HIH Insurance’s Business Risks
Discuss about the Insurance and Law of Obligations.
The business risk is defined as the possibility regarding an organization will have lower profits than that was expected or it can also be said that the particular organization will have losses instead of profits (Tarr and Mack 2013). It has been found that generally the business risks are influenced by different factors such as – price per unit, sales volume, input costs and overall situations like competition, economic climate and many more.
In case of HIH Insurance, the business risk assessment is provided below. It has been found that the particular business faces various difficulties due to its aggressive and expansive strategy. According to the case study, the particular organization HIH Insurance has also found to be entered into the markets, which are highly competitive and currently overcrowded. HIH Insurance has also acquired several organizations which have various issues. Therefore, this has resulted into various strategic risks of the organization. The organization ventured in the present market where the firm has less knowledge regarding the legal and business problems. Therefore, the particular firm faced various compliance risks. HIH Insurance also faced different fundamental issues regarding under pricing and inadequate reserve. It has also been noted that the HIH Insurance Company also proposed insurance at a minimum premium rate, however the particular firm failed to set away a fixed capital for covering its liabilities in its near future. In addition to this, this capital will also provide security to the particular firm HIH Insurance. Moreover, from detailed analysis it can be said that the specified company HIH Insurance have falsely represented the financial reports; the management of the firm was greedy, fraudulent and reckless (Damiani et al. 2015). All these factors have resulted into business risks of the firm. It has been found that all these risks have cause damage to the company’s reputation. Therefore, in case of HIH Insurance Company reputational risks are considered as one of the important risks that the particular firm faces. Thus, by assessing the risks of the company properly, it can be said that the firm will be able to manage them and can save the firm from getting collapsed.
- The cash balance of HIH Insurance was overly stated such that it could represent an increased amount of working capital.
- The company’s creditors were understated such that a high working capital could be represented (Sirtes et al. 2016).
- The company’s debtors were overly stated such that the working capital position could be improved.
- Lastly, it has been found that the financial condition of the particular firm was poor. Thus, the management of the firm has a pressure to exaggerate the sales data (Adams and Borsellino 2015). As per the case study, the management announced that the firm has achieved profitability targets and sales target but in real it did not achieve.
The royal commission of the HIH Insurance found that auditing, accounting and business factors are equally responsible for failure of the firm. Arthur Anderson completed external audit from 1971 till the year of collapse i.e. 2001 (Gamertsfelder 2016). It has been found that competent audit revealed the hostile accounting policy by HIH Insurance limited. Due to this, the liability of the auditors is considered as a vital factor. Presently, the auditors are subject to varieties of laws from contract laws to case laws and common laws.
Auditing Issues and Auditor’s Liability
An auditor’s role is very critical as it provides an efficient control in order to save from various errors and mistakes. For Pacific Acceptance Corporation ltd v Forsyth, auditor’s role is to express an opinion regarding the compliance of the financial reports to the relevant standards of laws and accounting (Gamertsfelder 2016). An auditor performs their duty with due care in case of Kingston cotton mill co, where the auditor requires competence and skills. As the numbers of users of the financial statements is huge, the liability of an auditor might extend to the creditors, investors (external users). Thus, an attempt was made for determining the auditor’s liability of HIH insurance limited to the external parties.
Auditor is liable for reasonable skill and care for preparing an audit of the company’s financial statements. For Pacific Acceptance corporation limited V Forsyth, the auditor was found to be negligent in performing his duties as he failed to inform regarding the irregularities and fraud about certain loans. Thus, here the auditor is considered liable for negligence.
For Esanda Finance Corporation V Peat Marwik Hungerfords, the applicant finance company suffered a loss as it gave loan to defendant client on the basis of audited financial statements (Ramsay 2015). Here, the court does not held the auditor liable as it was not prepared for use of finance organization. Therefore, as pr the particular case study, the high court overtly offered that auditors cannot be held liable for the neglectful misstatement.
An auditor uses the disclaimer for limiting the liability in case of financial reports that are supplied to the external stakeholders and shareholders. As per the case of Hedley Byrne V Heller, the disclaimer is efficient in Australia only if they are in accordance with the statutory obligations under the trade practice act and corporations act (Sisman et al. 2015).
For Pacific Acceptance Corporation V Forsyth, an auditor could not be excused for its negligence on the ground that the employees and the directors of the company was negligent. This was overruled in AWA Ltd V Daniels T/A Deloitte Haskins & Sells & Ors case. Here, the firm failed to take needed care for its protection, thus firm should be held proportionately liable with auditor. For Brown & Hatton V National Australia Bank case, the directors should bear proper responsibility for losses that the company suffered. This was considered as inappropriate for the directors in order to escape the liability by transferring the load of reimbursing external parties to auditors (Comino 2015).
Benefits and Ethics of Hiring External Auditors
Thus, on the basis of above case laws, it can be said that the an auditor is considered liable under negligence when the parties are entitled for recovering the losses from auditor. For HIH, the ASIC investigators raise various questions about the role of auditor. The auditors cannot be considered liable to the creditors on the basis of the case Esanda Finance Corporation V Peat Marwik Hungerfords (Adams 2013).
