Audit and Assurance Report: HIH Insurance Company's Financial Analysis

This report provides a comprehensive audit and assurance analysis of HIH Insurance Company, focusing on the factors contributing to its collapse. It begins with an introduction to the company and its history, followed by an assessment of business risks and inherent risks affecting its financial reporting. The report then delves into the legal liabilities of HIH Insurance towards its clients and creditors, examining factors influencing these liabilities and the consequences of neglecting them. It further explores the role of auditors, including the advantages of a single firm providing both audit and consultancy services, and addresses potential ethical violations. Finally, the report examines the impact of the Ramsay Report and CLERP 9 reforms on HIH Insurance, offering a complete overview of the company's financial and ethical landscape. This analysis highlights the key issues contributing to the company's downfall.

Audit and Assurance

Table of Contents
Audit and Assurance............................................................................................................1
INTRODUCTION...............................................................................................................3
QUESTION 1.......................................................................................................................3
a) Assessing the business risk of HIH insurance limited.................................................3
b) Inherent risk factors that affect the financial report of HIH insurance company........4
QUESTION 2.......................................................................................................................4
Legal liability of HIH insurance company towards its clients and creditors...................4
a) Factors that affect the partnership or cases in which partnership will be liable to its
clients and creditors.........................................................................................................4
b) Condition of company if it is neglecting something....................................................5
QUESTION 3.......................................................................................................................6
a)More auditors are hire by HIH insurance company for its external audit team............6
b) Advantages regarding both audit or consultancy services provided by one firm........6
c) Whether there is violation of ethical standard is done in HIH insurance company.....7
d) Impact on HIH insurance company of reforms proposed by Ramsay Report and
CLERP 9..........................................................................................................................7
CONCLUSION....................................................................................................................8
REFERENCES....................................................................................................................9

INTRODUCTION
Insurance companies are those companies which provide compensation in lieu of any
damage loss or injury has taken place in exchange of premium payments. So this report is
related to the one of the insurance company of Australia that is HIH insurance company
which was established in 1995 with the merger of CE Heath and Swiss based insurer and
in 1988 name of company was changed to HIH Insurance company from HIH Winterthur.
HIH insurance company was the second largest insurance company in Australia before
the collapse and the main reason behind the collapse of insurance company was it was
not able to provide proper future claims to their clients and the company was facing
regularly losses and due to some fraudulent activities done by the directors of the
company.
QUESTION 1
a) Assessing the business risk of HIH insurance limited
As risk are inevitable part of business more risk will lead to more profit in the
business. Risk means probability of occurring an event in future which may lead to great
loss as in the case with HIH insurance company they face huge losses and lead to
collapse. so it is very important to correctly evaluate the risk of business so that company
can take decisions regarding that risks. Business risk can be evaluated through many
strategies and by analyzing the past working of our business (Schmidt, Wood and
Grabski, 2016).
In HIH insurance company risk are related to insurance of marine aviation, natural
disaster and film financing insurance, company can evaluate these risk by doing internal
and external analysis of company and by knowing about the internal external factors
which are affecting business directly, and have to make proper strategies regarding the
factors that affecting the business and try to minimize them (Meadley, Mrcog and Mrcog,
2016). In HIH insurance company ,the main reason behind the liquidation was inability to
provide claims to their clients, if HIH has already assist this risk and had made proper
strategies regarding the fund of claims or had made proper reserves for unforeseen losses

or either it is prepared for this than the company will not face the huge losses like loss 0f
$100 million from film losses from typhoon occur in Florida in year 1999 and damage
claims in Sydney for hailstorm , and on facing losses on regularly bases company has
gone to liquidation.
b) Inherent risk factors that affect the financial report of HIH insurance company.
Inherent risk means risk arises due to any omission or error in financial reports of
company, this are controllable risk and mainly arise in financial report only .This arise
due to calculations complication and bigger estimation in financial reports. As due to
liquidity crises in HIH insurance company , company decided to sell their assets in order
to improve the position of balance sheet and to fund their insurance claims, and to repay
the debt this will lead the company in more crises and make adverse conditions for
company due to which company has to collapse and at the time of liquidation company
has not sufficient cash to repay the debt of its clients and they had face losses (Green,
2016). So the decision taken by members of company regarding the selling of assets was
wrong as this lead to company in adverse condition. And there is miss statement in the
balance sheet was make in order to show the improved balance sheet and also due to the
liquidity crises or inherent risk factor.
QUESTION 2
Legal liability of HIH insurance company towards its clients and creditors
a) Factors that affect the partnership or cases in which partnership will be liable to its
clients and creditors.
Liability of loss will be on everyone if a company is collapsing and in case of other
companies, company is liable to pay in full and final settlement to its creditor but
sometimes in extreme cases creditors have to pay to the company.
In 2001, a committee was appointed by Royal commission on investigation of
collapse of HIH, and the major reason they found behind the collapse was the failure of

