Question

Do a research on HIH Insurance collapse and analyse how auditors had failed to fulfil their responsibility professionally and cover the following points in your report.
1. Executive summary
2. Introduction of the company
3. Auditors of the company
4. Collapse due to the audit procedures
5. Auditors professional and ethical behaviour
6. Recommendation
7. Conclusion
And provide some references for your work.

Answer 1

Executive summary: - This has served as a case study into HIH collapse dealing with corporate governance and auditor’s failure to fulfil their responsibility professionally. The case study highlight the causes of HIH collapse &    how auditors had failed to fulfil their responsibility professionally. Based on such description, we are here to examine the mechanism flaws inherent in the HIH case that aided the failure of HIH, which include the ineffective corporate governance practice and questionable audit of Andersen Accounting Firm.

Key points: - Auditors failure to fulfil their responsibility professionally, Corporate Governance & Bankruptcy.

Introduction of the company: - HIH Insurance was founded in 1968 by Ray Williamsand Michael Payne. Known as "MW Payne Underwriting Agency Pty Ltd", it was acquired in 1971 by British company CE HeathPLC. Ray Williams was appointed to the board of CE Heath in 1980. The business operations of CE Heath were subsequently transferred to "CE Heath International Holdings Ltd" in 1989 with CE Heath PLC retaining 90% ownership of CE Heath International Holdings. In 1992, CE Heath International Holdings floated on the Australian Stock Exchange. In 1995, CE Heath International Holdings acquired CIC Insurance Group. The remaining 48% holding that CE Heath PLC maintained in CE Heath International Holdings was sold to a subsidiary of CIC Insurance Group called CIC Holdings Limited. CIC Holdings increased its share in CE Heath International Holdings to 50% and CIC Holdings was purchased by Winterthur Swiss Insurance Company (Winterthur Swiss). In May 1996, CE Heath International Holdings changed its name to HIH Winterthur. Through 1997 and 1998, HIH Winterthur acquired a large number of companies both in Australia and globally, including Colonial Ltd General Insurance's operations in Australia and New Zealand, Solart in Argentina and Great States Insurance Co in the United States. Most notably, however, HIH acquired the large Australian insurance company FAIInsurance, whose chief executive Rodney Adler became a director of HIH in 1999. Winterthur Swiss sold its 51% share in HIH Winterthur to the public and HIH changed its name to HIH Insurance Ltd.

Auditors of the company: - Arthur Andersen performed the financial audit of HIH from 1971 until HIH's provisional liquidation in March 2001. During this period Arthur Andersen developed a professional relationship with HIH, whom it considered to be one of its major Australian clients. ‘Australia's current financial reporting framework is recognized as amongst the world's best, but this obviously did not and cannot offer immunity from corporate failure’. There are numerous individual factors that can have and are having an impact on the reporting framework and should be addressed. Specifically, the auditor's role is to add credibility to the financial reports prepared and signed off by the company's directors and to provide a high level of assurance that the financial reports are free from material misstatement. Auditors may be unfairly or harshly judged for not foreseeing the collapse and warning the market and shareholders. In some instances there are clear cases of complacency on the auditors' part or outright negligence on the part of the auditor. The HIH Insurance collapse in 2001 has significantly influenced the audit profession, especially in the area of audit independence, audit committee and the legal liabilities of auditors and this case leads to a number of lessons that need to be learnt regarding the audit profession and the responsibilities of auditors.

Collapse due to the audit procedures: - It was found that three of HIH's board members in 2000 are previously employed by Arthur Andersen, who is the external auditor of HIH. It raised huge issues for the reliance of the information provided by company and their auditors. Lack of independence for non-executive director Dominance of Ray Williams, the CEO of HIH Lack of independent information resources Inadequate risk management FLAWS AS THE ROYAL INVESTIGATION REPORT OF HIH DISCLOSED, THERE ARE SOME FLAWED ASPECTS REGARDING HIH CORPORATE GOVERNANCE PRACTICE. Lack of independence for non-executive director from the management • Justin Gardener, member of audit committee, used to be the auditor of FAI in 1980’s and FAI was sold to HIH in 1998. This takeover transaction was regarded as the one of main causes for the later failure of HIH Company as HIH has to pay huge cost for the acquisition of FAI. Undue diligence for investigation work and misjudgment of the financial perspective of FAI contribute to this awful transaction. Justin Gardener must be put in the place where his independence was questioned due to his conflict of interest. Rodney Stephen Adler, the member of investment committee in charge of the transaction also got suspect in regard to the independence because the situation should have been better had he paid due diligence. Due to the seemingly defect in the independence of the non-executive directors who composed the audit committee, the function effect of the audit committee deserved to be doubted. Accordingly, the non-executive director can hardly fulfill their responsibility with independent information resources.

Auditor’s professional and ethical behavior: - Auditor’s professional and ethical behavior are:-
Trust, Confidence and Credibility- The legislature, the general public and the audited entities are entitled to expect the SAI’s conduct and approach to be above suspicion and reproach and worthy of respect and trust.
Integrity- Integrity is the core value of a Code of Ethics. Auditors have a duty to adhere to high standards of behavior (e.g. honesty and candidness) in the course of their work and in their relationships whether it be personal or with the staff of audited entities. In order to sustain public confidence, the conduct of auditors should be above suspicion and reproach
Independence, Objectivity and Impartiality- Independence from the audited entity and other outside interest groups is indispensable for auditors. This implies that auditors should behave in a way that increases, or in no way diminishes, their independence.
Political neutrality- It is important to maintain both the actual and perceived political neutrality of the SAI. Therefore, it is important that auditors maintain their independence from political influence in order to discharge their audit responsibilities in an impartial way.
Conflicts of interest- When auditors are permitted to provide advice or services other than audit to an audited entity, care should be taken that these services do not lead to a conflict of interest. In particular, auditors should ensure that such advice or services do not include management responsibilities or powers, which must remain firmly with the management of the audited entity.
Professional Secrecy- Auditors should not disclose information obtained in the auditing process to third parties, either orally or in writing, through any medium except for the purposes of meeting the SAI’s statutory or other identified responsibilities as part of the SAI’s normal procedures or in accordance with relevant laws.
Competence- Auditors have a duty to conduct themselves in a professional manner at all times and to apply high professional standards in carrying out their work to enable them to perform their duties competently and with impartiality.
Professional Development- Auditors should exercise due professional care in conducting and supervising the audit and in preparing related reports.

Recommendation & Conclusion:- The collapse of HIH increased awareness of the significance of insurance to the wider economy. In the case of long-tail classes of insurance, of which HIH was a significant provider, it is often possible to conceal past underwriting losses or management mistakes for long periods of time. Auditor should be professionally responsible.

Some references:-
1.   https://www.coursehero.com/file/28260857/SOCRES-POdocx/#:~:text=I.-,INTRODUCTION%20History%20of%20HIH%20Insurance%20Limited%20HIH%20Insurance%20was%20founded,of%20CE%20Heath%20in%201980.
2.   https://en.wikipedia.org/wiki/HIH_Insurance
3.   https://www.slideshare.net/Kmittal928/corporate-failure-for-hih-insurance
4.   http://www.oas.org/juridico/PDFs/mesicic4_blz_code_%20ag.pdf