Discuss about the Business Risk and Inherent Risk Assessment.
Imagine a situation where a company lost about 50 percent of its capital through dubious financial investments that have not been duly confirmed and authorized. The outcome is dire. It will only take one financial reporting for the corporate world to know that something has been going wrong. How one manages a business risk determines the value that will be realized by the shareholders. The role of the board of management and other senior executives in the corporate world is assessing business risks that may hinder them from achieving the organizational objectives (Hayes et al. 2005). The case of HIH Insurance Limited clearly confirms this statement. The company did collapse because it did not engage in extensive consultations before making significant investments and also because of failure to do due diligence to determine the viability of a given investment and the associated risk. In this analysis, the discussion will discuss various business risks and inherent risks associated with the company failure, the prevailing legal liability and the business ethics that all people charged with top leadership should exercise.
The business risk of HIH Insurance Ltd could be determined by looking at its business process and how decisions are made. From the company scenario, it is revealed that there is no clear decision-making process. The company did make major investments in the insurance industry by purchasing FAI Insurance, World Marines and General Insurance and Cotesworth. It did this without elaborate board members consultations. Further, the company did accept investment deals without carrying out due diligence. This possesses a very serious risk because the business was not able to identify what such moves have for the company and the long-term effect. The risk aspect was not taken seriously before making any financial decision. In simple terms, therefore, the assessment of the business risk is founded on how decisions are made (Hayes et al. 2005). Given the evidence from the company like forming the merger with Winterthur and the managing of business operations that were not open and transparent, clearly, demonstrate the business risk assessment situation for HIH Insurance Ltd.
The following are the inherent risk factors affecting HIH
Omission: The specific omission that amounts to the inherent risk of HIH Insurance Ltd is the authorization of the prospectus issue on the October 26th, 1998 by the Chief Executive Officer (CEO), Mr. William. The prospectus did omit some important information about the company activities which could have informed the stakeholders on the company prospectus.
Fraud: This is also another inherent risk associated with the company. This is demonstrated by the case where Mr. Howard was charged with criminal misconduct. He did receive $124,000 from Mr. Brad Cooper to facilitate the payment of $737,000. Howard did authorize the payment even though it had already been discharged. This was money lost.
Top management behavior: The top management also seems not to work as a team. The directors can make major decisions individually with involving the others. This is witnessed from the signing of reports by the CEO without the endorsement by the other directors.
Misrepresentation: This is one of the common inherent risks in the company. The CEO used to sign statements which were not and thus misguiding the stakeholders. The director did sign misleading letters apart from signing the reports that overstated the operating profits in the period 1998/1999. The report showed $92.4 million before abnormal items and income tax.
These factors if detected could have an inherent risk assessment. However, because they were committed without the notice of the other stakeholders, it is hard to stop them. This is an issue of governance and how they contribute to important matters affecting the company. The assessment of these risks will have protected the company from bad practices and mismanagement of resources.
In Australia, the insolvency rules and other regimes high regard both the clients and the creditors during the liquidation process (ICLG, 2017). This is to say that they have a right to claim to be paid what the companies owed them during the sale proceeds. This is to say that the clients and the creditors will stand a chance of getting paid at the end. However, this depends on some factors that as raised in the case of Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation) [2014] FCAFC 133 – 8 October 2014. The defendant was liquidating while the complainant (Commissioner of Taxation) was seeking direction from the court on how the accruing taxes will be paid. From the sale of the company real estate property, it managed to get $1.2m. The plaintiff wanted to get a binding as guided by Section 254 of the Income Tax Act (1936) to have all accruing taxes paid before any other payments can be made (Meyer, 2014). The complainant wanted the liquidator to fully account to the commissioner of taxes before any notice to assessment can be given. This was necessary to ensure that the Commission did get its rightful share as required by the law since the sale of the company property was a business transaction and therefore liable to paying tax.
