Business Risk and Inherent Risk Assessment
Evolution of Risk in Business of HIH
Risk is the threat or situation of danger which is present in every business. No business can run and achieved its aim and objectives without getting exposure to such risks. Business risks are the situations of danger occur while doing the working of the organization. Considering the given case, the business risks are always present in every business and the quantum of risk depends on the complexity in business. Such business risks identified should be removed or should consider while doing the business transactions. After analyzing the situation given under consideration, the major business risks are related to business combinations done by the company. The company done business combination in form merger in the year 1995 and name has been changed to HIH Winterthur. Winterthur invested in company to increase its wealth. He is able identified the future danger signals and demerged from company and the name has been changed to HIH Insurance Limited. He has done this step by knowing the fact that the policies and procedures adopted by the management of the company can lead huge amount of losses in every filed. This shows inaccurate and insufficient procedures adopted by the HIH Company for doing business combination. Even the management is not able to fully utilize the amount invested by Winterthur in company. Similarly, the company has considered that the business combinations done by the company in the 1998 in form of acquiring the shares of FAI company at the premium from one of the officers of the company. This purchase of shares has been done by the management key personnel without following proper business ethics. The value of these shares become zero in the year 2000 and led the company in losing huge amount of money. Also, HIH Company has invested in high volatile risk shares of Marine insurance, Fire Insurance, Film Financing, etc indulging the company into high exposure of losing money. So, in conclusion the business risk can be ascertained (Jiangbo, 2003).
Contribution and Identification of Inherent Risk Factor
Threats are the possibility of danger situation occurrence present in every business. Risks can occur by not following the proper rules and regulations by businesses. Financial Reporting of any organizations contains Inherent Risk, Detection Risk & Control Risk as laid down by different authorities defining the risk. The risk which occurs due to the inherent limitations present in the company is called Inherent risk. These inherent limitations present in the company by having lack of knowledge of good business practices to be followed by the company from the incorporation of company. Since, these risks cannot mitigate over the period of time and day by day exposure of the danger increases, the company with inherent risk generally comes in ambit of liquidation and resulting in high losses. The good internal procedures adopted by the company helps in reducing the degree of inherent risk. The advocacy of the internal procedures can be assessed only by independent auditor.
Legal Liability of Auditors
The inherent risk factors that contributed in increase in inherent risk assessment are as follows:
- Code of Conduct- The practice followed by the company plays major role in creating the danger situation in company. The business combination by acquiring the shares of high risk stocks like FAI at premium from one of the director, Marine and Fire insurance led to high chances of danger.
- Knowledge and Construction of Board of Company- The lack of knowledge of the key managerial persons in the Board enables the unethical practices being followed by the management. Also, the rotation in the Board of new personnel also led to hay way situations. This is the major risk because which demerger with Winterthur happened (World Bank, 2006).
Responsibility of Auditor in relation to Client and Creditors
External views on the affairs of any company without having any interest are what auditor does. The report provided by the auditor is considered as a base for investment and business combinations in any company as investor always assumed that the views provided by auditor were fully ethical and true and fair. The responsibility of the auditor arises in following events:
- The events listed in rules and regulations like Securities and Exchange Act.
- The auditor doesn’t represent the material facts related to fraud and error in his report
- The auditor doesn’t perform any task enumerated in the appointment letter.
- The auditor doesn’t follow the ethical code of conduct lay down for him by different authorities
- The auditor does not follow professional skepticism.
After considering the given situation, the facts and findings of relevant cases that Andersens should refer to establish the liability for auditor towards the Creditors and Clients are as follows:
Ultramares Corporation vs. Touche – This one of the history making case happed in 1932. In this case auditor has not performed his duties with full professional due and care in reporting the advice on the financial statements of the company. The Appellate court of New York has held that the suit for damages can be filed against the auditor by clients who relied upon the auditor report.
Credit Alliance Vs. Arthur Andersen & Co. – In the given case, the auditor should take into account the reporting requirements of clients and creditor before making the opinion about the affairs of the company. The auditor gives his reporting about considering the fact that it can be used by third parties to have reliance on the company. The European Am held auditor can be liable for this if any loss occurred to third party (Tata, 2010).
Circumstances for carelessness of Auditor:
Every auditor performs his duties with full ethical, professional due care. If any auditor is ding his audit by applying all the techniques for identification of fraud and errors, then it has been said that auditor has not performed the audit in ethical manner. There are certain circumstances in which auditor performs his work carelessly. These are:
- The auditor has deliberately fails to check the accounts even though he aware about the facts that there is material misstatement in books of accounts of the company
- Vouching and verifications tools of audit have not been properly used by the auditor while conducting the audit.
- Audit procedures as laid down by various rules and regulations such as compliance and substantive procedures not followed by auditor
- Disgustingly carelessness by the auditor while doing audit.
Engagement of Independent Auditor
The HIH Company should engage the External auditor to give his reporting in true and fair manner because of the following reasons:
- The external audit team will always have necessary experience and skill which they exercise with due professional care while reporting on different matters of financial statements of the client.
- Due to frequent communications among internal auditor and the officers of the company, there are chances of getting joint frauds created by employees and auditor. The external auditor helps in reducing such frauds.
- External auditor will apply compliance and substantive procedures in depth before giving the opinion. This will enhance the reliance of investor in the company and increases the investment for company.
If the company hires the external team member from his previous auditor team, then the degree of above benefits will increase as he has vast knowledge of the business of the company as well.
Benefit in including Audit and Non Audit services in the scope of auditor
The rules and regulations framed by the Accounting bodies governed the working of the auditor prohibits the auditor to perform the non audit services like accounting, taxation along with framing opinion on the financial affairs of the company. If the auditor perform both the services then the company has benefits as below:
- Better understanding of client business- The same person doing consultancy and reporting will have good knowledge of client business in addition to the policies and procedures followed by the company. This enables the auditor and company to remove the degree of Control, Inherent and detection risks in the company environment.
- Less Costs on Training- If the audit team is performing consultancy services then the cost can saved in future training of audit staff in relation to understanding the client business.
- Detection of Frauds and Errors-The auditor can detect frauds and error at the early stage at the time of providing consultancy services so that they can be rectified or preventive actions can be taken by client (Verschoor, 2012).
Breach of Moral Principles of Audit
In the give case of HIH Insurance Company, the situations involve the breach of morals principles. The following are causes for hurting the moral principles:-
- If previous auditor appoints or the same person does audit and non audit services then collision among employees and auditor occur which hampers the true and fair reporting of the auditor.
- The service quality in relation to professionalism also decreases over the period of time is the breach of professional behavior.
- Undue influence can be created in such circumstances which are in breach of auditor independence.
Primary Recommendations and their effect
The recommendations in relation to improvements in audit practices made by Australian Government in Ramsay Report and are considered by Corporate Law and Economic Reform Program. The following reforms have been laid by the authorities:
- The disclosure should be made on regular intervals which enable the auditor to identified after which interval the violation of ethical standard happen and corrective actions can be taken.
- Increase in obligation of management by making compulsory reporting by the officers of the company in his annual report in form of remuneration reports etc.
- Enhancement in scope of reporting by auditor about the affairs of the company related to non financial matters as well.
- Increase in role of shareholders in the decision making of the company
The above recommendations helps in better true and fair reporting adherence to corporate governance and ethical standards applicable on company at any particular time frame (Robinson, 2003).
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.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
