Auditing Report: Corporate Collapses of HIH Insurance & One.Tel

This report provides an in-depth analysis of the corporate collapses of HIH Insurance and One.Tel, two significant financial failures in Australia. It examines the roles and responsibilities of auditors, specifically Andersen and Ernst & Young, in contributing to these collapses. The report delves into the audit procedures employed, highlighting deficiencies in revenue recognition, expense management, and auditor independence. It discusses the lack of auditor independence, ethical behavior, and corporate governance failures that exacerbated the issues. Furthermore, it explores the improvements in auditing standards and principles that have taken place since these collapses, including recommendations from the HIH Royal Commission and CLERP 9. The report concludes with recommendations for further improvements in the auditing profession to prevent similar corporate failures in the future, emphasizing the need for enhanced auditor independence, ethical conduct, and robust corporate governance practices. The study highlights the importance of internal audit functions and the role of audit committees in ensuring financial reporting integrity. Overall, the report offers valuable insights into the causes of corporate collapses and the measures required to strengthen the auditing profession.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author Note

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Table of Contents
Executive summary....................................................................................................................3
Brief introduction of the two selected corporate collapses........................................................3
Auditor of the companies collapsed...........................................................................................3
An analysis of how have the audit procedures contributed to the collapses..............................3
Comment on the auditor independence and professional and ethical behaviour within the
cases discussed...........................................................................................................................3
Improvements that have taken place in the auditing standards and principles since then.........3
Your recommendations for any other improvements in the auditing profession.......................3
Conclusion..................................................................................................................................3
References..................................................................................................................................3

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Executive summary
The Phenomenon of corporate collapse involves an insolvency or financial bankruptcy of a
firm which is along with legal declaration of termination of existence of the firm. However,
this phenomenon is not a sudden one. It takes place gradually where the symptoms and signs
develop over the years. The study deals with two major corporate collapse of two companies
HIH insurance and one. Tell. The causes for the financial collapses may vary in various ways,
this occurs that even after rigorous financial crisis, a crisis happenss. Thus it is not easy to
find out from a perspective related to finance when a business collapse is coming up or a
improvement is possible. Therefore, it can be resulted that that financial instability is a vital
but not an adequate corporate collapse condition. Only after legal actions like filing by the
creditors can a corporate collapse can be predicted accurately.
Brief introduction of the two selected corporate collapses
The companies who have faced the corporate collapses are HIH insurance and One
tel. The HIH insurance is the Australia’s second largest insurance that have witnessed the
largest corporate in the history of Australia, HIH’s losses estimation can be summed up to
$5.3 billion. The Investigations found out that the reason for the collapse has led to
imprisonment and conviction of a handful of members of HIH management on various
charges relating to fraud (Christopher, Leungand Leong2017). It took place in the year 2000,
when there was an expansion in the business, a minor asset price change could see the
insurance company become insolvent and it occurred. Director Rodney Adler, CEO Ray
Williams and others were sentenced to prison for the act of fraud.
One tel. on the other hand, is the group of Telecommunication Company that is based
on Australia. The company has faced a severe corporate collapse in Australia in 2001.During
the collapse, it was the telecommunications company which is fourth largest in Australia with

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more than two million operations and customers in eight countries. There was a loss of
$290m as reported, the share price was crashed, and it entered the management. In ASIC v
Rich the persons to be found guilty of negligence were the directors were (Demirag2018).
Auditor of the companies collapsed
In the case of HIH insurance the auditors were Andersen and Justin Gardener who had
been auditors the company for many years. In addition to the auditors the Partners had been
accountable for the extended period’s audit the cases for, along with the audit team senior
members were mostly well known to specific senior executives of the client enterprise.
Moreover, the participation at Board level of ex-Andersen Partners gave a clear impression to
the Royal Commissioner of continuing and close relationship between the audit firm and its
client at the highest levels. Moreover there was a lack of auditor’s independence as per the
audit committee report (Hamiltonand Micklethwait2016).
In the case of One Tel. the auditors where auditor Ernst and Young who did not have
the outlines responsibilities this is because the board would act on its behalf controlling what
the auditors should outline in their reports hence this solely contributed to the collapse of the
company. There were many corporate governance practices deficiencies of OneTel that were
also responsible for its demise. During the collapse, the OneTel already had been operating in
seven countries and had AU$653 million of annual sales.
An analysis of how have the audit procedures contributed to the collapses
The case of HIH insurance:
The HIH insurance corporate collapse is considered as the largest corporate failure in
Australia due to this a Royal Commission was set by the Liberal Federal Government for
examining the various explanations for the failure of HIH.It has been identified that the
company of HIH had a corporate culture that was conservative and there was various

