Business Risk and Inherent Risk Assessments - Essay Example

TASK 1-HIH INSURANCE By Student’s Name Professor’s Name Institution Affiliation Course Code// Title Date Task 1-HIH Insurance Business Risk and Inherent Risk Assessments Business risks are potential sources of business failure if serious and effective measures are not taken to avert the situations. In the light of HIH Insurance Company, there were so many aspects of its operations that signaled the potential fallout of the company from its business excellence path. The risks associated with the firm could be measured through careful evaluation of the business environment that the company was operating in. For instance, as early as 1999, the company under the leadership of William had been performing poor in its financial deliverables. This was of the basis the risk associated with its poor performance could be evaluated. Another typical indicator of the risks of fall that the company witnessed is the termination of its trade in HIH insurance shares in 2001 that led to the intervention of the Australian Securities and Investment Commission to establish the course of poor performances of the company’s share. These indices could form the basis evaluation of the risks associated with the company’s operations. Besides, the companies share prices prior to its cessation had fallen remarkably. This fall was another major signal of the challenges facing the company in its long-term growth path. Besides, the performance of the company deteriorated amidst growing concerns of potential resuscitation of its operation given the possible fall out of the company from the insurance business after some of its partnerships failed to reap immensely as anticipated. The negative performance of the company despite the promising start that involved serious increase in the business capacity would be associated with both internal and external risks. The evaluation of the risks associated herewith could be based on the understanding of the company’s financial performance or viability amidst constrained business portfolio (Bell & Shackelford 2001). Besides, this could also be done through evaluation of effectiveness of her financial management taskforce including the accountants and the auditor among others. There are several inherent risk factors that HIH has been facing in its particular focus to business engagement. In particular, the company has been facing significant threats to its financial performance based on numerous internal challenges as far as financial management is concerned. For instance, the management personnel led by Mr. William the company’s director had abetted the production and propagation of misleading reports that contradicts the performance trail of the company as far as financial position is concerned. The presence of inefficient firm operators is a major threat to financial appropriation in the company and may derail the process of delivery of accurate financials and overall financial management prospects. Besides, significant omission in prospectus such as the cases issued by Mr. William contributes to significant loss of loyalty clients’ loyalty to the firm amidst suspicion of financial misappropriations. Similarly, misuse of powers by the firm’s top management to institute and generate false statements alongside the financial report projections and publication is one of the risk factor that would lead to increased rebellion against the deliverables of the company based on matters associated with the company’s financial performance and excellence. For instance, the overrating of current profits before tax could be a major source of poor decision making based on inaccurate financials that limits the capacity of the company to excel in the corporate world (Hogan and Wilkins 2008). The deliverables in the context of Mr. William’s tenure in the company were largely derailed by inaccurate reporting and financial projections. This scenario could have been precipitated by dishonest accountants and auditors who were charged with the responsibility of discharging financial matters of a company and subsequent clarification of figures associated with different operations respectively. Failure of Mr. Williams to make appropriate clarification prior to decision was the main cause of flawed decision making and communication. Legal Liability The liabilities of partners in a business are one of the main aspects that shape the participation of each partner in the core of businesses. The delivery of core business activities is an important function of the main partners in a business engagement. Auditors have unlimited liability for their professional defaults. The issue surrounding professional liabilities of the authors and accountants has been earmarked by different entities such as the common wealth, territory governments and the state since 1980s. The two main professional accounting entities in Australia that are concerned with accounting ethics and accuracy are ICAA and the CPAA. The two bodies have been largely concerned with the need for reforms in the area of accountancy (Knechel 2007). The need for addressing the current unlimited liability regimes have been a major concern for major accounting firms based on their particular submissions to Ramsay review regarding the independence of auditors. Amidst these concerns, Andersen’s consideration of her liability to the partnership and the challenges that the business faces are quite eminent and inbound. This assertion implies that while Andersen is a beneficially of the business partnership must be liable to the losses for the creditors and produces sustainable business engagement. The auditors are responsible for ensuring efficient service delivery in the company, financial management notwithstanding. The auditors and accountants at HIH have been dealing with the issue of unlimited liability exposures for professional defaults