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10302 Downloads1 I Published: 29 Dec ,2018
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.
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.
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.
Legal liability of HIH insurance company towards 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.
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.
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.
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.
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.
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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.
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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