Auditing: Insurance and Royal Commission

Topics: Insurance, Auditing, Ethics Pages: 11 (1994 words) Published: May 22, 2014


MIT765801
AUDITING

Individual Assignment

HIH Insurance Report

Student Name: Jinyun Wang
Student ID: MIT122634
Lecturer Name: Susan Currie
Tutor Name: Susan Currie
Due Date: 29 / 1 / 2014
Submitted date: 7/ 2/ 2014 by email

Executive Summary
The auditing profession plays a significant role in industrialized economies for many years. In the insurance industry, the manner of auditing profession is regulated. The collapse of Health International Holdings (HIH) was recorded as the biggest corporate collapse in the history of Australia. Also an investigation of Royal Commission was warranted by the HIH collapse. Two questions considered in the failures of HIH Insurance: Did the auditors implement their responsibilities and roles? Did the auditors fulfil their auditing work ethically? This report provides an analysis of auditing issues arising from the collapse of HIH Insurance. Among factors that have gave rise to the corporate failure of HIH Insurance, that of the ethics of auditing profession, roles of auditors and effectiveness of audit committee have regarded as particular significance.

Contents

1. Introduction
HIH Insurance was established when MW Payne Liability Agencies Pty Ltd was incorporated by Michael Payne and Ray Williams joining together to do business of insurance underwriter in Australia in 1968. Their operations were throughout the world, accompanied with businesses working in numerous countries such as the United Kingdom, New Zealand, Hong Kong, and the United States (Peursem, Zhou, Flood & Buttimore, 2007). There are many varieties of insurances in the markets of UK, the USA and Australia, involving compulsory insurance (for example, workers’ compensation and third party motor vehicle insurance) and non-compulsory insurance (for instance, home contents and travel insurance) (Kehl, 2001). More than 250 subsidiary companies comprised of HIH Insurance group in a highly complicated structure at the time of liquidation. With net assets of $939 million at 31st June 2000, HIH Insurance used to be the second biggest underwriting insurance in Australia. With debts of about between $3.6 billion and $5.3 billion, HIH Insurance was placed into provisional liquidation on 15th March, 2001 (Peursem et al., 2007). The collapse of the HIH Insurance was considered the largest corporate failure in the history of Australian business. Subsequently, the collapse contributed to the establishment of a Royal Commission to make an investigation on ‘the degree of which behaviours of employees, directors, auditors, advisors and actuaries give rise to HIH failure or concerned undesirable company practices’ appointed by the Australian federal government (Mirshekary, Yaftian & Cross, 2004). Because HIH Insurance was a major insurer in Australia, its collapse had a widespread impact on society (Leung & Cooper, 2003). The purpose of this report is to analyse the audit issues arising from the HIH Insurance collapse. A brief of HIH profile is provided prior to the auditing analysis of HIH Insurance collapse. The next part of this paper is devoted to examine issues related to HIH audit practices with respect to audit independence, audit committee and ethical considerations.

2. Discussion
2.1 Audit Independence
The issue of audit independence is fundamental significant in the collapse of HIH Insurance. Audit independence refers to giving an unbiased and objective perspective in the assessment of the results, the performance of audit tests, and the release of the audit report. This is one of the auditor’s characteristics of most crucial importance. In addition, independence is basic principles of objectivity and integrity (Arens, Best, Shailer, Fiedler, Elder & Beasley, 2010). According to HIH Royal Commission (as cited in Mak, Deo & Cooper, 2005), the Royal Commissioner discovered that Andersen was not independent and had not...
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