AUDITING AND ASSURANCE SERVICES -Company History
In 1968, Ray Williams and Michael Payne formed CE Health International. As a result of a merger in 1995 between CE Heath and the Swiss based insurer Winterthur Insurance Company, the company HIH Winterthur was established. In 1998 the name of the company was changed again, this time to HIH Insurance Limited. This last name change had been brought about by the withdrawal of Winterthur from the operations. Winterthur had become increasingly nervous about the operations of the company and consequently had sold its shares. HIH continued to expand its insurance ventures with the purchase of FAI Insurance, World Marine and General Insurance and Cotesworth, which had direct links with Lloyd's Insurance. However, FAI had been purchased in 1998 at a premium from Rodney Adler (Non-Executive Director of HIH) and without either board consultation or the completion of a due diligence report. Accordingly, in September 2000, HIH was forced to write off its investment in FAI for $400 million.
The insurance arenas entered into by HIH included the high-risk areas of marine, aviation, natural disasters and film financing insurance, in addition to the highly competitive workers' compensation insurance market in California. HIH experienced considerable losses due to its exposure to these high-risk areas. Such losses included:
- $100 million from film losses
- Considerable damages claims from the major hailstorm in Sydney (from the takeover of FAI)
- Large losses from the 1999 Florida typhoon
- Extensive workers' compensation claims as a result of the industry deregulation in California. The Californian courts had altered the award scale for benefits, which resulted in a dramatic increase in the cost of claims to insurance companies such as HIH.
Question 1 -Business Risk and Inherent Risk Assessments
"It is difficult for an insurance company to go broke in the space of a year, let alone a few months" Sydney Morning Herald, May 19-20, 2001.
Required:
a) How would you assess the business risk of HIH Insurance Limited?
b) List several inherent risk factors effecting HIH at the financial report level and whether they would have contributed to an increase or decrease in the inherent risk assessment.
Question 2- Legal Liability
Sydney solicitor Bruce Dennis will be coordinating a class action for some 600 HIH shareholders against the auditors - Andersens (as the firm is now known). In addition, HIH's liquidator, Tony McGrath of KPMG Peat Marwick is also likely to seek to recover funds for HIH creditors.
Required:
a) Discuss the facts and findings of relevant court cases that Andersens should refer to in determining the likelihood of the partnership being held liable to:
1) clients
2) creditors.
b) What conditions need to exist for a negligence action to be upheld?
Question 3 - Ethics
The HIH board of directors includes three former partners of the audit firm Arthur Andersen. In the past decade, Andersens has earned more than $8 million from auditing HIH books and $7 million for other services.
Required:
a) Why would HIH have wanted to hire prior members of its external audit team?
b) What are the advantages of having the same firm provide both the auditing and consulting services?
c) Indicate whether these circumstances represent a violation of ethical standards and give reasons for your answer.
d) Outline the primary recommendations for audit reform proposed by the Ramsay Report and CLERP 9. What impacts do you feel these changes will have on the practice of auditing?
Attachment:- auditing.rar