RUNNING HEAD: HIH INSURANCE COMPANY 1
HIH INSURANCE 3
HIH INSURANCE COMPANY
INSTITUTION
PROFESSOR
NAME
DATE
Table of contents
Executive summary 3
Issues 3
Facts 3
Ethical dilemmas 4
Ethical issues that led to the HIH Corporate collapse 4
Various issues 5
Apes 110 Code of Ethics in relation to HIH insurance company 7
Corporate Governance 8
Conclusion 8
Recommendations 9
Possible solutions 9
References 11
HIH INSURANCE COMPANY
Executive Summary
This report gives an analysis and evaluation of Ethical issues that led to the collapse of HIH insurance company. Ever Since it was put to record as the major collapse in Australia’s history, an investigation of the royal commission warranted by the HIH Company LTD was conducted to find out what really caused the company’s collapse. However several questions raised in relation to the collapse for instance: Did the auditors implement their roles effectively? Where were they when this was happening and did they really fulfil their work ethically? Who’s to blame for this?
Among various factors which led to the company’s failure, that of the role played by the auditors, the audit committees effectiveness and auditing profession ethics was regarded to have played a significant role in the corporate collapse. The purpose of this report is to examine the ethical issues that led to the failures of HIH insurance company.
Issues
Possibilities of fraud and underpricing
Very Poor Corporate governance and rapid expansion
Negligence, greed, dealing with self, cases of incompetence and reckless management.
Facts
HIH comprised of other subsidiary insurance companies including, (HIH Casualty and general insurance limited, (CIC) limited, General insurance and Marine limited the (WMG).
HIH dealt with many types of insurance in countries such as the United States, United Kingdom and Australia who’s included compulsory and non-compulsory insurance.
In year 2000 according to HIH insurance company annual report, it had an annual gross revenue worth $2.8 billion with total assets and liabilities worth $8.0 & 7.1 billion respectively and total net assets worth $ 900 M.
Ethical dilemmas
An ethical dilemma is a situation which exists when individuals in the event of a circumstance are given two options to choose but neither of the two options can solve the situation in an ethic manner. The main threats which challenged the Audit independence included the threat of intimidation threat, self-interest threat, threat of self-review, advocacy and familiarity this are some of the factors that caused the company to collapse. The HIH insurance company being the second largest insurance company you would expect it to be associated with big figures, but it’s actually the opposite of what happened.
Its collapse was a very big shock to many since there were no reports of bad grooming in the company, reports from the royal commission say that the chief executive of the company Ray Williams claimed that the main problem which led to the corporate collapse was his, self-interest, negligence and failure to study FAI insurance company which was found to be having gaps in its finances. The questions still remains: Who should be blamed for HIH demise? Where were the other members of the management particularly the Auditor independence when this was happening? What role did the Auditor independence play in its collapse? What were the auditors both (external and internal) doing?
Ethical issues that led to the HIH Corporate collapse
The insurance business is currently facing a higher level of market indiscipline cases. With its operators in hot pursuit for their share of money in the market which they use to engage in other unethical practices, this puts all the policyholders at stake. With respect to moral absolutism, deontological ethics and moral relativism the HIH management board and Audit members went against this moral principles which led to the Corporates demise. There are various issues and reasons which contributed to the HIH corporate collapse.
Various issues
Ethical considerations
Ethics refer to the prescribed code of conduct, moral values. A company or an individual can go against both absolutism and relativism moral ethics this may make them to be judged according to their actions either right or wrong. Auditors can always get stuck in very many complex circumstance that result to ethical dilemmas which may make us to judge them harshly or accordingly, Auditors should always should always how ethical standards while acting for the interest of the shareholders for instance Arthur Andersen committed act of self-interest and greed by offering services to the Non-audit members, where the supply of services to the Non auditors were for self-interest or the interest of the shareholders this should be considered.
Inadequate Funds and accounting practices which were aggressive
Researchers have said that inadequate funds was one of the major factors that contributed to HIH corporate collapse, the company failed to deal with its accounting anomalies. In the first place the money was never there to begin with so the company’s ability to provide for the future was limited. Accountants in a business play the role of financial functions so their role is to provide a correct, relevant and reliable information. But in the case of HIH Insurance assets were measured with over-exaggerating figures while liabilities were under-exaggerated which created a company that appeared to be more profitable than it really was. So the Accountants were greatly involved. The collapse of the company is the consequence which resulted from the accountant misleading information this means that the consequentialism came as a result of the fraud committed by the accountants.
Poor Management and lack of professional skeptics
Justice Owen in his report discussed that both internal and external Auditors played a vital part in the demise, internal auditors focus on management while external auditors focus on statements of finance and annual reports accuracy, so the question still remains where were they when this was happening? This shows that the Auditors were judged according to the greed, fraud and negligence which they did that led to the company demise.
Audit Independence and the Audit committee
According to deontological ethics judgement of someone action I based on their adherence to rule. The royal commission used this type of ethic to question Arthur Andersen independence, Justice Owen found out that the royal commission used the following facts to evaluate Arthur Andersen independence. For instance the board of management in the HIH consisted of three former partners of Arthur Andersen “Andersen reduced the amount of work which was supposed to be performed on the HIH audit since the management was reluctant to increase the Audit fees to be paid, an Andersen partner was expelled from the Audit team after meeting with the non-executive directors in the absence of the CFO and the management. The committee’s ineffectiveness went side by side with the HIH corporate governance, report from Royal Commission showed that Geoffrey Cohen a chairman of both the HIH and audit committee did not read the presentations of the auditors .Mr. White a member of the royal commission says that the members of the audit committee did not act unusually at the same time the neutrality of the committee is still in question. This show’s that both Geoffrey Owen and Arthur Andersen were judged based on the position in the company and the role which they played.
