Auditing For HIH Insurance Ltd: Inherent Risks And Ethical Implications

Inherent risks of HIH Insurance Ltd

Discuss about the Auditing for HIH Insurance Ltd.

In relation to HIH Insurance Ltd, it is notable that its insurance business failed to function in an appropriate way, thereby resulting in the appearance of various kinds of risks. In other words, the way by which a proper business must work, could not be undertaken by HIH Insurance Ltd. The key reason to such improper functioning of the company can be attributed to an improper due diligence process and other statutory compliances, thereby forcing Winterthur Insurance to withdraw their interest. In relation to the business risk of the company, it must be kept in mind that investment of public funds in the company must be looked after in an appropriate way. Moreover, such companies are responsible for undertaking prior precautionary measures by adhering to various statutory provisions and maintaining effective due diligence processes (Heeler, 2009).

Furthermore, in order to assess business risks of HIH Insurance Ltd, it must be noted that every company must adopt a proper study of market and relevant understanding of their businesses, but this was not prevalent in the case of HIH. Moreover, since the company had attained several businesses and diversified its operations into segments like marine, aviation, etc, without proper due diligence and permission of the Board, various associated risks started to emerge. On a whole, due to lack of proper research into several businesses, the company failed to adopt provisions based on claims settlement. Nonetheless, these irregularities damaged the company’s capital structure and made it vulnerable (Christensen, 2011).

All the irregularities of HIH Insurance played a key role in enhancing the inherent risk factors. A major setback happened when it took over FAI Insurance at a premium rate. Moreover, prior to such takeover, the company did not undertake proper due diligence processes. This loss became a major disadvantage for the company when it bought the shares of FAI at a premium rate. Furthermore, second risk factor relates with the discontinuation of industrial measures of maintaining prudential standards by the company. Since these standards assist in safeguarding contingencies and natural disasters, the company introduced reinsurance policy instead of these, thereby enhancing its inherent profile of risks (Mock et. al, 2013). Thirdly, the huge sum expended for auditing and consulting services by the company, its accounts, and other activities depicted various flaws that make it questionable in the minds of others. This also resulted in enhancing the inherent risk profile of the company. Furthermore, lack of non-executive auditors and directors’ independence made the company’s vigilance complicated (Cappelleto, 2010). Therefore, under-reserving measures, incapability to pay off liabilities, the absence of proper supervision, etc, played a role in increasing the inherent risks of HIH Insurance. Lastly, purchasing companies having a relationship with its competitors also destroyed its position because competitors always desire for such opportunities to arise. Hence, these are all the inherent risk factors that contributed to an increase in the inherent risk assessment of the company.

Factors contributing to an increase in the inherent risk assessment of the company

In relation to HIH Insurance, it can be witnessed that the directors of the company fraudulently utilized the funds invested by the public, by issuing and holding current annuity rate policies. Moreover, such a scenario was also prevalent in the court case of Equitable Life Assurance Society vs. Hyman wherein the directors of Equitable Life allotted various bonuses to the policyholders against the accepted terms and conditions. Therefore, because of such fraud, Equitable Society was held liable and terminated by the House of Lords. Hence, Anderson can take into account such a court case in ascertaining the possibility of the partnership being held responsible to clients.

Furthermore, in relation to the partnership being liable to the creditors, Anderson can take the court case of Harris vs. Balk into account for future reference. Besides, this court case can assist in encountering the declaratory knowledge of the partnership. In this case, it was held by the Supreme Court that the personal service wherein the court stays is appropriate, could offer court personal influence over it. Besides, the situs of a debt aligns with that of the debtor (Kaplan & Williams, 2013.

