Independence of Auditors
The objective of this study is to consider the statement as follows: "Unquestionably, the HIH story is also one of auditor failure" and to research into the background of the HIH collapse in Australia insofar as it relates to the role of auditors and their liability. A report will be prepared with summaries of the most important documents concerning this issue of auditor independence after the HIH collapse, the regulatory/legislative response and the review of the legislative response.
Ray Williams founded HIH in 1968. A British company, CE Health PLC acquired HIH in 1971. Prior to the collapse, HIH was the second largest Australian insurance company covering several segments of insurance. HIH had expanded globally into both the UK and U.S. markets. On the 15th day of March 2001 HIH entered into provisional liquidation with the liquidator estimating that HIH's total loss equaled approximately $A5.3 billion resulting from valuations of assets that were over-optimistic and liability being greatly under-estimated. HIH's failure is representative of the largest Australian corporate collapse in history. It was reported that the failure of HIH could be attributed to: (1) rapid expansion; (2) business strategy; (3) unsupervised delegation of authority; (4) underpricing; (5) reserve problems; (5) false reports; (6) reckless management; (7) fraud; (8) greed; and (9) self-dealing. (Causal Actuarial Society, nd, p. 2)
PART I
I. Auditor Negligence Prior to HIH
AWA is reported to be a company in Australia that had been established for a long time and that was in the import and export of electronic equipment business. The company made a decision that is would "hedge against currency fluctuations by engaging in forward purchased of foreign currency against contracts for imported goods." (Flynt, 1997) It is reported that the dealings of Koval has resulted in the company incurring losses that were approximately $50 million and these losses were kept concealed by Koval. There were two audits conducted by Deloitte Haskins & Sells during the employment of Koval and while the defects in the internal control system of the company was noted by the auditor the failure of AWA to put adequate internal controls in place and record and account keeping controls has resulted in the losses going unnoticed. AWA is reported to have sued the auditor for negligence due to its failure to draw attention to the deficiencies and failure to qualify the audit reports. The auditor denied a breach of duty to AWA and filed a cross-claim against AWA and "inter alia, the non-executive directors for contributory negligence." (Flynt, 1997, ) The court found that the non-executive directors were "expected: to take reasonable steps to place themselves in the position to guide and monitor the management of the company; to obtain a general understanding of the business of that company and the effect that a changing economy may have on that business; and to bring an informed and independent judgment to bear on the various matters that come to the board for decision." (Flynt, 1997) The case was appealed and the joint judgment of Clarke and Sheller JJA is one that is reported to have been heavily reliant on the opinion of the Supreme Court of New Jersey in the case Francis v. United Jersey Bank as it was held that the judgment "exposed what is generally expected of directors not only in the United States but in Australia." (Flynt, 1997) The court specifically stated that the director, as a general rule "should acquire at least a rudimentary understanding of the business of the corporation. Accordingly, should become familiar with the fundamentals of the business in which the corporation is engaged ... Directors are under a continuing obligation to keep informed about the activities of the corporation ... Directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies... While directors are not required to audit corporate books, they should maintain familiarity with the financial status of the corporation by a regular review of the financial statements ..." (Flynt, 1997)
II. State of Regulation of Auditors and Their Understanding of Auditor Independence Prior to HIH Collapse
The working party on the state of regulation of auditors recommends that there should be adoption of competency standards as the primary basis for the determination of whether the individual has enough practical experience in company auditing techniques for them to be registered as a company auditor. The working party is reported to have additionally come to the conclusion that "an hours-based regime should continue to be used pending the introduction of competency standards by the authorized...
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