Auditing and Assurance of Assessment & Effective Reporting

Describe about the Auditing and Assurance of Assessment & Effective Reporting.

HIH Insurance Limited, as originally formed in 1968, and finally restructured in 1998, was doing insurance business. But its ways seemed to be quite different from how an insurance business should ideally be done. And this exposed HIH Insurance Limited to multiple risks and this, in turn led to the failure of HIH Insurance Limited. There were a number of risks inherent to the HIH Insurance Limited. The business activities of the company were always questionable. That is why Winterthur Insurance Company withdrew its shares from the erstwhile HHI Winterthur Company. The activities of the HIH Winterthur Company made the management of Winterthur Insurance Company, the swiss based insurance company that had merged with the CE Health International, so nervous that they decided to end the merger and withdraw their shares from the merger. The basic nature of an insurance company is risk oriented. The insurer needs to ensure that the risk for his business is mitigated as far as possible so as to bring about a sense of security to him and his clients. He is entrusted with people’s money and safe keeping and proper utilisation of the same is the insurer’s responsibility and duty. Any act done so as to put that money at risk is in itself an inherent danger to the business (Baldwin, 2013).

HIH Insurance Limited was doing business recklessly. They would acquire companies without proper due diligence. They were spreading their wings in all forms of insurance business such as marine, aviation, film-making. They were doing this without proper due diligence or board consultation. Not just should there have been a due diligence about the company proposed to be purchased or merged with, but some research on the political conditions was also needed which they had done away with. The inherent risk to the business of HHI Insurance Limited was not just external factors since these factors contributed a meagre portion to the losses. The major deficiency was in their working pattern which led to the incredible losses they made. Also, the financial planning of the company was poor. Their investment plans were faulty and short sighted. The wrong investment policies were the major loophole and hence, a dent was seen in the overall system. They made poor provisions for natural disasters and they were unable to maintain proper prudential margins (Gilbert et. al, 2005). Since, margins declined considerably it led to disturbances and hence there was a deficiency in the system.

The HIH Insurance Company held a remarkable example of reckless planning and inefficient management. The takeover of FAI Insurance at a premium was a great setback to the financial position of the company. This contributed to an increase in the inherent risk factor of the company. Before a takeover, extensive due diligence is a must. And in this case, HHI Insurance limited took over FAI Insurance without any proper due diligence and research. This loss was already too much for the future of HIH Insurance Limited. To add to it, they purchased the shares of FAI Insurance at a premium. This shook the financial fundamentals all the more and added to the inherent risks (Heeler, 2009).

Another risk that HIH Insurance called for is the risk of discontinuing the industrial practice of maintaining prudential norms. These norms act as buffer for natural disasters and contingencies. HIH Insurance instead adopted the policy of reinsurance instead of maintaining prudential norms. This increased the inherent risk profile of the company by multiple times. In fact this can be said to be a major contributor in the downfall of the company. When the risk enhances it leads to a strong decline and the company fails to meet the changing scenario. For a company to be efficient and successful it is essential that the risk profile is managed with a precision (Wood, 2011).

The HIH Insurance paid a huge sum for auditing services and out of which, more than 95% was for provision of consulting and other services. Even after spending huge sums on consulting and such other services, the activities and accounts of the company showed many loopholes. Which is not just absurd but questionable too. This also led to an increase in the inherent risk of the company.

Lack of independence of non-executive directors and auditors, makes the company vigilance difficult. It is important for the company to have a proper administration that will look after the affairs of the company (Wood, 2011). Inability to pay off its debts, under-reserving policy, and lack of good guidance and supervision for the company, all added to the increase in business risks of the company. This has been clearly indicated that the company had a weak scenario and ultimately lead to a downfall.  

Now, purchasing companies which had links with a competitor is another factor that added to the increase in the risk profile of the company. It can be said to be a major risk because the competitor always look forward to destroy the position of the other company (Kaplan & Williams, 2013). All this contributed to the increase in inherent risks of the HIH Insurance Limited.

i) One of the case laws was: The insurance company’s directors unlawfully used money from people holding guaranteed annuity rate policies to subsidise people with current annuity rate policies. After a House of Lords judgment in Equitable Life Assurance Society v Hyman, the Society closed. Though never technically insolvent, the UK government set up a compensation scheme for policyholders under the Equitable Life (Payments) Act 2010.

