Corporate Failures : Corporate Law Assignment

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Introduction

The fall of some major companies has raised serious concerns about the role of auditors and how far they are morally responsible for Corporate Law Assignment Help. In this context, a detail study will be conducted to find out the role and contribution auditors in general management and avoidance of corporate scams.

Accounting irregularities in HIH Insurance

HIH Insurance was the second largest insurer in Assignment Help Australia and since its inception; they were significantly successful in expanding their business. However, large-scale irregularities in HIH Insurance forced investors to liquidate their business (Gilbert, 2006).

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Accounting and business irregularities were found in HIH Insurance. Most of the Corporate Law Assignment Help acquisitions of HIH Insurance were over-priced and they paid more than their actual valuation and thereby depleting their financial resources. HIH Insurance spend huge in unproductive areas and at the same time not operating according to minimum solvency requirement set by the prudential regulator, APRA and the Insurance Act 1973 (Bradford, 2003).

HIH Insurance started following aggressive accounting since 1992 and this led to either understatement or overstatement of assets or liabilities and thus severely hampering financial strengths of the company. Aggressive accounting led underestimation of liabilities by $18 million and under-reserved by $41 million when due diligence report was prepared by Ernst Young for CIC Holdings.

However, the major portion of the under-reserved was a part of prudential margin. Ray Williams, then CEO of HIH Insurance rejected considering prudential margin as reserve for conducting normal business assignment help. After completion of the merger between CIC Holdings and CE Health International, incorrect accounting treatment was carried by the management and thereby distorting different components of the balance sheet (Lawton and Lasthuizen, 2011).

HIH Insurance also used pledged securities in quarterly reports to hide their true financial positions and thereby avoiding negative sentiments for the company. Although, this action was not the main reason for their downfall, it revealed their characteristics and weakness in generating revenue and meeting investor’s expectations.

Acquiring companies without proper valuation led HIH Insurance to pay more than they original value. As they made number of acquisitions to expand their business, it drained financial resources of HIH Insurance. Most of their purchase was financed through debt and thereby putting tremendous pressure on them with respect to payment of interest. The acquisition of FAI is one such example. Sensing accounting irregularities, advisor of FAI, Goldman Sachs valued FIA at $20 million down from $200 million (Ammenberg and Sundin, 2005). This action severely affected the Austrailian financial review position of HIH Insurance and at the same time they were forced to write-off their investment in FAI. Besides faulty acquisitions, management used company’s fund for personal expenses. However, these personal expenses were not recorded according to accounting treatment but they were charged to Corporate Law Assignment Help credit cards (Arens et al. 2000)

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Thus, incorrect accounting treatment of expenses and others within HIH Insurance led to erosion of financial resources within the business.

The role of auditors

From 1971 to 2001, the external audits for HIH Insurance were conducted by Arthur Anderson. The HIH Insurance also collapsed due to lack of credibility and responsibility towards their duty. In most of the acquisitions, it has been found that Arthur Anderson knowingly did nothing with respect to overvaluation. Although, Arthur Anderson categorised their client ‘’HIH Insurance’’ in high risk, no efforts were made by Arthur Anderson to help HIH Insurance in minimising their level of risk (Gul, 2009). Year on year, this policy of Arthur Anderson continued and played no role in familiarising the amount of risk being generated in HIH Insurance.

The broad of directors of HIH Insurance included managers from Arthur Anderson and their personal relationship with the management assignment of HIH Insurance also forced them to overlook major developments risking their very existence.

Lack of independence between board of directors and auditors failed to produce sufficient working papers to support major negative developments within HIH Insurance and the quality of the audit conducted by them (Home and Join, 2003). In most of the cases, it has been found that competence, judgement and independence were comprised by auditors and thus false financial statement were prepared deceiving investors about financial soundness of the company.

Along with audit, Arthur Anderson also provided non-audited services to HIH Insurance which is allowed only in special circumstances. Thus, unethical behaviour and lack of responsibility on behalf of Arthur Anderson also contributed significantly to the collapse of HIH Insurance.