The issue in court was to determine under section 254(1) (d) of ITAA 1936 if the Commission was to be paid the full tax liable amount owed by the company before giving any priority to any creditors. The tax law requires the liquidator to be enjoined in such a case because of his or her role as a trustee. As a trustee, one serves the responsibility of making retains from business proceeds to pay the tax.
Following the submissions of both parties and the application of law, the judge did issue a cautionary statement about the distribution of sale proceeds. The liquidator was required to be prudent and retain part of the proceeds to pay for some other obligations. The court also required the liquidator to retain the proceeds until the exact position of the tax liability was established.
In essence, this case forms a critical background in the case regarding HIH Insurance Ltd. The case proofs that the clients and creditors can hold the liquidator liable, however, for one condition. All state obligations must be first from the capital gains. It, therefore, means that the two can be paid, if the full amount or not will depend on the balances after paying the tax (Hayes et al. 2005).
The following conditions must exist for the negligence action to be held:
Presence the duty to care: HIH Insurance Ltd had the duty to care both for their clients and the creditors. The company was expected to act in a reasonable manner to protect their interests. However, the company was irresponsible, and their actions were irresponsible.
Breach of one’s duty: Further, the company did fail to act in a reasonable manner towards its clients and creditors for not sharing with them correct information.
The injury caused: The clients and creditors were injured because they were not paid for the services rendered.
The existence of monetary losses: The services provided by the clients and creditors can be quantified in monetary terms.
The company wanted to hire prior members of this external audit team to come and destroy the evidence of the wrongs that had been done in the company. This clearly demonstrates a failure in business ethics since there is a clear conflict of interest. The direct cannot do oversight role of themselves since they will not give factual business position (Gückler & Armbrüster, 2003).
The following are the advantages of a company having the same firm carry out both the auditing and the consultancy services:
Economies of scale: Because of the amount of work which is huge, the company can be able to bargain and get a better deal regarding cost savings. This is because costs like negotiation costs will be constant.
Promoting professionalism: It is also important for the company to understand that the firm that does the auditing understands the company systems better and can give more practical recommendations (Hayes et al. 2005). This is because they have first-hand information about the business scenario and the challenges being faced.
Even though the recommendations are a major milestone in the corporate world, they may not have a major impact. This is because the recommendations have clearly stated what the consequences are for those partners that do not follow them.
Conclusion
This report has critically analyzed the concept of Business risk and inherent risk assessment with particular reference to the case of HIH Insurance Ltd. The company forms one of the major companies that have collapsed not only in Australia but globally because of the inherent risks committed by the leadership team. The inherent risks cause major shake-ups to businesses if not managed. The effects of inherent risks are dire and they affect many stakeholders including the clients and the stakeholders. These groups hold a liability case towards the liquidated company because of the pending bills. The problem of inherent risk is mainly caused by the acts of the board of governors. In general, to avoid the recurrence in the future, other recommendations alongside Ramsay Report and CLERP 9 have to be enacted. This is to send a stern warning to the perpetrators.
References
Gückler, J & Armbrüster, T 2003, Bridging uncertainty in management consulting: The mechanisms of trust and networked reputation. Organization Studies, 24(2), 269-297.
Hayes, R., et al. 2005, Principles of Auditing. An Introduction to International Standards on Auditing, Prentice Hall
ICLG 2017, Corporate Recovery & Insolvency, June 24th, 2016, available at https://iclg.com/practice-areas/corporate-recovery-and-insolvency/corporate-recovery-and-insolvency-2016/australia
Meyer, V 2014, MV’s Top 5 Insolvency Cases for October 2014, November 1st, 2014. Available at https://www.meyervandenberg.com.au/property-construction/mvs-top-5-insolvency-cases-october-2014
The Federal Government, 2001, Ramsay Report recommendations into audit independence, available at https://www.johnwiley.com.au/highered/auditing/lecturer-res/current_affairs/2002-05/2002-05-2.pdf
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