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deficiencies that resulted in the collapse. The CEO was found to be verycompelling and
dominatingand used to engage himself into practices that had high risk in the market which
was very competitive. According to the auditor’s report of 2001, there was no independent of
the auditors of HIH and therefore some of the directors even alleged that they were not aware
of the true financial position of the company. The various difficulties that had been faced by
HIH was due to its aggressive acquisition strategy, a culture of not giving the bad news and
the growth at all cost mentality that often resulted in the conflict between the implantation of
profit maximization and the procedures of corporate governance(Du Plessis, Hargovan and
Harris 2018).One of the auditors of the audit committee Justin Gardener who was the auditor
of the FAI in the year 1980 and in the year 1998 FAI was sold to HIH. This can be said to be
the main reason behind the corporate collapse of the HIH Company as this takeover
transaction highly influenced HIH Company.
In addition to this the HIH Company had five non-executive directors out of which
two are the former partner of the Arthur Andersen which is the auditor of the HIH Company.
Therefore, the audit programme was highly influenced. Further, it can be noticed that the
Arthur limited has earned $8 million after auditing the HIH business whereas it has earned $7
million from other auditing services. It is very well known fact that the non-auditing services
are regarded to be the major distracting source that takes the independence of the auditors.
Therefore the key points that can be noted in terms of audit procedures for the case of HIH
are the accounting practices adopted by HIH in regard to revenue recognition and expenses,
the audits nature conducted by Andersen and the lack of independence of the auditors from
HIH.
The case of One tel.:

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In the case of corporate collapse of One tel the external auditors act hard has an
important role in ensuring the financial reporting of the company especially if the company
fulfils the requirements of the public and is a significance in the national economy. An audit
that is well-conducted should make the users of the financial reports of a company to rely
upon the accounts with confidence. Therefore, it has not proved that if a company is declared
as insolvent, that it is the mistake of the external auditors because even the internal auditors
have their independence that is well stated (Du Plessis, Hargovanand Harris2018).
The internal audit process is to outline the objective assessment of the performance of
the company and the internal controls effectiveness. A revised and well-planned and internal
audit function can assist a company avoid risks that are unreasonable. In the scenario of
Onetel communications, the internal audit reports received by management was not presented
as per the full board or the audit committee. The board was unable to make sure that the
proposals made to bring about change were effective because it is only a summary that were
presented to the audit committee that was prepared without following the details of the
management (Bottenberg, Tuschkeand Flickinger2017). When the board of directors
instructed the secretary to eliminate an agenda from the outlined agendas of the audit
committee and hence scrapped off from the report. As per the report, the board did not follow
actively confirm whether the internal auditors report recommendations were implemented
hence leading to the major collapse.
Therefore, in the case is the external and the internal auditors must submit their
reports directly to the audit committee and not with the help of directors boards, so that the
management do not have an opportunity to delay the reports but submit them to the relevant
authorities (Teh, Ong, Adedeji, and Ng2016). There was an interest conflict with the auditor
that was compromised for the company’s non-audit services.

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Comment on the auditor independence and professional and ethical behaviour within
the cases discussed.
Even though in the audit report the audit Commission mentioned that, “…. on
balance, the perception of lack of independence (of the auditors from HIH) that I found to
exist did not translate to a reality that reflects a susceptibility to undue influence or pressure”.
There existed concerns related to the independence of the auditors were considered in
significantly. Several auditor independence issues were regarded as too fundamental that the
Australian government commissioned the Ramsay Report for seeking enquiry and advices for
the issues of independence of the auditor (Billings, Tilbaand Wilson2016). An auditor must
be independent both in appearance and in in fact is fundamental to an audit that is effective.
In the case of One tel.company that collapsed in 2001, the audits Report offers many
lessons for those who are involved in the running of companies along with the audit bodies a
well as their advisers. One of the procedures will be to adopt the strategy that was pointed out
by Justice Owen that is also adopted by the government (Arzova, Sismanand Yozgat2016).
Evident that the audit committee in Onetel communication was of law quality and lacked
proper supervision and organization hence it was of law quality audits. On top of that there
was no auditor’s independence provided that led to the collapse.
Improvements that have taken place in the standards and principles of Auditing since
then
In case of HIH insurance there were many recommendations related to audit and
governance enacted by the HIH Royal regulators commission , ASX and the legislature in the
CLERP 9 progress that stands for corporate economic reform program and the release of the
principles of ASX in the year 2003 (Siddiquiand Uddin2016). In addition to this there were
various considerable guidance provided by the ASX corporate and the CLERP 9 to the HIH