How auditors could have helped to avoid these collapses

The collapse of HIH Insurance could have been avoided if Arthur Anderson would have done their duty and responsibility in an effective manner.

For any external auditor, it is very important to conduct business according to ethics. Ethics is a set of standards or norms which guide an individual or company to behave in a particular manner. Unlike laws, ethics cannot be defined as right or wrong (Hossari and Rahman, 2005). Likewise, understanding with respect to industry norms would have helped them to force HIH Insurance in having better understanding of the market and pricing their products accordingly.  Fundamental problems of HIH Insurance were under pricing and reserve problems. HIH offered insurance at low cost but they failed to set aside securities to meet future liabilities (Mak et al. 2005). In this context, it was the duty of the auditor to identify these areas and thereby making strong recommendation to discontinue such practices. Such recommendations would have brought some changes in the working of HIH and thereby avoiding financial collapse.

One of the major roles of external audit is to act independently with respect to checking accounting transactions in any financial year. Likewise, independent auditing by Arthur Anderson would have enabled them to scrutinise any suspected transaction in the business. High level of independent would prevent HIH in influencing Arthur Anderson and thereby increasing the reliability and viability of their report. Independent report by Arthur Anderson would have accurately determined the amount of expenditure incurred for running normal operations of the business (Mirshekary et al. 2005).

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Independent audit by Anderson would have also helped them to track the movement of money used for personal purpose. It would have also helped them to verify and support the amount required for different mergers and acquisitions. This in turn would have enhanced better utilisation of financial resources and making investments at reasonable amount. Large amount of financial resources of HIH was eroded primarily due to incorrect valuation; independent operation of Arthur Anderson would have enabled them to value their investment in an appropriate manner and thus reducing the level of risk associated with them (Tarr and Derrington, 2001).

Honesty with strong working policy is very important for any external auditors and they are appointed by shareholders to present accounting reports with honesty. In this context, honest and hard working by Arthur Anderson would have highlighted different accounting practices to their shareholders and thereby changing the entire management of HIH. Performing duty with honesty would also generate fear among management and other practices in adopting malpractices within and outside the organisation (Watson and Weaver, 2007).

Their honest and dutiful activities would have prevented HIH from using pledge securities in their balance sheet. Maintaining high level of integrity by Arthur Anderson would have also helped in preparing financial statements free from biasness and thereby enabling shareholders to take concrete decisions. This would have also helped HIH Insurance in utilising their financial in an effective manner.

One of the major tasks of independent auditors is to assess the level of risk associated with their client’s business. Along with auditing, auditors are authorised to give advice with respect to different managerial aspects. Close working between Arthur Anderson and HIH would have helped in proper valuation of risks associated with merger and acquisitions and range of products offered by them (Gilbert, 2006). Insurance sector are prone to different types of risks which include both systematic and non-systematic risks. Shifting from traditional services like auditing to providing administrative and risk evaluation services would have been of immense help in hedging risks. This action on behalf of the auditors would have forced HIH to keep substantial amount of capital and securities and thereby avoiding problem of liquidity (Lawton and Lasthuizen, 2011).

It is not possible for audit companies to control or check all activities of their client throughout the year. In this context, sampling audit by Arthur Anderson would have been able to monitor activities pertaining to policy holders, governments, shareholders and others associated directly or indirectly with the company. This action would have also allowed Arthur Anderson to have better control over the activities of HIH. Unlike periodic auditing, conduct of sampling auditing would have cost very less to Arthur Anderson and at the same time being more responsible towards their clients (Bradford, 2003). Thus, had the auditors have taken above mentioned steps, collapse of HIH Insurance could have been avoided.

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Conclusion:

The collapse of major companies across the globe has raised serious concern with respect to the role of Corporate Law Assignment Help management, shareholders and particularly auditors. Integrity, independence, responsibility are some of the terms that are associated with auditors and when they are appointed they are expected to perform their duties. In this context, detail study of HIH Insurance showed that auditors too had some role and resulting in the collapse of HIH Insurance. Therefore, stringent rules and regulations are required to be made so that similar incidents can be avoided.