Assessing Business And Inherent Risks: A Case Study On HIH Insurance Limited

Business Risk and Inherent Risk Assessments

Discuss about the HIH Insurance Limited for Inherent Risk Assessments.

Each organization comprises of numerous different risk components while conducting its day-to-day operations. Therefore, in this case, risks within HIH has not been evaluated and recognized properly by its management; hence, resulting to a net loss of around 5.3 billion and then to collapse of the company. With these considerations, HIH business risk could be assessed in terms of the local, global as well as it control environment. This could also be assessed by understanding the overall insurance sector and then understanding how the HIH fits in this sector. To be more specific, HIH business risk would be assess through operational and financial risks.

To start with, financial risk linked with those risks arising from HIH financial operations, financial consequences and transaction of its operations should in this case be assess (Clarke, Dean and Oliver, 2003). Therefore, by assessing all these risks, it would assist HIH to be aware and relatively alert with its financial position, issues as well as it debt. This would have in turn assisted it in evading risk of having too much debt obligations as compared to its total return. On the other hand, in assessing HIH risks, it would be advisable to assess its operational risks. These are the risks arising from its internal activities or operations. In this case, it would be advisable to assess several classes of risk like legal risk, fraud, environment as well as physical risk of this organization. This would have assisted in detecting probable issues and errors resulting from such risks. Thus, by assessing operational risks of HIH; that is, how it operates as well as how it conducts its normal procedures, it could be easier for the firm to detect probable issues and errors; hence, the firm could have improved and expanded (The HIH Royal Commission 2003).

In conclusion, it is very significant for the risks to be assessed, managed and recognized properly such that controls are executed in order to evade and reduce probable risks that might arise. In fact, HIH could not have collapsed in case it risks were assessed and managed appropriately and on time. Thus, business risk of the HIH were extensive as it risks were not identified and managed properly.

Auditors should determine risks while working with their clients. One of the most important risks that they should be alert about should be inherent risk.  One of the main aspects that could influence or affect inherent risk is management level of integrity. Given that HIH management lack integrity by presenting erroneous financial report, there is a probability for reputation to the business community. Another factor affecting inherent risk in HIH are unusual pressure on it management (Von Wielligh 2004). Basically, there were some incentives that led the management to misstate HIH financial report which include poor operating results, cash inflow problems, as well as poor liquidity.  Change in competitive and economic condition in Australia was also another factor affecting inherent risk in the HIH at financial reporting level. These factors resulted in some increase in inherent risks assessment of the company.

How HIH business risk would be assessed

The partnership might be held liable to client if there is evidence that shows insufficient planning relating to goodwill alongside with deferred acquisition costs as well as income tax benefits. In case the clients were hiring former auditors, this would have some influence on independence of the external auditor since the former auditor could be holding higher partnership on auditing team which could hold higher influence to current auditors as a result of their authority. In fact there is a close relationship between existing and former auditors since they are capable of handling issues with the partners and influence they hold.

For the creditors, the partnership could be held liable to the creditors in this case since it is clear that creditors incurred loss as a result of the partnership performance. In essence, the partnership is liable to the creditors since there is prove that they breached due of due professional care due to approval of misleading financial report which included audit report. Basically, as per the facts and finding in Credit Alliance Corp. v. Arthur Andersen & Co. (1985) case, the partnership was fully aware of the reliance on financial statements of the organization by creditors. Therefore, they are fully liable for negligence to creditors.

Negligence is the cause of action where the plaintiff might assert civil tort against the defendant. For a negligence case to be upheld the plaintiff should definitely prove following conditions; first, s/he should prove that there was some duties on part of the defendant in conforming to a specific standard of conduct. Secondly, the plaintiff should prove that s/he has suffered some damages (Kimmel et al. 2006). Hence, even if the plaintiff proves that the defendant acted negligently, s/he might not collect the damages in case there was no evidence that s/he suffered any injuries. For a negligence to be upheld there should be prove that the defendant breached his or her duty that s/he owes to a plaintiff. The defendant might breach such duty through failure to exercise some reasonable care to fulfil his duty.

HIH would be willing to hire the previous participants of an external audit team since these members are relatively conversant with it; hence, would be easier for these members to carry out their audit of HIH financial statements. Furthermore, HIH might be willing to hire previous members of the audit teams since these members have some experience with several of the financial matters; hence, would take them lesser time to understand the financial statements as compared to new members. In essence, since these members could have been auditing the firm financial statement for some time, they understand clearly how the firm works as well as what could be done in order to improve its internal audit department. Furthermore, the firm could hire of the previous members of the external audit team since the teams could provide it with some insight of what the auditors are looking for and in case the personnel wanted to commit some frauds or erroneous act they could gain some insight and learn how better how to high such activities (Moroney, Campell and Hamilton 2011). Generally, this firm could be interested in hiring previous external auditor due to their know-how. For example in case the audit member has worked on specific engagement in HIH for numerous years, this member might understand more regarding operations of audited firm as compared to anyone else. In this case, there might be no other reason or agenda. Nonetheless, in case it consistently hires from its external audit teams, it would be unclear about the overall integrity of the company (Tahir, Idris and Ariffin 2014).