company in providing proper claims to people., and it was due to improper management
in the company. As in 2001 the total deficiency in company was around $2.7 billion to $4
billion.
At the time of collapse the company is not even able to pay full debt to his clients
And all the other companies which are under the HIH insurance company are clearly
insolvent and the condition of these companies are worse than their balance sheet, as the
balance sheet is not showing the true and fair balances there is misstatement in balance
sheet (Eaton and et.al., 2017). As due to liquidation of HIH insurance company mostly
affected area was shareholders as they incur losses on their investment made by them in
insurance company and the creditors of company whom company has to pay back their
debt or the persons who has invested in that company in order to receive return from
company.
There are many cases which shows the liability of company towards clients but are
violated by directors, as dishonestly receiving the payment oh behalf of HIH insurance
company, corruptly giving cash benefit to the agent of HIH , not paying the debt to their
creditors , not paying the claims (Burnaby, 2017). In all company is liable to pay to its
creditor the debt which the company has taken, or to pay all the claims to their clients.
b) Condition of company if it is neglecting something
For each and every company there are set of rules and guidelines which are to be
followed by them same is the case with the HIH Insurance company also as when
company was formed it has laid down the norms on the bases of which company will run
and its business will undertake. As from above it is clearly stated that HIH insurance
company has violate the rules as the directors and officers of company are indulging in
fraud and the financial statements are also not giving the true and fair picture of company
as due to all this company has to go for liquidation and was not able to do the settlement
of their clients (Robbins and Meyer, 2016). As general manager of company was
fraudulently receiving the payment on behalf of HIH insurance company, the deputy
chairman of HIH insurance company fraudulently make himself company director and
many of them are using powers beyond their authority. If from starting directors and

officers were not indulged into fraud and they had given the true picture of company than
company had not to liquidate, and shareholders have not face losses in their investments
which they had made in HIH insurance company (Robbins and Meyer, 2016). Financial
statements are the only documents on which the shareholders will rely and make
investment in our company, if these statements are not giving true and fair picture than it
will affect the goodwill of organization.
QUESTION 3
a)More auditors are hire by HIH insurance company for its external audit team.
As company establishes and liquidate it require auditors for various works ,When the
HIH insurance company was established it was the second largest insurance company in
Australia. At the time of establishment company as its peak and has appointed auditors
from the firm Arthur Anderson (Simnett, Carson and Vanstraelen, 2016). In 2000 HIH
insurance company was working at its best and have to appoint more auditor for its
external audit team so that their work can be done in best way and the company has paid
around $1.7 million for auditing the books of company to auditors and has pay $1.631
for their other services rendered, in total Arthur Anderson has earned around $8 million
from auditing the books of HIH and by providing other services it has earned around
$7million.
b) Advantages regarding both audit or consultancy services provided by one firm
As HIH insurance company has also gain advantage from appointing the Arthur
Anderson as this firm provides both the services that is auditing services and consulting
services.AS both the work done by the same person only ,as auditors have full
information about our company so he can easily give us the advice and can give us the
consulting services to us.AS if both the services are provided by Arthur Anderson to HIH
Insurance company than it is beneficial for both as HIH insurance company has not to
disclose their information to everyone as they have to just tell to one firm only and that
firm will guide and assist them (Escobar and Demeritt, 2017). As by providing both the

services by Arthur Anderson to HIH insurance company Arthur Anderson has earned a
huge profit from HIH insurance company ,and the HIH insurance company is also getting
his services fast (Ergüden, Kaya and Sayar, 2017). But sometimes biased answers given
by the auditor if he is providing the both the services and sometimes it is full of tired or
fatigue job as both the responsibility in on one person but in overall it is advantage for
both the organization .
c) Whether there is violation of ethical standard is done in HIH insurance company.
Ethical standard means some rules and regulations made by company regarding
ethics, ethics include the trust , faith or kindness . Ethical organization is that organization
which is not providing harm to environment and will not exploit its workers.As in the
case with the HIH insurance company as it is taking both the services from the Arthur
Anderson and it is not the violation of ethical standard as it is valid that on organization
can provide both the auditing and consulting services to other organization as HIH
insurance company is working within its ethical standard only and can take both the
services from one organization only (Lau, 2016). But in other cases HIH insurance
company has violate the rules as the operations of business are taking place in fraud
manner and all the directors and managers of the company are indulge in fraud and there
is misstatement with the financial reports of business also. As HIH insurance company
has changes the figures of balance sheet in order to show the good condition of company.
d) Impact on HIH insurance company of reforms proposed by Ramsay Report and
CLERP 9.
CLERP 9 is known as Corporate Law Economic Reform Program passed in 2004, it
is a set of guidelines and rules which show the reforms of Australia governance and
provide examples and give information about amendments and how amendments will
apply. Ramsay report contains the additional guidelines for auditors in case if in any
circumstances auditor will lack. Regarding with HIH insurance company work of

Ramsay report was to review the requirement of independence auditor and to make
changes regarding those requirement. CLERP 9 has make various recommendation
regarding HIH insurance company which are expanding the role of financial report
council (FRC) now the Financial Report Council has right to advice the independence
auditor and can monitor standards (Knechel, 2016). Now the auditors have to declare
about their independence that they are independent auditors and have to attend the
company Annual General Meeting (AGM).There should be proper disclosure of all non
audit services. And CLERP 9 has made certain restrictions on employment also.
All this reforms which are made by CLERP 9 and Ramsay Report has have positive
impact on practice of audit as now auditors have to disclose all the information regarding
their work to the shareholders of the company and have disclosed about the independence
of the auditor. And regularly interference of FRC had also make financial reports more
accurate hence auditors won’t be able to do any fraud in the financial statements.
CONCLUSION
From overall analysis it can be conclude that HIH Insurance company has violate
many laws and had not make proper strategies regarding risk that may arise in the future
if the company had make proper strategies regarding strategies and had given the true and
fair picture of company than company had not opt for liquidation. AS with the liquidation
of HIH Insurance companies many of its clients had faces huge losses as at the time of
liquidation company was not in position to pay the debt of its client and had not enough
cash to repay the claims. So if from starting company had given the true picture to its
shareholders than company has to not go for liquidation.

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