via professional indemnity of insurances (Bell and Solomon et al. 2008). In this regard, the insurance companies have been held accountable for the propagation of compensation in the event of loses accruing from auditoria loses as well as common practices that have been rendered ineffective in the management of firm’s financial resources. The auditors have the responsibility of ensuring efficient computation of the firm’s financial resource use. In this regard, Andersen would refer to incidents in the past that associated with flawed financial appropriation made from flawed audit reports. For instance, in 1991, KPMG and the Price Waterhouse were charged with audit malpractice and a fine of $120 million that led to the collapse of the South Australia State Bank (Johnstone 2000). This incident demonstrated the immense impact of false audit reports that can result into serious challenges influencing the operations of a firm. For instance, the current poor performance of the HIH might be associated with false audit reports that generate internal commotions that renders the firm unprofitable while diminishing the returns from investments of both the both firm and its partners. Nonetheless, under the partnership agreement, both the mother company and the partnering agencies are accountable for the losses unless the auditoria agencies are discovered to have flawed conduct that culminates into the losses. Similarly, there was another major litigation associated with the fall of Adsteam. This incident involved the Deloitte Touche Tohmatsu that resulted into settlement of $20 million for the losses incurred as a result of flawed audit outcomes. These incidents shows that litigation crisis has been a major challenge to the financial performances of companies associated with major firms and could constitute a series of mechanism that produce instabilities within firms. The process of instigating and propelling reclaimed losses offers a platform for transferring as well as pooling the risks associated with financial losses to the bodies that have the expertise to not only manage risks but also reduce prevalence of such risks. The professional indemnity insurance for instance, is a cover that insulates against losses that may arise from delivery of professional services that are being offered by insured personnel (Cohen and Wright et al. 2002). From this review, the insurance agency under which the auditors are subscribed to or insured under would be held liable to the offenses adjudicated under the capacity of individual professional accountants. Currently, Australia has been experiencing an insurance market scenario called, ‘hard insurance market’. This scenario implies that the market is composed of tough risk selections made by the insurers. Besides, the market for insurance has been mainly worsened by collapse in some of the main domestic giant operators in the HIH that constituted approximately 35 percent of the overall indemnity market. In the global perspective, majority of the insurance have also shifted into hard markets cycle over the last couple of years. The shift has been propelled by among other factors, terrorism attacks that have increased the level of risks associated with business portfolio. However, in the insurances against auditoria or professional flaws, the situation has not been any different. For instance, various economic risks and enhanced competition in the global and regional markets have led to setting in of personal interests and selfness to trail over and manipulate financial information of a company to boost their positions in the regional market for investments and other potential interest enhancement qualities capacities (Elder and Arens 2011). For any form of alteration in the financial appropriation of a company, the financial projections are critical to enhancing financial delivery while the stakeholders including Mother Company and their partners are liable to losses and gains associated with the firm. In this regard, both Andersen and HIH are held responsible for the losses accruing to the interest of clients and the creditors too. Losses to a firm may be a product of natural causes such as bad weather and accidents that results into losses of both physical and mental resources. However, in most instances, errors occur in the event of computing organizational financials. Any conduct that could be unintentional or careless encompassing breaches of contractual duty of care relative to the second party could be regarded as negligence. Negligence has been associated with one immense loss to many firms globally. The negligence may be demonstrated by the auditors or the top management that are not careful to scrutinize reports of the company’s financials before subjecting them to public audience (Curtis and Turley 2007). This scenario may result into immense image damage prior to realization of the real occurrence. The duty of care of the auditors to their clients arises from either the tort of negligence or in contract. In either case, the auditor may be held liable to some misconduct as far as his financial aspirations for the company are concerned. If auditors are found to be negligent, clients may launch a legal dispute for the misconduct and breach of implicit contractual terms that auditors have to exercise reasonable level of care and skills that would enhance recovery of any possible consequential losses suffered. Clients may also sue the respective auditors in a scenario of tort of negligence for obtaining serious damages that can potentially restore the clients to their original play level. These conditions are pertinent to the exercise of guilt of negligence for the customers against firm auditors. In some of these incidences the authors are firms are presumed independent of the auditor’s conduct. Ethics Ethical consideration is a paramount area of concern that individuals must subscribe in their