Auditing Theory Assignment of HIH Insurance

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Added on 2020-03-16

Auditing Theory Assignment of HIH Insurance

Added on 2020-03-16

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AUDITING THEORY

HIH InsuranceHIH Insurance was mainly engaged in the insurance business throughout Australia but its business often seemed quite distinct from how an insurance business must be conducted. The reason behind this can be attributed to the irregular accounting practices undertaken by the company 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 were overpriced and they expended more than what was the actual valuation, thereby resulting in the depletion of its financial resources. Furthermore, the company also spent enormous resources in various unproductive areas and at the same time, it failed to operate according to the least solvency requirement framed by the Insurance Act 1972 and APRA (Australian Prudential Regulation Authority). Besides, since the year 1992, the company started such aggressive accounting practices that played a key role in exaggerating or undermining the amount of its liabilities or assets prevalent in its financial statements. This altogether hampered the financial strength of the company. Further, this can be proved by the fact that its aggressive accounting practice 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 was rejected 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 CIC Holdings, the company also attempted various fraudulent accounting treatments within its financials 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 its quarterly 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 reason behind the collapse of HIH, yet this practice reflected their weaknesses and characteristics in generating income and addressing the expectations of investors. Another inappropriate accounting practice undertaken by HIH was that it failed to value the companies that it intended to 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 destroyed as a whole (Hoffelder, 2012). Further, most of the company’s purchases were undertaken debt financing 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 but 2

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