Assessing Business Risk of HIH Insurance

Answer -1 (Part a)

Business Risk for an organization or an entity is basically the risk that its goals and objectives will not be achieved due to various risk factors. These factors may be internal to the entity or external and can have a major impact on business workings and its profitability. The Business risks that are associated with HIH Insurance Limited can be assessed by a study of the company’s objectives and goals and thereafter judging the riskiness of the projects entered into by the company (Manoharan, 2011).

As per the analysis, the biggest business risk is unpredictability in the case of future claims by the insured which may arise both due to natural and manmade factors. This is also an inherent risk present in the business of insurance where the insurer makes good the loss happened to the insured against a payment of premium. The premium paid shall always be less than the sum assured and the insurance claim can be made payable to the insured at the tenure end or happening of any event (Kalpan & Williams, 2013). Hence, the business risk of HIH is unpredictable and calculation of which is also very complex. There are experts that assess the future claims by the insured on the basis of events like death rate, the premium paid, the age of the insured, etc. These experts are called actuaries. They assess the risk using statistical data and comparing them using various parameters (Baldwin, 2010). The calculation is quite complex and tricky.

As an auditor, one can use the reports generated by the actuarial and statisticians on how they calculate the premium to be paid and the sum assured. The auditor should also look on the re-insurances entered by the company, the premiums ceded and the capability of the re-insurance company on whether they are competent on the reinsurance ceded. Business risk can be assessed for HIH using such database, statistics, actuarial reports, the overall performance of the company, and the ability of the company to recover premiums from the client (Hoffelder, 2012). Further, the provisions that the company contains is complex in the scenario and these are certain major faults that have exposed the business to risks.

Answer -1 (Part b)

There were many flaws in the system of HIH and such flaws were inherent in the system from a prolonged time. When the takeover of FAI Insurance happened it added further pressure to the organization. The takeover happened without any proper due diligence and evaluation that aggravate the risk level. This led to more losses for the company.

The auditor shall always bear in mind that he has to rely on the report of the actuaries and statisticians. He may also not judge whether the premiums are correctly calculated and whether the business ceded by the company is correct or not. Hence, the auditor’s reporting is always under a threat that the reliance he has made on the expert’s reports is subject to judgmental errors also. Further, the auditor needs to bear in mind that the profit of the company depends on the future claims of the business (Parker et.al, 2011). The business carries risks of liquidity margin that ultimately becomes a problematic situation for them.  Further, it needs to be noted that Insurance business makes good the loss of the insured and in turn receive a premium. But, due to various nature of insurance like health, marine, fire, water, theft and life, the premiums are different and also the risk and the sum assured are also very different. So HIH should try to enter into less risky insurance areas like general insurance businesses (Mock et. al, 2013). Further, the auditor’s needs to consider that if the correct amount of provision is not estimated by the auditors then the company will pay more provision and payables will be more.

Inherent Risk Factors affecting HIH Insurance

All such factors mentioned above shall increase the overall risk assessment in the business so the auditor should perform audit procedure which strictly adheres to accounting and auditing norms and should use his best judgment in order to minimize the risks at reporting stage. The auditor should charge correct claims provisions and payables in the books of accounts even if it reduces the profits of the company because it may not lead to a sudden rise in claims settlement by the insured.

Answer -2 (a)

The clients and creditors of HIH are the parties that have entered into different insurance agreements with HIH that is the ones insured the re-insurers, the valuers, the actuaries, shareholders, financiers, etc.

Part a (1)

Various facts and findings of court cases to be considered by Anderson are:

The conviction and sentence of Mr. Ray Williams (former CEO of HIH Insurance Limited) that happened on 15^th April 2005 was one of the prime cases when it comes to the point of fact and findings. He had significantly distorted the true financial position of HIH. He had signed many misleading documents and in the annual report of year 1998-99, he had authorized a statement due to which the profits of the company got overstated by about $92.4 million. The effects of this overstatement continued for further years too.

The conviction and sentence of Mr. William Howard who was the former General Manager of HIH Insurance Limited on 23^rd December 2003 is one of the cases that can be referred to when it comes to point of partnership being responsible to the clients.  He had dishonestly received $1,24,000 for facilitating payments to Mr. Bradley Cooper and had facilitated a payment of $ 7,37,000 to a company associated with Mr. Bradley Cooper from company funds, although the payment was already made earlier to him. It ultimately decreased the profit of the company.

Part a (2)

The conviction and sentence of Mr. Rodney Alder ( Director of HIH and former owner of FAI General Insurance Company Limited) on 14^th April 2005. One of the charges was publishing false information’s and statements to induce people to buy shares of HIH. Other than these cases, various other cases have been put on many officials and ex-officials of HIH for presenting of misleading information to various associated parties, that need to be considered by Andersons.

Answer- 2(b)

Negligence is an act where the proper measure cannot be taken in case of something. This can pertain to both the cases that are intentional or unintentional or both. However, the difference happens when ignorance cannot be claimed to get rid of any negligence.

Following actions needed to be existed for negligence action to be upheld:

The Audit firm Anderson accepted huge sums of money for auditing services and consultancy services. Even in the year 2000 when the company`s financial position was in a critical condition, the company paid huge payments to auditors.

Still, the Auditors did not disclose the company policy of prudential margins. The company did not keep required sum of money as in liquid state. HIH instead adopted the policy of sharing business and doing reinsurance. The Auditors could have disclosed the matters to stakeholders. Hence the negligence could have been upheld. In the board of directors, there existed 3 former partners of Anderson firm.

