Auditing Theory Assignment of HIH Insurance

Added on - 16 Mar 2020

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HIH InsuranceHIH Insurance was mainly engaged in the insurance business throughout Australia but itsbusiness often seemed quite distinct from how an insurance business must be conducted. Thereason behind this can be attributed to the irregular accounting practices undertaken by thecompany that resulted in its downfall as a whole (Mock et. al, 2013).It can be observed from the affairs of the company that most of its business acquisitions wereoverpriced and they expended more than what was the actual valuation, thereby resulting in thedepletion of its financial resources. Furthermore, the company also spent enormous resources invarious unproductive areas and at the same time, it failed to operate according to the leastsolvency requirement framed by the Insurance Act 1972 and APRA (Australian PrudentialRegulation Authority). Besides, since the year 1992, the company started such aggressiveaccounting practices that played a key role in exaggerating or undermining the amount of itsliabilities or assets prevalent in its financial statements. This altogether hampered the financialstrength of the company. Further, this can be proved by the fact that its aggressive accountingpractice undermined the value of its liabilities by $18 million and under reserved the same for$41 million while the preparation of due diligence report was being facilitated by Ernst &Young. However, the significant part of such under reserved was a prudential margin that wasrejected by the company’s CEO (Ray Williams) as a reserve for the operation of normal affairs.In addition to this, after termination of merger betwixt CE Health International and CICHoldings, the company also attempted various fraudulent accounting treatments within itsfinancials so that various portions of the balance sheet could be efficiently distorted (Saville,2003). Nevertheless, HIH Insurance also attempted in utilizing its pledged securities in itsquarterly financial reports to conceal their real financial position so that negative comments fromthe external world can be effectively avoided. Even though this attempt was not the real reasonbehind the collapse of HIH, yet this practice reflected their weaknesses and characteristics ingenerating income and addressing the expectations of investors. Another inappropriateaccounting practice undertaken by HIH was that it failed to value the companies that it intendedto acquire and as a result, it paid more than what was actually needed to be paid. As the companymade several acquisitions to enhance their businesses, more financial resources were destroyedas a whole (Hoffelder, 2012). Further, most of the company’s purchases were undertaken debtfinancing that also put enormous pressure upon the company in terms of payment of interest. Forinstance, the acquisition of FAI wherein Goldman Sachs valued the company for $20 million but2
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