Auditing in Business: Analysis of Collapse of HIH Insurance and ABC Learning

This report analyzes the ways in which auditor’s processes, professional and ethical behavior issues resulted in collapse of HIH Insurance and ABC Learning. The report revealed that audit failure was observed to be the major cause behind collapse of these companies and the mismanagement of affairs was observed through observing lack of attention to detail, absence of performance accountability along with absence of integration in internal processes of these companies. Certain recommendations were also offered such as nonadherence with the corporate governance and ethical standards by the companies are required being decreased through appointing effectible authorities those can implement stringent regulations in penalizing the associated members.

Running head: AUDITING IN BUSINESS
Auditing in Business
Name of the University:
Name of Student:
Authors Note:

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Executive Summary
The concern of audit independence has fundamental importance in analyzing the corporate
collapse of HIH Insurance and ABC Learning Company. Considering such statement, the current
report to analyze the ways in which auditor’s processes, professional and ethical behavior issues
resulted in collapse of selected companies named HIH Insurance and ABC Learning. The report
revealed that audit failure was observed to be the major cause behind collapse of these
companies and the mismanagement of affairs was observed through observing lack of attention
to detail, absence of performance accountability along with absence of integration in internal
processes of these companies. Certain recommendations were also offered such as non-
adherence with the corporate governance and ethical standards by the companies are required
being decreased through appointing effectible authorities those can implement stringent
regulations in penalizing the associated members.

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Table of Contents
1. Introduction of Selected Companies................................................................................3
2. Auditor of Companies Collapsed.....................................................................................3
3. Audit Processes Contribution to Collapse.......................................................................4
4. Auditor’s Independence, professional and Ethical Behavior..........................................7
5. Recommendations in Auditing Profession Improvements..............................................9
6. Conclusion.....................................................................................................................10
References..........................................................................................................................12

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1. Introduction of Selected Companies
ABC Learning was observed to operate as a leader within the Australian childcare
educational sector. The company was listed in “Australian Securities Exchange (ASX)” and was
observed to have a market capitalization of AUD 2.5 billion (Agostini and Favero 2017). Due to
an increased mortgage crisis the company faced managerial receivership because of which a
considerable debt might be considered responsible for its collapse.
HIH Insurance was positioned as among the largest insurance companies those have its
operation all over Australia. The organization recorded a rapid progress between 1997 and 1998
because of its successful international expansion strategies because of which it got listed in ASX
(Bhadily and Hosie 2016). In this company few board members of the company were observed
to be guilty because of which they were sentenced imprisonment as they were associated with
manipulations and financial frauds.
Focused on the reasons based on which the selected Australian companies failed, the
major objective of the report will be to analyze the ways in which auditor’s processes,
professional and ethical behavior issues resulted in collapse of these two selected companies.
2. Auditor of Companies Collapsed
The audit partner that was responsible for carrying out auditing operations within ABC
Learning Company is Pitcher Partners. The audit person Simon Andrew Peter Green was
responsible to causing the company’s failure because of his conduct of “material misstatements”
in the financial report. The auditor of the company was suspended for five years as the audit
partner failed to perform suitably and accomplish his responsibilities as auditor (Carnegie and

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O’Connell 2014). “The Australian Securities and Investments Commission” declared that the
audit partner of ABC Learning failed to attain enough audit evidence in consideration to reliable
accounting treatment for its obtained fees. This has further resulted in considerable material
misstatement of the company’s revenue. The new auditors led by “Ernst and Young” challenged
the organization’s revenue and earnings treatment within its interim and end of the financial year
of 2008.
The audit partner of HIH Insurance was that was accountable for developing accurate and
reliable financial and audit reporting for the company. Anderson was responsible for developing
the financial report of the company (Carnegie 2016). The audit failure within the company
resulted for the reason that the audit partner of the company failed to detect fraud that is one of
the major role and responsibility of the auditor. The audit was involved in mismanagement of the
accounting affairs along with lack of integrity in the organization’s internal systems and
processes along with poor decision making. “The Australian Securities and Investments
Commission” recognized that the accounting practices adopted by HIH Insurance in
consideration to revenue and expenses recognition (Carson, Fargher and Zhang 2016).
3. Audit Processes Contribution to Collapse
There are certain loopholes within the audit process of the companies namely, ABC
Learning and HIH Insurance that has resulted in the corporate collapse and downfall of these
companies in Australia. The audit process failure factors that were observed within ABC
Learning Company are indicated below.
 Carson, Fargher and Zhang (2016) in indicated that audit processes contribution has
increased impact on corporate collapses. This statement can be supported through

