Ethical Lapses and Audit Deficiencies: HIH Insurance Downfall

This report examines the major audit deficiencies and ethical issues that contributed to the downfall of HIH Insurance. The analysis highlights the ethical violations, including the provision of non-audit services, and the lack of auditor independence, which compromised the integrity of the audit process. The report discusses the significant audit fees paid, the cozy relationship between the auditor and management, and the failure to identify and address aggressive accounting practices. It also explores the flawed decisions made by HIH, such as expansion into the UK and the acquisition of failing businesses, which were not adequately scrutinized by the auditor. The report emphasizes the importance of auditor independence, adherence to auditing standards, and the need for auditors to provide qualified opinions when irregularities are identified. Ultimately, the report underscores how the failure of the auditor to fulfill their responsibilities with due diligence and ethical conduct was a significant factor in the collapse of HIH Insurance. The report references several key sources to support the analysis.

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Auditing & Assurance

Major deficiencies in Audit that led to downfall
There were many ethical issues observed in the profession of an audit that generated from the
HIH collapse. Moreover, the ethical issues gave rise to the incident of a downfall. Ethics
pertains to the moral values and principles. Ethical dilemmas produce many situations that
tend to confuse the auditors. It is important that the auditor should practice in the best
interest of the company and the shareholders. In the case of HIH Insurance, five major ethical
principles were observed by the Framework for Assurance that is integrity, objectivity,
confidentiality, professional behavior and competence (Matthew, 2015). The payment of a
huge sum amounting to $5.1 million in terms of audit fees and $2.8 million in terms of non-
audit fees from HIH was observed. Further, Andersen earned a sum of $5.097 million
conducting the audit of the financial statement and $2.824 million was earned by providing
nonaudit service to the HIH Insurance in the three financial years.
It needs to be noted that providing such non-audit services unethical in nature because it was
against the interest of the shareholders. As the management of HIH declined to increase the
audit fee, Arthur Andersen reduced the work performance and this is a clear indication that
there was a cozy relationship between the management and the auditor (Westfield, 2003).
Further, the close association between Arthur Andersen and HIH lead to the use of a strong
accounting policy. Hence, it needs to be noted that the opinion of the auditor Arthur
Andersen was false in nature that the statements projected a true and fair view. In short, the
financial statements were highly fabricated and influenced (Westfield, 2003). The overall
situation denotes that the integrity of the auditor was under immense pressure.
The major reason for the collapse was observed from the point of view of audit
independence, audit committee and consideration of audit. The independent view of the
auditor was missing in the case of HIH as the auditor developed a relationship with the
management (Roach, 2009). The provision of non-audit services by Arthur Andersen to HIH
can be tagged as the major reason for the collapse.
In addition, the auditors failed to ensure that the accounts of HIH that was certified in a
manner, provided a true and fair view of the financial position of the company. The auditors
were well versed with the aggressive accounting approach undertaken by the management.
Further, there were risks when it came to the conduct of audit which the auditors failed to
respond with diligence and assessment (Roach, 2010). The collapse of HIH can be attributed
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to different reasons however, the noteworthy factor was the flawed methods that was taken
into consideration. The company made provisions of inadequate nature that pertains to future
claims liability and made different decisions that proved to be disastrous in nature. The three
decisions were to have a higher presence in the United Kingdom, to re-acquire the business of
US business that was weak and falling and to purchase the FAI insurance (Westfield, 2003).
Therefore, if the auditor would have carried the responsibility with due diligence and
pinpointed the deficiencies then the collapse could have been averted. The major failure was
observed from the audit point of view. The independent view of the auditor is the major
consideration that was absent in the case of HIH. The auditors need to provide a footnote of
the irregularities and provide a qualified opinion that would have averted the situation to a
considerable extent. It is therefore imperative that the auditor needs to follow the auditing
standards and does not have a material interest in the company to avoid any chance of failure.
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References
Matthew, S. E. (2015). Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review [online]. 90(2), p. 495-527. Available from:
https://doi.org/10.2308/accr-50871 [Accessed 7 May 2018]
Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.
Westfield, M., 2003. HIH : The Inside Story Of Australia's Biggest Corporate Collapse,
[online] Available at: http://www.smh.com.au/articles/2003/03/14/1047583693489.html
[Accessed 7 May 2018]
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