Analyzing the HIH Insurance Collapse: Audit and Stakeholder Impact

This essay provides an analysis of the HIH Insurance Limited company collapse, focusing on the various issues that contributed to its failure and the subsequent impact on stakeholders, auditors, and shareholders. The essay highlights the role of poor corporate governance, misleading actions by the company's directors and senior management, and the failure of auditors to identify and address fraudulent activities. It discusses the findings of the HIH Royal Commission, including the manipulation of data and the misuse of power by key individuals. The essay further examines the implications of the collapse, such as the loss of trust in the insurance industry, the financial losses incurred by stakeholders, and the impact on the auditing profession. The importance of proper auditing and the adoption of a substantive approach to auditing are also discussed, emphasizing how these measures could have potentially mitigated the severity of the collapse and protected stakeholders. The essay concludes by summarizing the key factors that led to the HIH Insurance collapse and reiterates the significance of effective auditing and corporate governance in preventing such failures in the future.

AUDIT ESSAY

EXECUTIVE SUMMARY
The essay summarized the different issues of HIH Insurance Limited company and their
impact on stakeholders, Auditors and shareholders of the company. During the period of collapse
the have to face policyholder and corporate governance has to face various problems because of
the misleading of HIH director and senior management. The commission is appointed by
Australian government to identify the reason behind the insufficiency of fund and collapsing of
HIH. HIH royal commission found that the board of HIH was not able to identify the fraud and
misleading of senior management. In royal commission it was found that Alder mislead the data,
manipulate the stock market, acting dishonestly and use his power in wrong manner. It has been
identified that it suffer from the heavy losses but the Auditor are not able to find the problems
which increases their debt. Firm need to choose specific audit approach in order to ensure that
sufficient step was taken before collapse of company. Auditor focus is on large size transactions
that happened at workplace during a year. It helps them to manage their accounting statements.
The collapse of company make negative impact on the trust and confidence of customer on the
insurance company. It also summarized that the proper auditing of company financial statements
helps to identify the various fraudulent and misconduct activity of management.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................4
MAIN BODY...................................................................................................................................4
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Audit is the process of inspecting and examining different accounting statements by the
auditor to ensure that the accounting practices and concepts are properly followed and managed
by the company. Audit is conducted to ensure that the present data in annual report are accurate
and free from error and biases. HIH Insurance Limited is second largest general insurance
company and largest corporate failure in Australia. The essay highlights the reason behind the
collapse and the key people who are involved in the collapse. It explains the various implication
of collapse on the different entity and stakeholders. It also highlights the importance of auditing
to reduce the likelihood of collapse if auditing is taken before to the collapse.
MAIN BODY
HIH Insurance Limited is second largest general insurance company which provide
variety of insurance schemes to their policyholders such as home insurance, vehicle insurance,
employee compensation, life insurance etc. (Damiani, Bourne and Foo, 2015). In March 2001
HIH collapse its business because off the various reason. They apply in court to place provisional
liquidation in 15 march 2001. The commission is appointed by Australian government to identify
the reason behind the insufficiency of fund and collapsing of HIH. They identify that there are
various reason behind collapsing such as poor management, conglomerate complexity, under
provisioning, lack of integrity of information, inadequate and inappropriate asset valuation etc.
The asset of company is not properly managed and the financial information provided by
them are also mismanaged which increases liability of HIH Insurance. The poor corporate
governance lead to ineffective decisions regarding the business policy and strategies. They are
failed to recognize the accounting responsibilities and abnormalities which increases their
liability. It also results to delay in the payment of policyholders (Othman and e.al., 2015). HIH
royal commission found that the board of HIH was not able to identify the fraud and misleading
of senior management. They had to paid attention on the activities of senior management to deal
with the situation and may be the prior control on management reduce the chances of insolvency.
The key people involved in the collapse are CEO, CFO, management team and internal
auditor etc. The internal management of HIH was not too strong and because of their self-interest
they mislead the financial data in the final report. The internal auditor are also not able to
identify the accurate position of company and the misleading of data which create the situation
of liquidation or insolvency. Key person involve in collapse is Rodney Alder the former director

of HIH. In royal commission it was found that Alder mislead the data, manipulate the stock
market, acting dishonestly and use his power in wrong manner. On 15 March provisional
liquidator is appointed to identify the reason behind the insolvency of HIH. In their report they
highlight various reason such as reckless management, false report, reserve problem,
unsupervised authority delegation, incompetence and self-dealing.
The insolvency of HIH Insurance make huge impact on the different entity and
stakeholders. The collapse of company make negative impact on the trust and confidence of
customer on the insurance company (Roy, 2017). Due to the insolvency of company thousands
of employees were unemployed, many policyholders still did not get their money. Different
professionals, travel agency, employers invest in the share of HIH Insurance company they also
have to suffer from the heavy loss. Professional indemnity such as lawyer, doctors, engineer,
government employees highly invest in HIH. The insolvency of company make huge impact on
their financial wealth of policyholders, third party, government and corporate body. Further it
can be identified that collapse of HIH Insurance Limited company also affect the wealth of
shareholders.
The collapse of company affect all the stakeholders such as customer, creditors,
shareholders, government and corporate bodies. Due to the insolvency HIH is not able to meet
the liability of company and pay back the amount to the policyholder which affect the confidence
and trust of policyholders (HIH : The Inside Story Of Australia's Biggest Corporate Collapse,
2019.). It also affects the other corporate bodies and insurance company of Australia because the
customer are not ready to invest their money in any insurance company. It reduces the wealth of
stakeholders and also affect the growth of market.
The insolvency and liquidation of company also affect the auditor profession or auditors
and the corporate governance. The collapse arises a question on all the auditors regarding their
profession because of the last 6 months financial statements of HIH Insurance Limited. It has
been identified that it suffer from the heavy losses but the Auditor are not able to find the
problems which increases their debt (Ullah & et.al., 2016). On March 2001 the annual report of
company show that the asset value AUS $7.1 billion and liability of the company is AUS $8
billion which clearly indicate A$900 million deficiency. It was only the books of account loss
but the real loss or debt of company are much larger than the expectation.