Its reforms includes
Regulation of the corporate governance
Organize Independence requirements
Act as watch dogs and standard setters
Apes 110 Code of Ethics in relation to HIH insurance company.
Integrity
In order for a firm to run smoothly the management and committee should be straightforward in their dealing so as not to violate the principle of integrity According to the royals commission report Geoffrey Cohen a chairman of the auditor committee violate this principle when he failed to fully read all the auditors presentation, even though he attended all the meetings, this means that he was aware of the bad news but he didn’t tell them.
Objectivity
The case of HIH collapse the principle of objectivity was violated when Arthur Andersen reduced the amount of work which was supposed to be done on the HIH audit because the management was reluctant to increase the Audit fees to be paid also Justice Owen in his report discussed that both internal and external Auditors played a vital part in the demise, internal auditors focus on management while external auditors focus on statements of finance and annual reports accuracy.
Professional competence and due care
This principle ensures that all members be it employees or clients should maintain knowledge and skills which is required by both to receive services based on legislation practices which have applicable standards. Unlike in HIH were the management was incompetent with the policy holders.
Confidentiality
Reporters from the royal commission ay that the Audit committee played a very vital part in the demise due to its effectiveness, for instance the Auditor independence of Arthur Andersen was in question also he violate the principle of confidentiality when he offered audit services to the non-auditors. This created a cozy relationship meaning that Andersen cared for the third parties
Professional behavior
Accountants in a business play the role of financial functions so their role is to provide a correct, relevant and reliable information. But in the case of HIH Insurance assets were measured with over-exaggerating figures while liabilities were under-exaggerated which created a company that appeared to be more profitable than it really was. So the Accountants violate this principle by giving false information.
Corporate Governance
It’s the way a company uses its power to exercise certain roles in its management can be good or bad. A good corporate governance constitutes of clear roles and responsibilities of the board, legislation of the laws. The HIH insurance corporate governance in Australia used a system of external mechanisms with respect to its open market orientation, these two factors form external markets which are very dynamic for labor managerial and corporate control. Directors who are deemed to be independent tend to have no relationship with the corporate as a worker/employee. The mixtures in the board design structure are supposed to be monitored by mechanisms of external governance and internal monitoring systems. However this system has led to various queries of the systems effectiveness. In essence poor corporate governance will lead to a collapse business and a depressed stock, The HIH insurance company is perceived to have had a conservative corporate culture in which its demise came as a surprise to many.
CONCLUSION
This report discusses the ethical issues that led to the collapse of the HIH insurance company. Factors such as poor pricing, mismanagement of funds, poor corporate governance, and poor auditing led to the company’s demise which obviously came as a big shock to many since no one expected the downfall. Among other factors that led to the company’s failure the role played by Auditor independence and Audit committee was very effective in the corporate collapse. However according to deontological ethics, the judgment of someone’s actions is based on their adherence to rule. So the Royal commission used this type of ethic principle to question Arthur Andersen independence. In relation to the company’s failure the royal commission gave the following recommendations that addressed on the issues
Recommendations
The Auditor independence should be under corporate act.
Introduction of several liquidation measures to the company disciplinary committee.
ASX implementing rules that would check on the performance of the employees.
Possible solutions
A Possible solutions to the scandal was election of a new audit committee in the company, avoid problems of underpricing, mismanagements of funds and adequate auditing.
In terms of Questioning Arthur Andersen’s auditor independence the corporation Act recommended provided solutions to corporate governance and the Auditors were required to be independent.
References
APES110 Code of Ethics for Professional Accountants, APESB, 2010. Other recommended references: Enron and World Finance A Case Study in Ethics Edited by Paul H. Dembinski, Carole Lager, Andrew Cornford and Jean-Michel Bonvin
Buchanan, B., Arnold, T., & Nail, L. (2003). Beware of the ides of March: The demise of HIH Insurance.
Cheffers, M and Pakaluk, M., Understanding Accounting Ethics (2007) Allen David Press, Sutton, Mass.,
Clarke, F., Dean, G., & Oliver, K. (2003). Corporate collapse: accounting, regulatory and ethical failure. Cambridge University Press.
Grayling. A. C., Ideas that Matter, (2010) Phoenix, London APES110 Code of Ethics for Professional Accountants (2010) APSEB, Canberra
George, G.R,, Jones, A., Harvey, J., (2013) Analysis of the language used within codes of ethical conduct, Journal of Academic and Business Ethics, 2014.
Hofstede, Geert, Gert Jan Hofstede and Michael Minkov. Culture and Organizations: Software of the Mind, 3 rd Ed., New York, McGraw-Hill, (2010)., ETHICS
Mardjono, A. (2005). A tale of corporate governance: lessons why firms fail. Managerial Auditing Journal, 20(3), 272-283.
McKay, R., Stevens, C., & Fratzl, J. (2009). A 12-step process of white-collar crime. International Journal of Business Governance and Ethics, 5(1-2), 14-25.
Mellahi, K. (2005). The dynamics of boards of directors in failing organizations. Long range planning, 38(3), 261-279.
Parker, L. D. (2005). Corporate governance crisis down under: post-Enron accounting education and research inertia. European Accounting Review, 14(2), 383-394.
Westfield, M. (2003). HIH: Inside the Story of Australia’s Biggest Corporate Collapse. Wiley.
