auditing services to their auditing client at the same time (Cheng 2012). The rationale for this prohibition is that there will be conflict of interest if an accounting firm is allowed to provide consulting services to their auditing client at the same time. Accounting firms in most cases provide a broad range of non-auditing services such as human resource consultancy, tax advice, or management consultancy. Providing non-auditing and auditing services to the same client, the accounting firm may compromise the objectivity of their reports. Borrowing from Coghill et al (2005), auditing firms ought to be objective so as to provide unbiased report regarding the financial position of a firm (Coghill et al 2005). Moreover, other issue of ethical questioning that ringed in readers minds was the fact that other concerning issues were addressed in court and the defendant pleaded guilty to the charges. For example it is evident from the case study that Mr Williams pleaded guilty for willingly collecting some reasonable amount of money that was approximated at $ 737,000 from one Mr Brad Cooper in order for him (Mr Cooper) to receive money in the form of payments to his company knowingly well that the payment order had been discharged by the court of law (George 2004). Q3 (d) Audit report recommendations CLERP paper 9 contains an in-depth discussion on government’s response to Independence of Australia Company Auditors report which is commonly known as the Ramsay report. The report’s main purpose was to examine the impact of Australia’s professional and legislative requirements on independence of company auditors. The report recommended among others; that an auditors are not perceived independent if there is notable conflict of interest. In reference to section 324CD, it is stated that an auditor or a member of an audit team should not exercise impartial or objective judgement in regard to the conduct of the audited body. In section 324CI, the report recommended that a retired or resigned partner of an audit firm should not become a member or director in senior management of clients for which he or she has been acting as an audit team member for the last two years. Furthermore, the report recommended that auditors should declare in writing that there is no auditor independence contravention as stated in the Act or contradicting code of conduct as stipulated in section 307C. Moreover, the report recommended that auditor is under corporation Act. Schedule 1, part 7, item 123 should report all noted breach of the corporation Act to ASIC (Gray 2013). List of References Allan, G.H., 2006. The HIH collapse: a catalyst for costly reform. Accessed on 29th April 2017< http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1478&context=lawpapers> Cheng, S. and Seeger, M., 2012. Lessons learned from organizational crisis: Business ethics and corporate communication. International Journal of Business and Management, 7(12), pp.74-86. Coghill, K., Ariff, M., Tam, O.K. and Wilkins, L., 2005. Rating Governance in Australia. Deegan, C. and Rankin, M., 1996. Do Australian companies report environmental news objectively? An analysis of environmental disclosures by firms prosecuted successfully by the Environmental Protection Authority. Accounting, auditing & accountability journal, 9(2), pp.50-67. Eslake, S.R., 2005. Three seemingly unrelated propositions concerning Australia's identity and economic performance. In Papers and Proceedings of the Royal Society of Tasmania (Vol. 139, pp. 53-60). George, G. and Malane, F., 2004. Auditors and Corporate Failure: An Analysis of the AWA and HIH failures in Australia and the Role of the Auditors. Gray, A 2013, 'Contractual Penalties In Australian Law After Andrews: An Opportunity Missed', Deakin Law Review, 18, 1, pp. 1-25 Iskra, L.A., 2016. Australian Industry Superannuation Default Funds: Examining Sequencing Risk for Baby Boomers. Mardjono, A., 2005. A tale of corporate governance: lessons why firms fail. Managerial Auditing Journal, 20(3), pp.272-283. Parker, L.D., 2005. Corporate governance crisis down under: post-Enron accounting education and research inertia. European Accounting Review, 14(2), pp.383-394. Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121. Read More