When someone starts the business then he has to take the risk. Without any risk no business can smoothly function. But the risk should be at such level which can be controlled and mitigated easily so that the continuity and the perpetuity of the business does not hamper. Risk may be of any kind like risk of having losses, risk of having the sudden removal or vacation of the position of the key managerial personnel, risk of having the loss of stock, loss due to non receipt of payment of debtors and sudden closure of the company due to changes in the external environment of the company including that of the stakeholders and shareholders of the company. In the given case study the business risk has been identified and assessed from the very beginning. It is mentioned that in the year 1995, the company CE Health International is merged in the year 1995 with Winterthur Insurance Company into a resultant company – HIH Winterthur and in the year 1998 Winterthur gets separated and the new name come into existence as HIH Insurance Limited. He has withdrawn himself from the company only because of the fact that HIH Company has engaged itself in such practices that can lead to several losses to the company in all the spheres. It entails that the company has high degree of investment risk. This is majorly due to inefficient and inappropriate investment strategy adopted and followed by the company (Jiangbo, 2003).
The same fact of having higher degree of investment risk is supported when the company has written off the amount of investment amounting to $ 400 million in the books of accounts for the year ending 2000 after purchasing the FAI Company from the Rodney Adler at the premium in the year 1998. The decision of purchase has been made without the discussion at the board meeting and without carrying any diligence. Further due to investments in the high risky areas including the marine, aviation and natural disasters the company has suffered the huge amount of losses. It includes hundred million dollar from the film losses, huge losses from the typhoon in Florida, losses from hailstorm that has happened in the Sydney and etc. This has created the remarkable point in the history of the Insurance Sector Industries. Thus, in this way the business risk can be identified by going through each part of the case study.
The factors that contribute towards the happening or non happening of any event are described by the risk in the better manner. Risk is defined as the likelihood of any event to occur and risk factors are the factors responsible for having the risk element present in the business. Risk in the financial statement and accounts balances level are of three type’s inherent risk, control risk and detection risk. In the given case study more emphasis has been laid on the inherent risk. Inherent risk is the risk defined as the possibility of having material misstatements in the financial statements of the company due to the inherent limitations present in the internal framework of an organization. These inherent limitations are not emerged in a particular year rather it occurs because of the practice the company is following since its inception.
Because of the above said inherent limitations, the companies have usually gets ended up with the liquidation or winding up or shut down. In order to reduce the same, the company shall have sound internal control system and that too with the regular external checks.
Following are the inherent risk factors (World Bank, 2006):
Auditors are regarded as the people who are eligible to authenticate the financial matters of the company and on the basis of which the users of the financial statements take the useful and meaningful decision like stakeholders on the basis of the annual report of the company gets ready to provide the guarantee or provide loans or ready to invest the amount without any doubt. As per the Corporations Act 2001 clubbed with the Australian regulatory framework the auditor will be liable for the damages if any caused to the parties to the company because of the auditor’s report issued by the auditor of the company.
The liability of auditors of the company arises from the major four sources and these are:
In regard to the following court cases and relevant finding, Andersen will have high chances of liability towards the client and the creditors:
In this view, the auditors are fully liable towards client and creditors.
Negligence is the act conducted by the persons and entails the failure on the part of that person to exercise due diligence and professional care. The act of negligence may be ordinary or grossly. The Ordinary negligence occurs when the auditor does not perform the functions in accordance with the applicable accounting standards and auditing standards. The Grossly negligence occurs when the auditor performs the function without having any concern for the third parties and even if the damages were caused to them. These definitions itself provides the factors that are relevant for favoring the negligence caused by auditors. As per the code of conduct of Chartered Accountants issued by the Institute of chartered accountants, if the auditor is found guilty of any negligence on his part then he will be liable to cover the damages and losses caused to the parties of the clients. Here the negligence includes the following:
Apart from the above listed factors, there are other factors which make the auditor to behave in the particular manner and behave as grossly negligently. Thus, these are the conditions which are required for favoring the grossly negligent to the auditors.
External audit is the audit conducted by the outsider audit firm engaged by the company for
Authenticating the financial statements of the company and that too for inclusion in the annual
Report for the year end. Company becomes familiar with the external audit team as the time passes and on their regular visits to the office of the company. By hiring the members of the external audit team including those who have worked earlier also will serve the company with the following benefits:
Thus, in this way the HIH Insurance Limited wants to have the prior members of the external audit team.
Corporations Act of the country provides that the firm who is doing the audit of the company shall not perform the non audit function otherwise the independency of the auditor will get affected in many ways. But in the today’s world, the audit firm usually performs the audit function clubbed with the non audit function including the consultancy services. The benefits which the company will get are as follows:
Each and every company shall follow the ethical practices within the framework of the company. Ethical practices refer to the application of the moral principles and defined code of conduct of the performance of the employees including those charged with governance of the company. Such practice will ensure not only the smooth functioning of the company but also provides how reliable the company’s affairs are being managed by the management.
Yes, the circumstances referred in the case study exhibits that the ethical standards have been violated in total. It is because of the following:
References
Jiangbo X, (2003), “HIH Insurance Limited : Corporate Governance and Corporate Excesses”,
available at https://www.seiofbluemountain.com/upload /product/201010/2010jjfzh05a8.pdf accessed on 15/4/2017.
Robinson A, (2003), “HIH Report and CLERP 9”, available at https://www.allens.com.au/pubs/pdf/ma/focgmay03.pdf accessed on 15/04/2017.
Tata Mc, (2010), “Legal Liability of CPAs”, available at https://www.google.co.in/url?sa=t&rct=j&q=&edata-src=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjK0NmumajTAhUExLwKHWGmBq0QFgghMAA&url=http%3A%2F%2Fwww.wou.edu%2F~beebej%2FBA%2520451%2FChap004.ppt&usg=AFQjCNGebMKLW15csyn2X3G5e-qmyqHjEA&bvm=bv.152479541,d.dGc accessed on 15/04/2017.
Verschoor C, (2012), “Pros and Cons of using External Auditors for Internal Auditing and Other
Services” available at https://www.financepractitioner.com/auditing-best-practice/pros-and-cons-of-using-external-auditors-for-internal-auditing-and-other-services?full accessed on 15/04/2017.
World Bank, (2006), “HIH Case Study on Corporate Governance”, available at https://www.iaisweb.org/modules/cciais/assets/files/pdf/061004_C1
-9_hih_corpgov_round01.pdf accessed on 15/04/2017.
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