The above court case was a remarkable case that showed the world how deceitful an insurance company could be. It is a clear cut indication that the insurance company has played a deceitful role. Andersons can refer to this case law to determine the partnership being liable.

The case law of Raskov vs. Stapke & Harris can be referred to when it comes to partnership being liable to the creditors. In this case it as witnessed that partnership can defend the declaratory judgement and hence can take a stand. Therefore Anderson can check this case for reference.

Negligence is an act of the management where they turn blind to the activities of the company. Negligence can be deliberate or due to carelessness. Ignorance however cannot be treated as an excuse to evade penal and legal actions (Roach, 2010). Providing false and misleading information, giving away deceitful claims, conducting dishonest activities or being ignorant about facts and being wilfully ignorant, these are a few things that amount to being negligent. And any of these can attract penal provisions against the accused. And negligent action can be upheld against such a person (Hoffelder, 2012). Also, any personal profit made under professional name also attracts penal actions. Any act of negligence that causes harm is punishable. If someone is entrusted with a duty, and especially if it involves public money, it is mandatory for the person to take extra caution and be extra diligent. Any wrong act can be a problem and will lead to a problem therefore, it is of utmost necessity that due care is taken and specifically when public money is involved.

For a case of negligence to be withheld, there should first be an element of duty, which should be breached. These are two important ingredients. There should be a responsibility to be fulfilled and someone should breach that responsibility as well. Where a reasonable person would find that a duty exists under a particular set of circumstances, the court will generally find that such a duty exists.

A defendant is liable for negligence when the defendant breaches the duty that the defendant owes to the plaintiff. A defendant breaches such a duty by failing to exercise reasonable care in fulfilling the duty. Unlike the question of whether a duty exists, the issue of whether a defendant breached a duty of care is decided by a jury as a question of fact. Now there should exist a cause in fact. The plaintiff has to prove in the court of law that the defendant’s action caused losses to him. The next element is a proximate cause. This defines the scope of the defendant’s responsibility in the negligence case. The defendant must have foreseen the level of losses he is causing. So if the losses are more than what he would have foreseen, then the plaintiff cannot prove that the defendant’s actions were the proximate cause of the plaintiff’s damages (Mock et. al, 2013). Then comes the element of damage. The plaintiff’s responsibility is to prove the legality of the damage done to him. Just his inability to exercise reasonable care is not enough. There must exist actual, legally enforceable losses. The final and most important element is the availability of a skilled and expert lawyer who can put forth claims and make the case a win. An expert lawyer turns the adverse situation in the favour of the client (Cappelleto, 2010). This is the most challenging and difficult part about the case of negligence.

The prior members of the external auditor’s team would have been hired because in the past Andersons had earned a lot of revenue from HIH Insurance Limited. It is evident that Anderson would have helped HIH Insurance Limited in concealing their foul activities for the entire duration of them being the auditors of HIH. The company had paid major chunk of its fees as consultation fees and still they could never point out or rectify the malfunctioning of the company or its inconsistencies. There are no traces of the auditors being diligent in any way to point out the inconsistencies and foul play happening in the company. It was their duty to suggest the right thing to the company (Livne, 2015). The company’s management had been constantly messing with the finances but the auditors could not find out, is a hard to believe fact. Hence, it can be presumed that the auditors must have been wanted to be re hired so that they can manipulate with the accounts. Arthur Anderson, the auditor of HIH Insurance Limited, had given the company an all clear on their financial statements and four months later an absolute different picture emerged. Susceptibly, handing over the keys of the locker to the thief is the safest way to safeguard the valuables. And his might have been what HIH Insurance Limited must have thought. Anderson however had kept too many things at stake, from his reputation to his licence for audits.