Negligence generally comprises of something that an ordinary or reasonable individual would not commit or running away from committing anything that an individual would do after scrutinizing the scenarios (Gilbert et. al, 2005). Hence, if a person intentionally falsifies or contravenes the rules and regulations by taking signatures of policyholders without their permission, it is termed as intentional negligence and punishable as well. Therefore, to ascertain negligence to be upheld, an act of contravention is compulsory, and there must be a proper duty. Besides, it is upon the jury to decide whether an act is a negligent one or not. For this purpose, both plaintiff and defendant must bring forward relevant matters in order to allow the jury to make a proper It is upon the plaintiff to prove whether any injury or loss has occurred because of the defendants’ negligence. Similarly, the defendant must undertake proper care to the plaintiff, or else the jury may rule the judgment in the favor of the plaintiff. After bringing forward their matters, the lawyers of both plaintiff and defendant must bring their claims so that the jury is convinced of the actual happening.

In relation to HIH Insurance Ltd, its management consisted of three prior partners who worked in the audit firm. The company wanted to hire these prior members of the external audit team because according to the company, such team was already well known with its operations, and therefore hiring the same team would fetch them more opportunities for the future. Moreover, this can assist in effective risk management and the parties can procure an effective level when prior members work in the team. However, it was shocking that investing huge amounts of resources in auditing and consulting services, many loopholes generated, which concludes that such prior members were hired to manipulate the company accounts.

Negligence, fraud, and liability in relation to HIH Insurance Ltd

It is the auditors’ duty to understand the business functioning and report in case of any irregularities to the Board. However, in the case of HIH Insurance Ltd, provision of auditing and consulting services by the same firm has raised many objectives. Nevertheless, it has also been witnessed that such combination of services through the same firm can assist in developing expertise in several areas of business that no other consultant can cater to. Furthermore, with an enhancement of a number of transactions in today’s businesses, substitute choices such as consultancy, etc, looked after by the auditors are very beneficial in enhancing business operations. In addition, services associated with taxation policies and human resource management can also be offered by such audit firms that are effective for enhancing judgments. On a whole, the more understanding of business procured by auditors, the more developed will be the provision of consultancy services (Baldwin, 2010). Hence, provision of both auditing and consulting services through a single firm has its own limitations and advantages, but it depends upon the management to make proper decisions regarding selecting such firms.

As per the rules designed under the ethics code, an auditor can offer consultancy services as well as auditing services. However, an auditors’ independence must not be deteriorated because of such decision, as it directly influences the judgment by making it biased (Sawyer, 2013). Furthermore, there are specific scopes under such code of ethics that avoid the operation of auditing services against the well-being of the company (Hoffelder, 2012). In other words, if an auditor offers consultancy services that are associated with taxation policy or human resource management, it is ethical. However, if such an auditor also plays a key role in managing the books and accounts of the company, it is considered unethical by nature. Hence, in relation to HIH Insurance Ltd, it can be witnessed that the hiring of previous partners of the external audit team is unethical by nature, as they failed to report any loopholes and irregularities prevailing in the company’s operations.

In relation to HIH Insurance Ltd, it can be witnessed that because of improper decisions and ineffective management on the part of the company, various risks arose that resulted in its downfall. Besides, this example can be very relevant in the case of any insurance businesses. Hence, to avoid any kind of such incidents in the upcoming tenure, the CLERP and Ramsay Report designed several strict frameworks that must be followed by every insurance company. Moreover, the prime goal behind such introduction was to replace the irregularities in the present system. On a whole, it can be stated that the processes of the audit are crucial for the smooth functioning of a company, as it assists in assessing the true and fair value of its financial position. In addition, adherence to every other statutory provision is compulsory as it assists the companies to enhance their reputation in the market, thereby enhancing their performance as a whole (Parker et. al, 2013). Moreover, these statutory compliances also accommodate undertaking of prior due diligence before making any relevant decision that can affect the company’s operations, thereby resulting in its downfall. 

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, 88(1), 199-232.

Mock, T. , , Bédard, 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.

Sawyer, L 2003, Sawyer’s Internal Auditing,  Institute of Internal Auditors.