Corporate Collapses: An Analysis of Auditing Procedures and Ethical Behavior in Harris Scarfe and HIH Insurance

This report examines the corporate collapses of Harris Scarfe and HIH Insurance in Australia, analyzing the role of auditing procedures and ethical behavior in contributing to these failures. It explores the specific accounting practices, auditor independence, and governance issues that led to the collapses. The report also discusses improvements in auditing standards and principles since these events and provides recommendations for further enhancements to the auditing profession.

Auditing
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Contents
Executive summary:.............................................................................................................4
b. Brief introduction of the two selected corporate collapses:...................................................5
c. Auditor of the companies collapsed:...................................................................................7
d. An analysis of how has the audit procedures contributed to the collapses:..............................8
Mark-to-market accounting........................................................................................9
e. Comment on the auditor independence and professional and ethical behavior within the cases
discussed...........................................................................................................................10
f. Improvements that have taken place in the auditing standards and principles since then........11
h. Conclusion:....................................................................................................................13
References:........................................................................................................................14
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Executive summary:
Corporate scandals and collapses are considered as an incident of insolvency and bankruptcy in
major business enterprises. It includes corporate business and operational scandals, unethical,
alleged and fraudulent behaviour happened by people actions and on behalf of Business
Corporation. False, wrong and misleading accounting and auditing reporting are also included in
business scandals. This business report will include all information about two major corporate
collapses and contribution and behaviour of independent and professional auditor within the
cases will be discussed further. Proper analysis will be made in the relation to analyse auditing
procedures, principles, and standards for corporate auditing improvement. The first aim to this
report is to analyse all fundamental causes of unexpected accounting and corporate failures in
Australia, the second aim is to recognize whether the auditor would be able to improve those
collapses or not.
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b. Brief introduction of the two selected corporate collapses:
Introduction:
1. Harris Scarfe:
Harris Scarfe Limited was the company which was experiencing one of the largest corporate
collapses in Australia with the total debts $265 million. The major reason for this corporate
fraudulent behaviour was negatively affected by accounting frauds and auditing profession in
Australia. For an example, the corporate collapse of HIH insurance in the company, OneTel and
Ansett Australia overall occurred in a short time span in the starting of 2001. The major
declaration of financial collapse depends on accounting information related to decision making
just because of expectation gap. Harris Scarfe was facing difficulties such as Auditing
Committee, Auditing independence and ethics and unethical and illegal liabilities due to
expectation Gap and accounting scandals (Baiardi, 2018).
The major problem was:
1. Management responsibility and external auditory responsibility:
The major problem was considered as management of corporate collapse due to unethical issues
and financial problem in Harris Scarfe in audit department firms. The company was not able to
prepare and direct annually financial report and failed to produce director declaration in true and
fair view.
2. Failure of the Audit committee and Auditory independence:
The company had assisted to make an audit committee to assist the board of director in order to
fulfill all oversight financial responsibilities to make remained an independent management to
review financial information which was failed due to provide all financial information to
shareholders and others.
3. In Australia, it was not required for the ASX listed companies to make proper audit Procedure
Company and follow audit law but it was totally required to disclose all audit requirement and
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accounting policies to confirm composition. Harris Scarfe Company had failed to have own
appropriate structure of audit committee which could provide proper disclosure argument.
2. Cadbury Australia:
In 1968 Australian entrepreneur named Ray Williams stared HIH insurance company with the
collaboration of the Michael Payne Company. After 1996, HIH insurance has faced corporate
collapse due to false Accounting entries and fraudulent behaviour. On 29 August 2001, the
Commonwealth Government and NSW Supreme court has approved and gave the order to place
HIH into provisional liquidation. The major reason for the collapse in HIH insurance company
was prudent for the federal and state government in order to wait for all liquidating assessment to
the magnitude of HIH’ losses. After the corporate collapse, the Insurance Council of Australia
has provided a solution to policymakers and claimants affected by the collapse of HIH (Rezaee,
et. al., 2018).
The reason for corporate governance in HIH:
1. Board of directors:
As stated, the board of directors was needed to take care of major responsibilities to maintain and
working environment to regulate fraud problem and make healthy control of financial
environment but directors of the company faced difficulties in managing Healthy environment
and speculation related to implementing auditory policies. The company had great opportunity to
prevent fraudulent behavior and actions through the implementation of audit policies.