It has been found that there are mainly four elements in the negligent case. These are – duty, cause in fact, breach of duty and proximate cause and damage.
- Firstly, determination of the auditor regarding any duty to the applicant is a vital factor. For this, relationship between the applicant and auditor is counted in order to ascertain the duty (Merkin and Steele 2013).
- Secondly, determination of the auditor has failed in performing any duty. The liability for negligence arises when auditors fail to perform his duties.
- Thirdly, the plaintiff should prove regarding the auditor’s action that has caused real injury. It can also be said that if the auditor has not performed the action, then plaintiff might not suffer from the injury.
- Fourthly, auditor is liable for damages that it might have foreseen.
- Lastly, the plaintiff should prove that negligent action of auditor that might cause real damage.
An organization might hire a member of its external audit team and there are various reasons for that the purpose. These include:
- External auditor is habituated to with the regulation of the firm.
- Auditor has an experience with various financial matters of the firm
- The firm’s management has to work closely with the auditor such that the management might have a good relationship with auditor.
Benefits for engaging external auditors for the service of consulting are as follows:
- Auditor has considerable knowledge regarding client’s business. Therefore, he can provide effective consulting facility.
- Generally the auditors are familiar to the business, thus, both effort and time are saved for merely knowing the entity (Bonner et al. 2014).
- Auditor is able to provide with unique solution to all the problems.
- When auditor himself plays the role of a consultant, then savings in costs take place.
The ethical issues found in HIH Insurance limited are all related to auditing that have resulted into collapse of the firm. Ethics are a series of moral values but auditors get stuck to different complex situations that turned into ethical dilemmas. An auditor should act according to the five ethical standards – confidentiality, objectivity, integrity, professional behavior and professional competence and for best interest of shareholders. HIH Insurance has paid a huge amount for both non-audit and audit services. Therefore, it should be considered that whether it was ethical or not to serve for such non-audit fees by taking into account the shareholders’ interest (Drinnan and Campbell 2015). It has been found that the audit fees of HIH Insurance was not increased by its management, thus Andersen reduced the total work amount on the audit of the firm. Moreover, it maintained good relationship with management in order to take up non-audit services and to raise its fees. Close connection between audit firm Andersen and HIH Insurance has provided it follow hostile accounting policies. Auditor is required to give an opinion regarding the financial statement, however this agreement of Andersen is unethical as the auditor is in a pressure condition.
The Ramsay report and the CLERP 9 discussion paper have served with various recommendations in order to enhance the auditing function (Merkin and Steele 2013). The main recommendations are as follows:
- An informed individual should not conclude that auditor is dependent.
- Proper disclosure should be made in the annual report of the firm. This report should also have a statement from the committee of audit regarding their satisfaction about the non-audit services.
- The engagement partner and the review partner should rotate after each five years and there should be a waiting period of two years for an audit partner in order to join the firm as a senior manager.
These recommendations provide aims to affect the auditing functions positively. An independent professional should perform the auditing in order to obtain opinion regarding the financial statements. These recommendations also provide enough safeguards regarding the employment of audit partners. Thus, all the recommendations will help to enhance the auditing functions and all the changes have positive influence on the practice of auditing.
Reference
Adams, M. and Borsellino, G., 2015. Is there a positive link between corporate governance and board diversity? Lessons from Asia. Journal of Business Systems, Governance & Ethics, 10(1).
Adams, M.A., 2013. Leighton’s character, complexities and conflicts.Keeping Good Companies, 65(11), p.676.
Bonner, G., Hunt, S. and Watson-Dunne, N., 2014. Interim report into the financial system. Government News, 34(4), p.555.
Comino, V., 2015. Australia’s’ Company Law Watchdog’: ASIC and Corporate Regulation. V Comino, Company Law Watchdog-ASIC and Corporate Regulation (Thomson Reuters, Australia 2015).
Damiani, C., Bourne, N. and Foo, M., 2015. The HIH claims support scheme. Economic Round-up, (1), p.37.
Drinnan, R. and Campbell, J., 2015. Class action risk: Now and in the future.Governance Directions, 67(9), p.537.
Gamertsfelder, L., 2016. Disclosure laws and class actions: An irresistible relationship. Governance Directions, 68(5), p.276.
Merkin, R. and Steele, J., 2013. Insurance and the Law of Obligations. Oxford University Press.
Ramsay, I., 2015. Increased Corporate Governance Powers of Shareholders and Regulators and the Role of the Corporate Regulator in Enforcing Duties Owed by Corporate Directors and Managers. European Business Law Review, 26(1), pp.49-73.
Sirtes, G., Lo Surdo, A. and White, R., 2016. Corporations law and class actions: Court recognises indirect or market-based causation in shareholder claims. LSJ: Law Society of NSW Journal, (23), p.80.
Sisman, F.A., Yozgat, U., Abunaz, E. and Ozarslan, T., 2015. Importance of transparency on sustainable success orientation. Research Journal of Business and Management, 2(3), pp.366-379.
Smith, H., 2015. Australia’s Company Law Watchdog: ASIC and Corporate Regulation.
Tarr, J.A. and Mack, J., 2013. Auditor obligations in an evolving legal landscape. Accounting, Auditing & Accountability Journal, 26(6), pp.1009-1026.
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