Inherent Risk Aspects Effecting HIH

Hiring of the same organization providing both consulting and auditing services could be advantageous. This is because a higher level of effectiveness would be gained by same organization offering both services since the company could leverage auditor’s deep understanding of it customer and it information system in offering extra or additional services. In addition, having same organization offering both consulting and auditing services could assist the company establish weaknesses during audit work and same could assist in closing this view (Tahir, Idris and Ariffin 2014).

Hiring the same organization to provide both consulting and auditing services would result to violation of the ethical standards.  This is based on the fact that the act could impair independence of the company in conducting their auditing work (Clout, Chapple and Gandhi 2013). Furthermore, such circumstance would represent violation of auditing ethical standards since it would impair the firm’s objectivity. This would in turn influence the company’s auditing opinion; hence, their auditing responsibility might be compromised. Generally, this circumstance could represent violation of ethical standard since the firm could ignore observation made during their auditing work and could fail to conform to their audit opinion since the firm is still offering consulting services which could in turn be a better proof of the firm’s weakness in its consulting services.

The main recommendations in this case is enrichment of independence. The second recommendation was strengthening of the financial reporting framework (Barret 2003). This is aimed at promotion of vibrant and strong economy as well as provision of a framework which assist business easily adapts to change. Furthermore, there was recommendation to enhance continuous disclosure provisions which apply to the listed firms. There is also recommendation to look for some civil consequences in case of contraventions of constant revelation by disclosing or auditing firms (Kleinman and Palmon 2001). Basically, there is a recommendation that CFO of an organization signs statutory declaration that an organization’s financial information are materially complete and faithful and that they comply with relevant acts. CLERP 9 and Ramsay Report also recommended that auditors should report to the ASIC any endeavour to coerce, mislead, influence or manipulate the auditors (Ladakis 2005). Another important recommendation for the auditors is to ensure that their duties are provided in a manner that ensures that financial services are provided honestly, fairly and efficiently. The CLERP 9 recommends that audit work is conducted competently and professionally, with full regard provided to shareholders’ interests, independence needs as well as professional ethics. The act also recommends regular rotation of the audit partners (Islam, Karim and van Zijl 2005). Furthermore, there is a recommendation for introduction of some statutory cap on the professional liability where auditors are put liable for exercising their duties unethically.

The Likelihood Being Liable

These recommendations would have significant impact on practice of auditing since it would help in amending the annual audit report for the listed firms to reveal respecting auditing requirements. In addition, such recommendation enhances substantial improvement in the auditing practice in that they would enhance consistency of the financial reports (Clout, Chapple and Gandhi 2013). For instance, the recommendation to seek civil penalties would make auditing firms more careful while auditing the financial statements; hence, reduced probability of presenting misleading reports or information in regard to an organization’s financial performance. Further, such recommendations would help in improving on auditing independence; hence, an improvement on auditing services or works (Chapple and Koh 2007). For instance, regular rotation of the audit partners would enhance independence of the auditing firm since there would be no continuity of knowledge. These recommendations would also improve on auditing work in that there would be reduced case of unethical practices during auditing.

References

Barret, P 2003, ‘Governance and Auditing in a Changing Environment in the Public Sector,’ Speech Charted Secretaries Australia, 4.

Chapple, LJ and Koh, B 2007, ‘Regulatory responses to auditor independence dilemmas–who takes the stronger line?,’ Australian Journal of Corporate Law, 21(1), 1-21.

Clarke F, Dean G and Oliver K 2003, Corporate Collapse: Accounting, Regulatory and Ethical Failure, Revised Edition, Cambridge University Press.

Clout, J, Chapple, L and Gandhi, N 2013, ‘The impact of auditor independence regulations on established and emerging firms,’ Accounting Research Journal, 26(2), 88-108.

Islam, A, Karim, AK and van Zijl, T 2005, Auditor independence and NAS: A comparative analysis of selected current regulatory frameworks.

Kimmel, PD, Carlon, S, Loftus, J, Mladenovic, R, Kieso, DE and Weygandt, JJ 2006, Accounting Buidling Business Skills 2nd edition. Milton: John Wiley & Sons Australia, Ltd.

Kleinman, G and Palmon, D 2001, ‘Understanding Auditor-client Relations: a multi faceted analysis,’ Wiener, Princeton.

Ladakis, E 2005, ‘The auditor as gatekeeper for the investing public: Auditor independence and the CLERP reforms-a comparative analysis,’ Company and Securities Law Journal, 23(7), 416.

Moroney, R, Campell, F and Hamilton, J 2011, Auditing A Practical Approach. Milton: John Wiley & Sons Australia, Ltd.

Tahir, FA, Idris, KM and Ariffin, ZZ 2014, ‘Dimensions of Auditor Independence: A Pilot Study,’ International Journal of Business and Management, 9(6), 72.

The HIH Royal Commission 2003, “The failure of HIH: a critical assessment”, in The Failure of HIH Insurance, Volume 1: A corporate collapse and its lessons, April, Commonwealth of Australia.

Unger, D 2002, Contract Audits: Contingent Fees and Confidentiality. J. St. Tax’n, 21, 76.

Von Wielligh, SP 2004, ‘High inherent risk elements in financial statements of listed South African long-term insurers,’ Meditari: Research Journal of the School of Accounting Sciences, 12(1), 195-217.