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Executive Summary - Essay Assignment

Auditing And Assurance Services (University of Wollongong)

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Abstract

Auditing profession act as an essential part in industrialized market for a long time. The way of auditing is
controlled in the field of Insurance. The collapse of Health Insurance Holdings (HIH) was documented as the
greatest corporate crumpled ever in our economy market. There are two inquiries to be measured in the
failure of HIH Insurance: Is the auditors actualize their obligations and parts? Is the auditor satisfy their
inspecting job morally? This essay deliver an investigation of reviewing issues emerging from the crumpled
of HIH Group. From the factor that have offered ascend to the corporate failure of HIH Insurance that of the
ethics of auditing profession, roles of auditor and effectiveness of audit committee have regarded as
particular significance and viability of review board of trustees have viewed as specific centrality.

Introduction

HIH Insurance was established in 1968 and grow as one of the biggest company in Australia.
Unfortunately on 15 March 2001, it was placed into a process where comes as a part of the corporation
insolvency laws of a number of common law jurisdictions which known as Provisional liquidation .HIH
Insurance was recognized by Michael Payne and Ray Williams and its recognized as MW Payne Liability
Agencies Pty Ltd. In 1968, HIH Insurance was formed into a legal corporation by Michael Payne and Ray
Williams where they build up an insurance company providing Underwriter services in Australia. HIH
operation were remarkable and globalized, follow with dealings running in various places for example: UK,
Hong Kong. There are two different types of insurance which is compulsory insurance (for instance,
employee’s compensation and non-compulsory insurance (Kehl, 2001). In time of liquidation, with an
exceeding of more than 200 subsidiary companies composed of HIH insurance group stuck at a confounding
circumstances. As company operations end, the remaining assets of $939million at 31st June 2000, based on
the priority of their claims, the second largest underwriting insurance company in Australia was HIH
Insurance.

HIH Group was experienced provisional liquidation with a remaining debts of around $3.6billion to $5.3
billion in the year of 2001. The crumpled of the HIH Insurance was viewed as the biggest corporate disaster
in the historical backdrop of Australian market. In this way, the breakdown contributed to the foundation of a
Royal Commission to make an examination on the degree of which practices and behaviors of employees,
directors, auditors, advisors and actuaries offer ascent to HIH Insurance failure or concerned unfortunate
organization practices designated by the Australian national government (Mirshekary, Yaftian & Cross,
2004).

2. Issues
Audit Independence

First and foremost, one of the major issue involved from the fall of HIH Insurance was audit independence.
It alludes to provide a fair and square judgment in the auditing report, performance evaluation on audit tests
and the conclusion of the audit assessment. Traits and qualities of an auditors were one of most urgent
significance. Nevertheless, independence is essential standards of fairness and honesty (Arens, Best, Shailer,
Fiedler, Elder & Beasley, 2010). Anderson was caught by the Commissioner for not self-regulating and
insufficient of proficient audit assumptions and also lack of beliefs about the responsibilities as a
professional bodied. This were stated in the history of Insurance business by the HIH Royal Commission.
(Mak, Deo & Cooper, 2005). Arthur Anderson were responsible for the audit in HIH Insurance since he
joined the Insurance group in the early of 2001(The HIH Royal Commission, 2003). There are few evidences
were discovered when assessing the independence of Arthur Andersen by Justice Owen. There are three
previous partners of Andersen were discovered in the Board of Controllers of HIH Group: ‘One of his
partner was consistently remunerated under a consultancy contract; Another was detached from the team
after consultation with top executive and the chief financial officer (CFO) was his previous partner” (Mak,
Cooper, Deo & Funnell, 2007). ‘When the amount of audit charges paid to Arthur were rise, Arthur wanted
to lessen the work contribute in the audit team” Next, Geoffrey Cohen as Chairman of Board also an ex’s
partner of Anderson was rewarded in consultancy charges with totaled of $190,887.60 for 9 year with the
administrations and usage of office. Perceived in second part in the Code of Ethics, threats of intimidation,
familiarity, support, advocacy, self-audit and intrigue are considered as threats of independence.

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As stated in Corporation Act, the closeness of a relationship could carried a threat of independence to auditor.
According to these situation, Arthur showed the lacked of independence as a professional auditor.
Furthermore, the auditing practice statements (AUP) 32 declared; the acting advisory capacity in accounting
or auditing matters, there shall not be any officer to be rewarded with any remuneration from any externals.
However, the general conference of the management were not revealed on the total installments from
consultancy charges. Perhaps results in an absence of independence in doubt (Mirshekary et al., 2004)

Audit Committee

Royal Commission’s report have identified that there was a flaw practice in the governance of HIH
Insurance’s effectiveness among the audit committee (Johnson, 2014).
Arens et al (2010) stated that the subcommittee has the responsibilities to supervise the independence of the
audit function. The corporate governance has elements which includes audit committee which supports the
Directors to ensure satisfaction of the particular company as stated by the Institute of Chartered Accountants
in Australia and CPA Australia (2004). It’s common for the non-executives to enable the committee to be
accountable and to ensure there is none facing of trade-off (Mirshekary et al., 2004).