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insurance companyfor the explanation andfor the compilation of the basis that were stringent
than the various Australian disclosure requirements.
There was a major reforms of Australian legislative that responded towards the failure
of the HIH was the CLERP 9 which has a significant effect on the auditing process of the
Australia that even continues to the present day. The CLERP 9 proposals had a direct
influence on the Auditing practices that had made auditor independence mandatory
(Jamasband Pollitt2015).Therefore, external auditors of the listed companies were required to
compulsorily attend the annual general meetings and answer the questions of the company’s
shareholders, there a process of policy for recognizing the various unethical and fraudulent
misconduct in the entity and the shareholders participation shall be enhanced in the
company’s meeting (Appiahand Amon2017).
In case of Onetel communications the audit process was made much restricted since
the time of its collapse (Jones and Beattie2015). Effective Auditing process requires a proper
environment where expert is implemented with total ethics and responsibility. This includes
that the executive, directors and non-executive to continuously supervise and questions the
board chair to ensure a proper flow of information to the Directors. The company has made
resolutions for a proper executive balance and non-executive directors along with a flawless
responsibilities division between the board chair and the chief executive officer (Ullah et al.
2017). There has been a provision for transparent methods for the appointment of new
directors and an understandable balanced and reporting. The maintenance of a proper internal
system of control.

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Recommendations for any other improvements in the professionof Auditing
The various steps for improving the profession of audit so that the mishaps and the
corporate collapses such as the case oh HIH and One tel. can be avoided. The following
implementations can help in enhancing a sound and ethical audit procedure:
 Standard and ethics: The primary process that can be involved in the process is the
application and development of various standards and ethics in the auditing and
governance process in the companies (Trickerand Tricker2015). Therefore, in the year
2014, the AICPA proposed the Code of Professional Conduct that includes making
itmandatory to act with objectivity andintegrity in order to maintain auditor’s
independence, and exercise with professional competence and care while performing
audit and attest clients services.
 CPA learning and support: There has beenvarious new initiatives madefor the
improvement of the quality of audit. The AICPA Competency and Learning site that
has been launched recently at present offers practitioners a mechanism to build
andassess their employee benefit plan-related competencies.
 Peer review:AICPA is enhancing the required qualifications for the reviewers to
perform a review and speeding up the removal of poor reviewers (Abdulmalik and
Ahmad2016). The AICPA at the same time works on the measurement to make sure
that the firms is complyingthoroughly with the requirementsof the peer-review.
 Practice of future monitoring:An initiative designed for the promotion
discussion about the monitoring practice into a system that is technology-based that
will allow firms to identify and correct the various potential issues in near real time
(HamiltonandMicklethwait2016).

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Conclusion
In order to facilitate a sound financial performance and ultimate maximization of the
shareholders returns it is extremely vital to have a sound practice of auditing. From the cases
as discussed in the above of the corporate collapses of the two major companies OneTel and
HIH in Australia it can be analysed that the process of Auditing is much more than just a
normal verification of accounts and report process that involves marking the columns. The
monitoring model of the HIH was award winning but it was ineffective while the OneTel
omitted the corporate governance guidance. Both the entities were not able to periodically
access the Auditing practices. Due to the collapse of the HIH and OneTel various codes and
reforms were introduced according to which the board was allowed to review the manner of
its operation. The above report has analysed the various misconduct and manipulation of the
audit process and the Auditors independence. In the case of HIH though it has a very well
developed Auditing model but the actual internal audit practices have been flawed. For the
reason of practice improper and manipulative audit process there is a high company’s
inherent risk.

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