professional engagement. The hiring process of HIH is a competitive process that is done based on merit. In essence, the external audit term has a close monitoring capacity of the internal financial tributes of the HIH. Subject to this work proximity, the hiring process that constituted individual form the external audit firm could have been a plot to undertake progressive hide out of the real financial situation of the company that is resultant of poor financial auditing. In previous accounts, it has been observed that gross misconduct including posting of false financials has been a characteristic scenario of the HIH while the external audit team was in place. This scenario implies that there might have been tangible collusion between the internal accountancy, management and the external audit firm to generate flawed financial posting that would define the company’s financial position as a flawless and place the company on a path of excellence. The hiring of external audit team members could have been precipitated by the need to continue concealing the financial health matters of the company. The financial statement audits can be anticipated to have favorable impacts on efficiency and honesty on employees. This aspect can however not be guaranteed based on the financial appropriation of a company at any given time. In the light of this hiring process, HIH might be intentionally seeking to deny independent audits to be undertaken that would incidentally result into few errors in the overall accounting process and mitigate the possibility of the top management to misappropriate the overall assets. The audit and consultation services can be undertaken by the same firm effectively. In such scenarios where an individual firm provides both consultation and auditing service, the process increases the overall level of efficiency since the firm can influence the auditor’s concrete understanding of clients and their information systems in the provision of supplementary services. This scenario must however be monitored and managed from the HIH top management free from coercion into any consolidation of figures that would eventually compel the performance of the firm to be revamped. The undertaking of both consultation and auditing function provided a neutral play ground in which both the recipient company can monitor consultation outcomes based on the audit reports that credit outcomes from the consultation. The recipient firm, in this case, HIH is also charged with the manipulation of the data from consultation to revamp their financial performances and inclusion of remedies that are sought after to enhance overall financial performance. The audit firms in such case also base their arguments on raw data that they have an ultimate understanding of, an aspect that promotes the performance quotient of the recipient firm. The hiring from the former partners of the audit firm is a major flaw and violation of ethics for HIH to execute. In particular, the conduct basically overrides the professional code of ethics of objectivity and professional behavior. Besides, it exposes the firm to self-interest threats that arise from the need of the top management to conceal some of their former raw deals. Similarly, this choice of members also expose the firm to familiarity threat which is a major challenge to overcome in a bid to enhancing recovery process from the financial depression that the company may have been dipped owing to ineffective audit activities. Finally, Ramsay report focuses on enhanced independence of the auditor. First, both Ramsay report and the CLERP 9 recommend inclusion of a statement within the Corporations Act that subscribe to the independence of the auditors. Besides, the reports also recommend that auditors must make declarations annually to the company’s Board of Directors with claims that they maintained personal independence as provided for by the rules of accountancy and the Act above. Besides, the documents also prescribe to the establishment of auditor independence supervisory boards comprising of majority members of the board as independent personnel in the accounting professions. The report and CLERP 9 also recommends enhancement of the audit committees. If these recommendations are executed fully, they may lead to enhanced accuracy of accounting and help generate positive growth of the corporate financial segments where flaws can be detected early and resolved amicably. This process may also promote deliverables of accounting professionals in the long-run based on professional excellence and minimize occurrences like internal hiring witnessed in the HIH insurance company’s case. Reference List Bell, T.B., Doogar, R. and Solomon, I., 2008. Audit labor usage and fees under business risk auditing. Journal of Accounting Research, 46(4). Bell, T.B., Landsman, W.R. and Shackelford, D.A., 2001. Auditors' perceived business risk and audit fees: Analysis and evidence. Journal of Accounting research, 39(1). Cohen, J., Krishnamoorthy, G. and Wright, A.M., 2002. Corporate governance and the audit process. Contemporary accounting research, 19(4). Curtis, E. and Turley, S., 2007. The business risk audit–A longitudinal case study of an audit engagement. Accounting, Organizations and Society, 32(4). Elder, R.J., Beasley, M.S. and Arens, A.A., 2011. Auditing and Assurance services. Pearson Higher Ed. Hogan, C.E. and Wilkins, M.S., 2008. Evidence on the audit risk model: Do auditors increase audit fees in the presence of internal control deficiencies?. Contemporary Accounting Research, 25(1). Johnstone, K.M., 2000. Client-acceptance decisions: Simultaneous effects of client business risk, audit risk, auditor business risk, and risk adaptation. Auditing: A Journal of Practice & Theory, 19(1). Knechel, W.R., 2007. The business risk audit: Origins, obstacles and opportunities. Accounting, Organizations and Society, 32(4). Read More