Legal Liability of Andersens in HIH Collapse

Previous auditors were given key position like director and finance director in the company which itself is misleading.  The auditor who was the past auditor cannot be elected for reappointment. The auditor’s role was found suspected by the investigation done by the ASIC as the agreements entered were suspicious and not yet disclosed by the audit firm. There was an immense problem in the case of disclosures (Heeler, 2009). The failure of the company was due to mismanagement and inadequate reply to international insurance markets. The audit firm did not advise HIH about the challenges faced by the company internationally. Since HIH was unaware of the prevailing situation it led to immense pressure on the management. Moreover, additional insurance segments were purchased by the company that added an enhanced level of pressure. The auditors could have upheld the negligence charged against them by advising the Company about the financial pressures and challenges.

Answer- 3 (a)

HIH use to pay hefty payments to the Auditors for not disclosing their financial policies to their stakeholders. Anderson firm did not disclose their financial frauds and not adhering to prudential norms to public and clients. HIH knew this fact that they are paying Anderson huge sum of money so in order to suppress the matter and not allowing others to know this fact. HIH wanted to hire previous audit partners of Anderson and place them at key positions (Kruger, 2015). Further, the former auditors knew each and every loophole in the workings of the company. The company wanted to keep these loopholes hidden.

Answer 3(b)

The advantages are that where auditors are advisors also, they can mold the accounting and auditing norms so as to favor the auditee company itself. The Auditors can also change their disclosure requirements when they shall also be financial advisors of the company also. The auditors as advisors also know the shortcomings of the auditee and can advise them accordingly to hide the matters intelligently (Heeler, 2009). Further, the auditors as advisors very well have the knowledge about the working papers and working style of the auditee, which is a time taking procedure for a new auditor to study in detail every documentation of the company. But all these advantages to the auditee take away the audit independence of the auditor to a large extent, hence it should be avoided. For an audit to be successful, it is very important that the auditor should present his unbiased opinion about the financial statements of the auditee (Kruger, 2015). Hence, it is the need of the hour to represent a true and fair view because that implies audit independence. But knowing the internal system of the auditee and being a part of auditee in internal workings, it is not possible for the auditor to give his unbiased opinions (Cappelleto, 2010). The auditor should not be related to the management or hold any place in the company because that affects the decision-making skills of the auditor.

Answer 3(c)

HIH being an insurance company had a social and moral responsibility of answering to the common public on how they utilized their money and how will they repay their claims. However, HIH did not follow the prudential norms and invested funds in the riskier insurance business. In all of this, they incurred huge losses. There was a big gap when it comes to transparency and disclosure. They put at risk common man`s money and had to face inquiries against them (Gilbert et. al, 2005). Hence they violated ethical standards. Further, hiring of previous auditors as key personnel just for the sake of hiding malpractices and enhancing them further also indicates a violation of ethical standards, not only on the part of the company but the auditors also. It is clearly implied that HIH worked against the normal scenario and did not apply any process of due diligence that ultimately led to bigger issues for the company (Cappelleto, 2010). The auditor-firm knew about the malpractices but helped the company to hide the same. This was a violation of the ethical standards because an auditor is expected to work for the betterment of the company by displaying a strong ethical standard, however, when it comes to the auditor of HIH they displayed unprofessionalism and helped the company to engage in fraudulent activities.

Answer 3 (d)

The collapse of HIH was also because of non-disclosure of key matters by the auditors. Ramsay report also highlighted the areas where auditors shall not have the liberty of reporting and disclosing and hiding key matters. The main recommendations were to enhance auditor independence, disclosure by auditors to the board that auditor independence was there while performing an audit, making regulations for non-audit works by the auditor, etc. CLERP 9 Act 2004 also recommended changes in auditing areas and their disclosures. They were consistent with Ramsay Report & Royal Commission. Had these were in place, Auditors would be cautious in their reporting and disclosure of key matters.  The new regulations stand high when it comes to due diligence and an effective audit that will help to reap benefits (Wood, 2011). It will enable the companies to perform in an effective manner and hence, an independent notion can be achieved.

References

Baldwin, S 2010,  Doing a content audit or inventory, Pearson Press.

Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne

Christensen, J. 2011, ‘Good analytical research,’ European Accounting Review, vol. 20, no. 1, pp. 41-51

Gilbert, W, Joseph J & Terry J. E 2005, ‘The Use of Control Self-Assessment by Independent Auditors’, The CPA Journal, vol.3, pp. 66-92

Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press

Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.

Kaplan, S & Williams, D 2013, ‘Do going concern audit reports protect auditors from litigation?’ A simultaneous equations approach, The Accounting Review, vol. 88, no. 1, pp. 199-232.

Kruger, P 2015. Corporate goodness and shareholder wealth. Journal of Financial economics, pp. 304-329

Manoharan, T.N 2011, Financial Statement Fraud and Corporate Governance. The George Washington University.

Mock, T. J, Bedard, J, Coram, P, Davis, S, Espahbodi, R & Warne, R 2013, ‘The audit reporting model: Current research synthesis and implications’, Auditing: A Journal of Practice and Theory. 32, 323-351.

Parker, L, Guthrie, J & Linacre, S 2011, ‘The relationship between academic accounting research and professional practice’, Accounting, Auditing & Accountability Journal, vol. 24, no. 1, pp. 5-14.

Vause, B 2009, Guide to Analysing Companies, Bloomberg Press

Wood, D A 2011, ‘The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision,’ The Accounting Review, vol. 86. No. 6, pp. 34-56