2. Issues of corporate governance:
It is the system by which company is to be directed, managed and maintain all financial reports
and accounting laws for proper and internal control. Management of Harris Scarfe Company was
not able to reduce accounting gap through proper management of financial reporting. The
collaboration and with the company “Ernst and Young Company which was served in 1988 and
in 1997 but this company was also failed to understand internals control structure if business due
to corporate collapses (Baiardi, 2018).
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c. Auditor of the companies collapsed:
1. Harris Scarfe Company's main problem was a fraudulent set of accounting work and books;
Auditor of the company was not able to represent all profit which was higher than its real
revenue and value. Another question was there company had not got any accounting problems
until 2002s’ then the company went into liquidation due to a problem related to cash flow and
fund requirement.
The major problem and conflicts in Harris Scarfe were:
In the earlier, it was easy for the company to make few accounting entries to manage .stock and
balance the profit rolling. As company increase and decided to expand their business, company
needed to maintain their books to clarify all business parties to perform their duties. When
auditors of the company needed to the investigation to focus on the responsibilities of
management but the corporate governance problem became more complex (Rezaee, et. al., 2018)
2. HIH insurance and corporate auditory structure:
It was an open negotiation with the insurance companies for the HIH insurance in order to view
them taking over all evil and bad policies. And wrong underwriting books of HIH. Company’s
major intention was to write and implement to the premiers and chief ministers seeking
companies and Market Corporation due to lack of corporate building auditory procedure. The
proper implementation of corporate governance could help the company to reduce auditory fraud
and improve such collapses through fast-track legislative changes.
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d. An analysis of how has the audit procedures contributed to the collapses:
The combination of all these fraudulent activities later resulted to bankruptcy in the company.
The major improvement was needed to make proper details related to financial expectation,
advocated and up to the mark to marketing accounting based on face value in the market pressure
in both of the company.
The contribution of Auditing:
Revenue recognition:
Harris Scarfe has adopted ethical standards and norms through conventional agent model. This
agent model helped to recognize future threats related to revenue, royalty, cost and brokerage fee
in proper reported time for a specific financial year. Harris Scarfe instead selected agent model to
report and produce financial development report in order to manage the entire value of trading
and revenue. The merchant model was utilized to make accounting trading more aggressive to be
stable in a competitive market (Vasarhely & Halper, 2018).
Harris Scarfe earned a profit by providing all services such as wholesale trading, financial
management, and risk management, in addition, to build and manage all important documents
and reports especially to the decision-makers in the field of finance and operation. Audit
procedure has given a proper idea to the company to make reliable and highly competent to
cover objective. The auditory process was based on ethical processes and standards which helped
the company to forces all financial holding in order to manage high profit in the competitive
market (Alles, et. al., 2018).
Ethical liabilities:
Audit process helped the company to changes and replaces their name with the earliest one. In
the beginning, Audit process helped the company to record $211,284 as new standards financial
statement based on financial independence to stop auditors performing non-auditory services in
Australia governed by ethical regulations and laws.
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2. HIH insurance:
Mark-to-market accounting
In HIH insurance and financial business, the auditory process had been totally sensible and fairly
straightforward. When the skilled employee joined the company, they demanded that the trading
company wanted to adopt mark to market accounting, citing that it would be represented all true
economic value. HIH insurance has become a first non-financial company in order to use this
method to account for its critical and complex long-term contracts (Wang & Su, 2017).
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e. Comment on the auditor independence and professional and ethical behavior within the
cases discussed.
Concerned the overall analysis and impact, auditors are independent and free to measure and
influence financial statement as a key component of the regulatory framework to support
financial problem and reduce corporate collapses. The restatement of Harris Scarfe Company is
significantly independent and competent to measure and regulate corporate failures. On the other
hand, HIH insurance has shown devastating effect of loss of confidence in the corporate failure
to find out all obstruction of justice against collapses.
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f. Improvements that have taken place in the auditing standards and principles since then
Improvement of auditing:
 Enhancing audit firm governance to compare financial requirement independent director
with full voting power.
