Corporate Collapse and Audit Failure: A Case Study of HIH Insurance

This report provides an in-depth analysis of the HIH Insurance collapse, examining the failures of the auditors in fulfilling their professional responsibilities. The report begins with a brief introduction to corporate collapse, followed by a detailed overview of the HIH Insurance case. It explores the role of the auditors, including Arthur Andersen, and analyzes how audit procedures contributed to the collapse. The report also addresses issues of auditor independence, ethical and professional behavior, and the amendments to auditing standards that have taken place since the collapse. Furthermore, the report offers recommendations for improvements in the auditing profession based on the lessons learned from the HIH Insurance case. The report concludes that Andersen's approach to the audit was insufficiently meticulous to engender confidence in the reliability of HIH's financial statements and emphasizes the need for auditors to be diligent, independent, and ethical in their work.

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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of 7.38 billion dollars, give its net assets of around 940 million dollars. For this work, Andersen
received 1.7 million dollars as an auditor to group for 12 months. The AWA case is a leading
authority of Australia that works upon the issues related to auditor negligence. Mismanagement
of affairs of company epitomized true lack of attention to details, accountability for performance,
lack of integrity in internal systems and processes of company and poor decision making. The
accounting systems of company and the audit performed on these were not proper. Failure to
audit planning procedure of DHS also contributed to failure of the company. Failure of auditors
to perform post balance day reviews appropriately, failure to adequately inform board regarding
findings of audit related to foreign exchange transactions, failure to qualified accounts for year
1986, the signing through auditors of erroneous profit report, non-detection of foreign exchange
manager's illegal activity are the reasons behind biggest collapse of HIH insurance (Fernando,
2018).
Auditor’s independence and ethical and professional behaviour within case\
Lack of independence did not translate to reality that shows susceptibility to undo impact.
The issues associated with auditor independence were considered crucial to enquire (McGivern,
and Handford, 2015). The royal commission established close and long standing relationship
between Andersen’s and HIH. Thus, lack of independence is not surprising. The audit objectives
and procedures of Andersen was determined by commission and as given primary evidence of
practices and principles adopted by it. In respect to the risk determined in auditing HIH, effective
actions taken by Andersen even though its own system of assessment correctly determined HIH
as maximum risk client needing particular care and supervision and requires to develop risk
management plan.
Amendments that taken place in auditing standards & principles since then
There have been considerable changes takes place in amendments to ensure proper
standards of audit. For better regulation in this area, the main impetus came from collapse of
HIH and other companies who are indulge in fraudulent activities (Kumar, 2017). In this area,
the most far reaching reforms were executed in United States by Sarbanes Oxley act of 2000,
consumer protection act and Dodd frank Wall Street reform. Corporate law economic reform
program was introduced in Australia in corporation’s act. Some drastic transformations to
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regulation of audit profession as well as new provisions associated with constant disclosure and
protection of whistle-blowers.
Recommendations for any other improvements in auditing profession on the basis of collapse
It is recommended that the auditors must be careful while investigating the financial
statements of any company. They should not have signed off any statement on the basis of trust
and good relation with the respective firm. It is the prime responsibility of auditors to ascertain
illegal or fraudulent activities takes place in organisation. It is also recommended that forensic-
type fieldwork phrase must be introduce in the process of auditing in order to increase the
probability that auditors will identify fraudulent financial reporting easily. Apart from this, audit
companies must put more stress on performance of audits with high-quality in communication
with upper management, training and compensation, performance evaluations, and promotion
decisions. The audit firms are require to ‘aspire to “zero defects” as their prime goal and effort to
remove audit failure completely’
CONCLUSION
As per the above mentioned report, it has been concluded that the approach of Andersen to
audit in year 1999 and year 2000 was insufficiently meticulous to engender confidence in users
as to reliability of financial statements of HIH. The auditing issues includes independence of
auditors, role of audit committee of HIH's board, over statement of revenue and understatement
of expenses etc. It has been clearly found from the analysis that HIH was indulged in the illegal
activity and hide the actual situations from its investors and other stakeholders.
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REFERENCES
Books and Journals
Bourke, S. and Béchervaise, N.E., 2017. Corporate 8_. Something to Believe In: Creating Trust
and Hope in Organisations: Stories of Transparency, Accountability and Governance,
p.59.
Damiani, C., Bourne, N. and Foo, M., 2015. The HIH claims support scheme. Economic Round-
up, (1), p.37.
Fernando, M., 2018. ETHICS, VALUES AND RESPONSIBLE LEADERSHIP. Leadership:
Regional and Global Perspectives, p.99.
Kumar, R., 2017. A hundred years of corporate responsibility. Something to Believe In: Creating
Trust and Hope in Organisations: Stories of Transparency, Accountability and
Governance.
McGivern, B. and Handford, P., 2015. Two problems of occupiers' liability: Part two-the
occupiers' liability and civil liability legislation. Melb. UL Rev., 39, p.507.
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