The top management or senior authority mislead the accounts and manipulate the share
market beyond the rules and regulation of company which affect the corporate governance.
During the period of collapse the management team is not able to make effective and efficient
policies for the company which highly affect corporate governance.
Firm need to choose specific audit approach in order to ensure that sufficient step was
taken before collapse of company. If substantive based approach is used then in that case firm
can ensure that likelihood or severity of collapse will be reduced to great extent. This approach is
used in a situation where financial reporting system or internal control over financial control are
not completely reliable. In this approach auditor never attempt to test level of control on financial
reporting. Auditor focus is on large size transactions that happened at workplace during a year.
In this approach after identification of large size transactions' auditor demand vouchers or any
other document that prove that transaction was happened during financial year. On basis of
analysis of facts, it is identified whether transaction actually happened or any malpractice
happened. In the entire process accountants check whether accounting recognition and
classification are according to accounting standards that are taken in to account to prepare
accounting statements. Important fact to be noted is that firm can present all evidence in front of
auditor but it may do wrong classification of transaction which may lead to fraud and collapse of
the business firm.
There are some limitations of this approach and one is that large number of documents need
to be reviewed and it becomes very difficult task for single team to do. Major advantage of this
approach is that auditors can minimize risk that internal control have on the financial reporting of
the accounts of the business firm. Hence, it can be said that there are benefits and drawbacks of
approach but weight of benefit is very high (Brown-Liburd, Issa & Lombardi, 2015). Thus, on
this basis it can be said that substantive based approach is one of the best approach that can be
used to reduce likelihood or severity of collapse. In past few years number of cases happened
where it is identified that firms face loss in their business consistently but hide such kind of facts
from public by manipulating facts and figures in the books of accounts. Such kind of cases
comes in existence when situation become out of control and it is necessary to communicate real
facts to the public. Substantive approach is one of the method that can be employed by business
people to identify if there is any manipulation in the company books of accounts. By using
mentioned approach likelihood or severity of collapse can be reduced to some extent.

CONCLUSION
It can be summarized from the above report that HIH Insurance company collapsed
because of the various reason such as bad management, misleading statements, under
provisioning, lack of attention of management, insufficient control etc. It can be analysed that the
director of the company manipulate the share market, mislead financial statements etc. which
increases debt of the company. It can be concluded from the essay report that the collapse of
company affect the different stakeholders and entity. The wealth of the stakeholders also affected
because of the collapse. The liquidation of HIH Insurance Limited Company make huge impact
on Auditing profession and corporate governance because it increases the question mark on the
performance of corporate governance and auditors. It can be concluded from the essay that the
proper auditing of company financial statements helps to identify the various fraudulent and
misconduct activity of management. If the proper auditing is done before the collapse than HIH
company are able to pay back the insured amount to the policyholder and also the stakeholders
does not have to face the losses in their investment.

REFERENCES
Books and journals
Brown-Liburd, H., Issa, H. & Lombardi, D., (2015). Behavioral implications of Big Data's
impact on audit judgment and decision making and future research directions. Accounting
Horizons. 29(2). pp.451-468.
https://www.aaapubs.org/doi/abs/10.2308/acch-51023?journalCode=acch
Damiani, C., Bourne, N. & Foo, M., (2015). The HIH claims support scheme. Economic Round-
up, (1). p.37.
https://treasury.gov.au/sites/default/files/2019-03/Roundup_01-2015_article3_HIH.pdf
Othman, Z., & e.al., (2015). Characteristics of Ethical Business Culture in Small and Medium
Enterprise: A Case. ADVANCES IN GLOBAL BUSINESS RESEARCH Vol. 12, No. 1, ISSN:
1549-9332. p.832.
https://files.eric.ed.gov/fulltext/ED501640.pdf
Roy, S., (2017). The Significance of Business Ethics as a Competency Requirement in Fiji’s
Accountancy Profession. Australian Academy of Accounting and Finance Review, 2(3).
pp.264-279.
file:///home/user/Downloads/28-112-2-PB.pdf
Ullah, M., & et.al., (2016). DOES CORPORATE GOVERNANCE AFFECTS RISK: A CASE
OF LISTED FIRMS ON PAKISTAN STOCK EXCHANGE. City University Research
Journal, pp.21-26.
http://www.cityuniversity.edu.pk/curj/Journals/Journal/special_aic_16/3.pdf
Online
HIH : The Inside Story Of Australia's Biggest Corporate Collapse. 2019. [Online]. Available
through : <https://www.smh.com.au/entertainment/books/hih-the-inside-story-of-
australias-biggest-corporate-collapse-20030315-gdgff3.html>