 Promoting advisory boards to regulate financial and auditory governance responsibilities.
 Heighten the existing auditing standards and code of ethics regarding the auditor’s
through going concern evaluation.
 Allow shareholder and stakeholders proposal in order to address auditor issues, including
auditor ratification and financial report.
 Expansion of business to implement audit report that recognizes and provides meaningful
and effective information to the investors.
 The requirement the audit reports to include the all names and signature of the leading
and flexible engagement partner (Cheng, et. al., 2017)

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g. Your recommendations for any other improvements in the auditing profession
Recommendation:
 Quality Audit should be improved due to if the overall clients accounting to push the
bounds of acceptability that the auditor can highlight all financial reports.
 All important and incremental information should be included in the report would be
made relevant for both investment and budgetary reporting (AICPA, 2017).
 The more profitable profession will attract better entrants to improve audit quality in the
financial long run.
 The statutory benefit of all auditory and effective corporate governance should be well
documented in the corporate community (Gaynor, et. al., 2014).
 Audit quality would be improved by more closely to align the auditor incentives with
those of internal and external users of audit services.
 Enabling private ordering, rather than one size fits all regulations in order to benefit from
greater and grouping tailoring to an individual of the other issues in total presentation.
Improvement process:
 Lack of guidance: quality audit should clearly define the lack of guidance to measure
financial requirement and understand all financial attributes and action related to
standards.
 Lack of financial objective measure: Auditor and manager are allowed to implement
to reduce all financial threats.
 Ensure improvement and financial records: managers and financial analyst are
allowed to make enough arrangement of financial reports and auditing reporting
(William, et. al., 2016).
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h. Conclusion:
This report has been made which has explained all audit process, compliance, procedure and
financial records. This report has been revolving around two major corporate collapsed company
name HIH Insurance and Harris Scarfe in order to explain and recognize quality audit and
compliance behavior. This report has also described provided recommendation related to
auditing profession and standards related in regards to improving corporate collapse.
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References:
 William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A
systematic approach. McGraw-Hill Education.
 Gaynor, L. M., Hackenbrack, K., Lisic, L., & Wu, Y. J. (2014). The Auditing Standards
Committee of the Auditing Section of the American Accounting Association is pleased to
provide comments on the PCAOB Rulemaking Docket Matter No. 029; PCAOB Release
No. 2031-009: Proposed Rule on Improving the Transparency of Audit: Proposed
Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor’s
Report of Certain Participants in the Audit.
 AICPA. (2017). Statement on Auditing Standards, Number 126: The Auditor's
Consideration of an Entity's Ability to Continue as a Going Concern (No. 126). John
Wiley & Sons.
 Alles, M. G., Kogan, A., & Vasarhelyi, M. A. (2018). Feasibility and Economics of
Continuous Assurance 1. In Continuous Auditing: Theory and Application (pp. 149-167).
Emerald Publishing Limited.
 Vasarhelyi, M. A., & Halper, F. B. (2018). The continuous audit of online systems.
In Continuous Auditing: Theory and Application (pp. 87-104). Emerald Publishing
Limited.
 Rezaee, Z., Sharbatoghlie, A., Elam, R., & McMickle, P. L. (2018). Continuous auditing:
Building automated auditing capability. In Continuous Auditing: Theory and
Application (pp. 169-190). Emerald Publishing Limited.
 Baiardi, L. (2018). Valuation and management of Real Estate(Vol. 2). Edizioni Nuova
Cultura.
 Wang, K. H., & Su, W. H. (2017). Quality Management Mechanism, Job Satisfaction, and
Performance Audit. Accounting and Finance Research, 7(1), 25.
 Rezaee, Z., Sharbatoghlie, A., Elam, R., & McMickle, P. L. (2018). Continuous auditing:
Building automated auditing capability. In Continuous Auditing: Theory and
Application (pp. 169-190). Emerald Publishing Limited.
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 Hopkin, P. (2017). Fundamentals of risk management: understanding, evaluating and
implementing effective risk management. Kogan Page Publishers.
 Cheng, Q., Goh, B. W., & Kim, J. B. (2017). Internal control and operational efficiency.
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