One Case of Corporate Collapse and how Auditors Had Failed to Fulfil their Responsibility

One Case of Corporate Collapse and
how Auditors Had Failed to Fulfil
their Responsibility
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Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Brief introduction of corporate collapse......................................................................................3
Auditor of company collapsed.....................................................................................................3
An analysis of the way audit procedures contributed to collapse................................................3
Auditor’s independence and ethical and professional behaviour within case\............................4
Amendments that taken place in auditing standards & principles since then..............................4
Recommendations for any other improvements in auditing profession on the basis of collapse5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
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INTRODUCTION
Auditing is referred as the process of examining financial records of a company in order to
identify if they are in accordance with applicable laws, regulations and rules and are accurate
(Bourke and Béchervaise, 2017). The main purpose of auditing is to administer objective
independent inspection of company's financial statements which increase their value and
credibility thus, maximize user confidence, decline investor risk and cost of capital. This report
is based on corporate collapse of HIH insurance company and analyze the way auditors had
failed to fulfill responsibility professionally.
MAIN BODY
Brief introduction of corporate collapse
The HIH insurance collapse is one of the biggest financial collapse in the history of
corporate world which takes place in March 2001. The collapse of company sent shock waves by
Australian business community. With 8.1 billion asset base in year 2000, the firm was widely
perceiving as extremely reliable and robust organisation. However, the internal reports begin to
depict that debt leverage of company and insurance liabilities was also high and there was a risk
of insolvency. This resulted to precarious financial situation of company became untenable and it
endured the biggest corporate collapse in the history of Australia, with the losses of above 5
billion dollars. The failure of HIH insurance is due to widespread distress, cost to taxpayer,
uncertainty and loss.
Auditor of company collapsed
Justin Gardener was the member of audit committee who used to be auditor of FAI and it
was sold to HIH insurance in 1998. This acquisition transaction was one of the major cause of
failure of company as it has to pay high cost for takeover of FAI. The misjudgement of financial
perspective and undue diligence of examination work contribute to offer transaction. Due to the
conflict of interest of Justin Gardner, he should put in place where his independence was
questioned (Damiani, Bourne, and Foo, 2015)
An analysis of the way audit procedures contributed to collapse
The auditor of HIH insurance, Arthur Andersen, signed off on financial statements of company
in October 2000, indicating that firm had assets of 8.32 billion dollars in opposition to liabilities
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