Auditing and consultancy services are inter-related but not the same. Auditing services are provided to audit accounts and provide expert opinion on the financial position of the company (Sawyer, 2003). Their duty is to be a watch-dog of the financial activities of the company and stop any malfunctioning. The job of a consultant is to assess the needs of the company and suggest various courses of action. He is entrusted with the task of providing correct advise and service that goes in the best interest. These services are inter-connected. So taking these services from the same person or firm is a beneficial idea. Consultation and audit is a step by step process. First analysing the situation and then providing a solution and then auditing and keeping a close vigilance is the end to end process. It’s hence beneficial for the company to assign the work of both audit and consultancy to the same person. But care should be taken that this does not result in a fraud cartel at the end of the tunnel (Vause, 2009).

Appointing one and the same person as the auditor as well as the consultant is in no way against ethical standards as long as it is not against the law. A valid appointment of an auditor cum consultant is allowed if it is allowed as per law (Vause, 2009). If not as per law, any act done is unethical. HIH Insurance Limited appointed previous auditors as external auditors. The reason seems fishy. For reasons as stated above. It is evident that these auditors have been appointed to give the accused management a leverage of evading their scams being exposed. This is quiet unethical. They are not appointed in this case. They are framed to benefit the management of HIH Insurance Limited. And then, they appointed one and the same person as auditor as well as consultant. If this is not allowed as per the auditor’s law, then they are unethical. Every action must be in tune with the ethical principles and if not it might lead to unwanted result (Christensen, 2011).

The HIH Insurance Limited was remarkable for the insurance industry. It was established that the main reason for the collapse of HIH Insurance Limited is because it failed to provide for its contingencies and also failed to fight the international pressure from the industry. Another very crucial reason was its mismanagement. Its failure to comply with the prudential norms. The Ramsay Report and CLERP propose a number of audit reforms. They have laid down principles and rules to be followed by insurance companies, and details of their dos and don’ts. They include a whole new set of corporate and economic reforms and new prudential norms.

The practice of audit has been very subjective since its inception. The basic principle is to provide an assurance that the financial statements provide the truest possible information and that can be relied upon. Not knowing of facts is pardonable but wilful negligence is not acceptable (Prakashan, 2012). The new economic reforms shall bring a change in the way insurance companies work. Better prudential norms to be followed, more diligence, effective audits are the different benefits that shall be reaped. The practice of audit shall get more systematized and methodical. There shall be more diligence and careful audit procedures. More safeguard of audit papers, better audit practice by practitioners, efficient audit procedures, independence of auditors and more controls are among the few benefits (Parker et. al, 2011).


Prakashan, N 2012,  Practical Auditing, Nepal

Vause, B 2009, Guide to Analysing Companies, Bloomberg Press

Sawyer, L 2003, Sawyer’s Internal Auditing, Institute of Internal Auditors.

Wood, D A 2011, ‘The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision’,  The Accounting Review, vol. 86. no. 6

Baldwin, S 2010, Doing a content audit or inventory, Pearson Press.

Cappelleto, G 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne

Christensen, J. 2011, ‘Good analytical research,’ European Accounting Review, vol. 20, no. 1, pp. 41-51

Gilbert, W. Joseph J and Terry J. E 2005, ‘The Use of Control Self-Assessment by Independent Auditors’, The CPA Journal, vol.3, pp. 66-92

Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press

Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.

Kaplan, S. & Williams, D 2013, ‘Do going concern audit reports protect auditors from litigation?’ A simultaneous equations approach. The Accounting Review, vol. 88, no. 1, pp. 199-232.

Livne, G 2015, Threats to Auditor Independence and Possible Remedies, viewed 18 August 2016,

Mock, T. J., Bédard, J., Coram, P., Davis, S.,  Espahbodi, R. & Warne, R 2013, ‘The audit reporting model: Current research synthesis and implications’, Auditing: A Journal of Practice and Theory, vol. 32, pp. 323-351.

Parker, L, Guthrie, J & Linacre, S 2011, The relationship between academic accounting research and professional practice, Accounting, Auditing & Accountability Journal, vol. 24, no. 1, pp. 5-14.

Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson. has been providing exceptional thesis help to students for the last eight years. We offer our thesis writing services for undergraduate, postgraduate as well as PhD levels. Only PhD qualified writers work on the student’s thesis. We ensure that each thesis is plagiarism-free and fully customizable.

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