As stated by the Royal Commission, Geoffrey Cohen failed to deliver the performances of audit team.
Geoffrey Cohen and other senior management appeared in the majority of the audit committee meetings.
According to the counsel from Royal Commission mentioned that “the management did not revealed the
evidence in the general meetings of auditors. This indicates that the management of HIH Insurance not
regulated according to Standard of Procedure (SOP). Last but not least, there are doubts from his various
identities from acting objectivity in Board of Audit (Mirshekary et al., 2004)

Ethical Considerations

The corporate failure of HIH Insurance had arisen some ethical and moral issues related in the field of
auditing. Ethics refer to a progression of good qualities or standards. Ethical dilemma could cause numerous
complex situations and caused professional auditors to get stuck in the difficulty. When an individual
standing at the point of situations which require trade-off was known as Ethical dilemmas. (Arens et al,
2010). Fairness, honesty, confidentiality and professionalism along with legal obligations were the ethical
traits expected on auditors when inspecting their work .This five ethical standards were recognized by the
Framework for Assurance Engagements. (Arens et al, 2010). Auditors were expected to obey with ethical
principles while bringing in the greatest advantage of investors. During the time of year 1997 to 2000, Arthur
was remunerated $5.1million in audit charges as well as rewarded $2.8million in non-audit fees from HIH
Insurance (Johnson, 2004)

Additionally Andersen earned $5.097 million as far as examining the money related articulations of HIH
Group as well as rewarded a total of $2.824 million from proposing a non-review administrations in the final
three budgetary periods of HIH Insurance. Regardless of whether the source of non-review administrations
was moral: earning best advantages of investors ought to be prioritizes. As of now specified, "Since HIH
administration were hesitant to build the measure of review charges paid to Arthur Andersen, Arthur
Andersen tried to decrease the measure of work performed on the HIH review " were expressed in remarks
of Mr Martin.
The supply of non-review benefits by Anderson should likewise be taken the moral predicament of having an
obligation of care to outsiders in thought. He additionally communicated with Andersen agree to the
utilization of these arrangements in assist articulations (Mirshekary et al., 2004). A previous bookkeeper,
Jeffrey Simpson expressed where the nearby association between HIH Insurance and Arthur Andersen
empowered HIH Insurance use of forceful bookkeeping strategies. With respect to reflect his's obligation and
duty of care to deliver a sentiment to investors which the announcements introduce a genuine and reasonable
vision, the understanding of Arthur is untrustworthy being referred to and the inspectors' respectability in
weight circumstances.

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The Sarbanes-Oxley Act of 2002 (SOX) is a law endorsed by U.S. Congress to prevent shareholders from the
possibility of undergo any corporate fraud. The main objective is to improve the control of corporate
governance and financial disclosure from any accounting practices. Several issues were raised involving with
Australian Auditors after the endorsement of Sarbanes Act in the industrialized economy.
Section 302
This Section act as a main provision in Sarbanes Act. It prohibited corporate malpractice and corporate
fraud. First and foremost, this law amend and fix the auditing control relating with security legislation.
Section 302 directs that all reported financial statement were compulsory to verify by top officers to ensure
the accurateness. After the signing officer had verified and signed the financial reports, they were
automatically responsible for the financial disclosure issued. Nevertheless, the Australian Auditors are
required to make evaluation on the performance of financial reports involving the internal control enforced in
the company within 3 months.
Section 404
This section forces corporate administration and auditors to implement strong internal controls and the
standards ways of recording in any financial disclosure generated. If the fraud is detected, the CEO of the
company will be facing criminal accusation. The criminal penalties were arisen when different kinds of
financial malpractice and corporate fraud were detected. An overview assessment of the audit report were
required to prepare to examine the efficiency of the internal control implemented. This improve the fairness
in financial reporting and ensure the accurateness of auditing disclosure. Also, this section resolved major
issues faced by Australian Auditors in financial reports and governance control.
Requirements
Under Sarbanes Act, auditor watchdog who known as PCAOB were created to established standards for
financial reports. All auditors from public corporate were directed to register with PCAOB. Besides, firms
had strengthen internal control and enforced with higher compliances after the investigation from the
“WatchDog”. With the rotation of duties and role would lessen the threat of experienced or senior auditors in
the company from practicing fraud. This law was introduce to prevent any negligent professional practices
when corporate scandals dispute the belief in shareholders and caused threats to the profit of the business.
In a nut shell, the enforcement of Sarbanes Act has improved auditing, amend the accounting industry with a
better adjustment of financial standards, and resolved corporate disaster such as Enron. Several issues
involving with Australian Auditors that were more controls were set up to ensure the accurateness and
fairness when generating financial audit reports in order to prevent any corporate fraud in industrialized
auditing industry.

Conclusion
In a nut shell, this report talks about the reviewing problems of the crumpled of HIH Insurance in the region
of audit independence, review panel and moral contemplations. In connection to Andersen's managing HIH
Group, concern with the review accomplices as well as connection between senior HIH administrations
ready to focus on the autonomy of Andersen. Secondly, is focused on the part of auditors’s consideration of
HIH Group when the company collapse. As to the moral contemplations that emerged from the crumple of
HIH Group, specifically, the arrangement of Andersen's non-review administrations to HIH Group, is the last
review problems.

Reference List
Arens, A.A., Best, P., Shailer, G., Fiedler, B., Elder, R. J. & Beasley, M. (2010). Auditing, Assurance
Services and Ethics in Australia (8th ed). Accessed on 05 April 2018

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Frenchs Forest, N.S.W.: Pearson Australia CPA Australia and the institute of Chartered Accountants in
Australia. (2004) Accessed on 06 April 2018.

“Auditing Handbooks”, Prentice Hall, Sydney. Johnson, R. (2004). Accessed on 05 April 2018

READINGS IN AUDITING. Milton, Qld: Wiley.Kehl, D. (2001) Accessed on 06 April 2018

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https://prezi.com/q1l75kpyq-pg/the-collapse-of-hih-insurance/ Accessed on 11th April 2018

https://www.ukessays.com/essays/business/collapse-of-hih-insurance.php Accessed on 12th April 2018

https://treasury.gov.au/publication/economic-roundup-issue-1-2015/economic-roundup-issue-1/the-hih-
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https://www.iag.com.au/sites/default/files/Documents/Government%20submissions/G2002_hih-
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