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observe that accounting scandals takes place with disclosure of misdeeds by trusted audit
partners of the organization as observed in case of HIH Insurance. It is gathered that
because of audit process failure and misstatement fraud from the end of auditors, the
second half of 2007, the company dealt with a downfall in its overall profit by 42% that
was recorded to be $37.1 million (Christopher 2018). In such situation, the company
faced a debt burden of approximately $1.8 billion. Such factors were resulted from the
mis-statement conducted by its audit partner and served as the major reason of its
collapse.
 A considerable drop in the profit has caused drastic impact on the company’s share prices
for the reason that it has decreased by 43% to $2.15 that took place after small trading of
$1.15 (Carson, Fargher and Zhang 2016). For this reason because of increased financial
concerns, the company’s proprietor was encouraged to sell its shares that are value of
around $20 million. For this reason, the company was positioned in a position of trading
halt. In addition to such concern, the auditors of the company have made considerable
delays in disclosing all its earnings over the years from 2007 to 2008.
 Corporate failure in ABC Learning took place for the reason that the auditors of the
company have not investigated the financial statements suitably that results in business
receivership (Christopher 2018). Due to failure of audit along with improper
implementation of unsuitable method for valuating intangible assets can be recognized as
an important reason for the company’s collapse. In consideration to auditing issues face
by ABC Learning, it has been observed that increased financial statements fraud has
resulted in increased impairment charge for the company $8.4 million. Moreover, the
auditor has not valued its future cash flows properly that resulted in decrease of profit

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$8.4 million (Clarke and Dean 2014). This served to be one-off the vital reasons that led
to liquidation of ABC Learning.
The audit failure factors those led to downfall of HIH Insurance Company operating
within Australia are explained under:
 Based on the guidance of the auditors, the board members of the company have invested
a great amount for acquisition of FAI Insurance that was observed to be risky for the
insurance companies. Moreover, the decision of the auditors of HIH Insurance was both
accurate that resulted in business collapse. Moreover, the auditor of the HIH Insurance
has undertaken a wrong move through entering within the business of offering funds to
the film makers. For this reason, the company has dealt with loss of around $ 100 million
(Crockett and Ali 2015).
 Clarke and Dean (2014) has revealed that audit processes such as fraudulent accounting
practices and not addressing professional and financial statements report guidelines and
responsibilities resulted in adequate disclose and company collapses as observed in case
of ABC Learning. The company did not service partly because of natural calamity that
took place in Florida. Due to this reason, the company needed bank loans and increased
its debt burden that resulted in drastic net less of the company.
Audit failure in these two companies was observed to be the impact of domineering chief
executive, particularly where the auditors involved in the audit fraud in these organizations.
It was observed that the necessary guidelines of “Australian Accounting Standards” were not
maintained by the auditors of ABC Learning and HIH Insurance. It can also be indicated that
the true and fair view requirement was not observed in case of financial reporting of these

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companies. “Audit Expectation Gap” was observed in case of these companies as a
significant mismatch was observed between the auditors’ role ad public expectation from the
audit report (Saravanan and Thakkar 2018). Audit failure was observed to be the major cause
behind collapse of these companies and the mismanagement of affairs was observed through
observing lack of attention to detail, absence of performance accountability along with
absence of integration in internal processes of these companies (Saravanan and Thakkar
2018). Erin accounting and auditing issues that was evidenced from the case of corporate
collapse of ABC Learning and HIH Insurance are indicated below:
 The independence of the companies audit partners
 Replacement, appointment along with rotation of audit staff and auditors
 Particular accounting concerns which led to certain overstatements of revenue or
expenses understatement
 The role of the “Audit Committee of the company’s Board” was violated
 Audit planning failure because of faulty risk evaluation
4. Auditor’s Independence, professional and Ethical Behavior
The concern of audit independence has fundamental importance in analyzing the
corporate collapse of HIH Insurance and ABC Learning Company. It was observed for both the
cases of these companies that the auditor failed to comply with the “Joint Code of professional
Conduct” maintained by “Society of Certified Accountants (CPA)” in Australia (Doyle 2017). In
case of ABC Learning company is observed that auditors independence is not followed within
the company because of which the revenue misstatements. The directors of both the companies
failed to implement necessary oversight over the company’s management. The board failed to

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implement a generally independent and questioning initiative to every material indicated by the
management. The board’s independence was compromised through the influence of management
in ABC Learning and HIH Insurance in consideration to related deliberations. This has resulted
in existence of numerous interest conflicts (Goodwin and Wu 2016). For instance, in HIH
Insurance Company, Robert Reginald Stitt, that is one of the lawyers on board that served as
significant supplier of HIH based legal consulting services and also served as a company
consultant appointed by the organization as a legal advisor. The failure of responsibility by the
concerned person led to corporate failure
Certain professional and ethical behavior failure has resulted in the accounting and
corporate failure within the company of HIH Insurance and ABC Learning. “APES 110 Code of
Ethics for Professional Accountants” and “Listing rules of ASIC” are the auditing standards that
was to observed to be followed by these two companies because of which certain ethical
concerns were followed by them (Kashyap et al. 2018). “APES 110 Code of Ethics for
Professional Accountants” is deemed to be a specific standard for the accounting specialists that
are not complied by needed code of conduct and ethics. Five codes of ethics were needed to be
followed by accounting specialist. The first code of conduct associated with ethics is integrity
and based on this code honesty and straightforwardness is expected from the parts of the
accountants at the time of business conduction. This is also not observed to be followed by ABC
Learning and HIH Insurance and the next code of conduct that involves maintaining objectivity
and the audit partners of this companies faced issue of bias, interest and impact of professional
judgment along with overriding business (Miglani, Ahmed and Henry 2015). The fourth ethical
code mentioned within thus standard is confidentiality and this was in maintained by the auditors
of ABC Learning and HIH Insurance. The fifth ethical code that was violated by these two

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companies is related with professional behavior and obliging accountants in making
conformance to the related laws and regulations. Violation of such guidelines mentioned in
APES 110 is not abided by the company.
“Ethical and auditing governable riles of ASIC” is also another driver factor on valuating
the performance of organizations based on following corporate governance standards. This has
also necessitated the requirement for ASIC in analyzing several aspects associated with
maintaining corporate governance standards in ABC Learning and HIH Insurance (Nisi 2017).
Certain ethical regulations are developed by ASIC for the companies and focused on the same it
has been gathered that the selected companies in this paper failed to comply with necessary
corporate actions related with share capital that is another rule listed within ASIC. Along with
increased consumer complaints and poor trading environment, the companies were impacted
drastically by charges associated with faulty corporate governance practices. It was also reported
that these organizations offered sponsorship along with certain lucrative maintenance contracts
for the companies centres that resulted in a drastic impact on confidence of shareholders and
because of which stock could not take place from such concern (Ratnatunga 2016). Governance
issues were drastic in case of thee two companies as the directors mislead the board on the matter
of financial position of these organizations. The billing state along with the process of debt
collecting served as major corporate governance failure reasons in these companies.
ABC Learning and HIH Insurance employed the privilege information attained by the
directors within the board meeting in order to trade their individual gains. Such discrepancies
within the book of accounts were not accounted by the “Chief Financial Officer” of the
organization and they were observed to have less concern for their stakeholders and shareholders
(Riaz and Kirkbride 2017). Moreover, the cash position of these companies was not evacuated

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suitably because of which the auditors could not recognize any material misstatement. Corporate
governance standards were not followed by these companies and this can be evidenced in
corporate failure case of both of these companies. This is through observing that the available
financial information that flows from management to board was improper as the system was not
suitably supervised by the auditors of ABC Learning and HIH Insurance.
5. Recommendations in Auditing Profession Improvements
From observing the audit, corporate governance and ethical factors that resulted in the
collapse of HIH Insurance and ABC Learning certain effective recommendations are provided to
maintain effectible financial reporting of companies. Certain suitable recommendations
regarding auditing profession improvement is indicated below:
 The essay regulations and rules related with corporate governance can serve as an
effective contribution in decreasing the unethical measures implemented by the
organization.
 Non adherence with the corporate governance and ethical standards by the companies are
required being decreased through appointing effectible authorities those can implement
stringent regulations in penalizing the associated members.
 Another structural recommendation can be to enhance board effectiveness that can be
done through developing a board with support of independent individuals. Moreover, the
nomination of this board of directors must be made by attaining nomination from
shareholders and their appointment decision must be encouraged for maintaining better
imprcekent of auditing profession.

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6. Conclusion
The major objective of the report was to analyze the ways in which auditor’s processes,
professional and ethical behavior issues resulted in collapse of these two selected companies. It
was gathered from the report that audit failure in these two companies was observed to be the
impact of domineering chief executive, particularly where the auditors involved in the audit
fraud in these organizations. It was observed that the necessary guidelines of “Australian
Accounting Standards” were not maintained by the auditors of ABC Learning and HIH
Insurance. Moreover, it was also gathered from the report that the auditing standards that were
observed to be followed by these two companies because of which certain ethical concerns were
followed by them. Based on such results certain effective recommendations were offered
regarding maintenance of necessary regulations and rules related with corporate governance can
serve as an effective contribution in decreasing the unethical measures implemented by the
organization.

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