Financial Reporting Assignment: Accounting Scandal Practiced By HIH Insurance

Question

Task:
Write a financial reporting assignment discussing about the accounting scandal and financial reporting of an organisation (of your choice) in detail.

Answer

Executive Summary
The report on financial reporting assignment aims to provide meaningful insight into the accounting scandal practiced by the HIH insurance. The issues in financial reporting together with low financial reporting were the reason for HIH downfall. Further, the report discusses regarding the financial reporting quality, manipulation, effect of the scandal and the overall impact of the scandal on HIH. The report gives an emphasis that reforms and regulation of the insurance sector is highly needed.

Introduction
The accounting standards are prepared to keep a general reporting at par in the Industry so that every stakeholder of the company would be able to get the desired information and take its investment and other decisions accordingly. The system of auditing is there to ensure that the financial statements are per guidelines and show a true and fair view of the accounts. In the time when the accounts are showing some negative trend about the company which will impact its share price and goodwill, in the long run, the management of the company would like to hide such issues and window dress the accounts. This window dressing leads to low financial reporting quality and financial scandals.

HIH description
The HIH Insurance was the second-largest insurance company in Australia. In just 10 years the company was expanding at a very high rate. It was a public listed company. The main reason for its growth was continuous acquisitions of the other insurance companies. It has the policy of acquiring another company which was the reason for its growth and also become the reason for its fall (Andon, Free & Scard 2015). The last major acquisition of the company leads to its downfall due to its aggressive accounting practices.

HIH Scandal

• Reasons for the downfall
  The company didn’t fail to any fraud or theft but due to the absence of due diligence of the company. The accountants and supervisors were unable to evaluate the company is doing under-provisioning of its claims. As per Andon, Free & Scard (2015) the insurance companies are required to keep a minimum provision on the insurance policy as claimable. Due to this under-provisioning when the actual claims occurred the company has to pay such claims from the current profits which also lead to the accumulation of losses over the period. The company was having the required capital base to absorb such losses (Livne 2015). Thus continuous acquisitions and under-provisioning were covered with faulty accounting disclosure quality.
• Manipulations by HIH
  The company could hide or disguise such poor quality reporting as the regulations were supporting technical provisions to be manipulated as there was no compulsory actuarial advice, safety margin requirements, discount factor mechanism to control the provisioning pattern (Murphy, 2015). Even the capital requirements of the insurance companies were not on the risk factors associated with it. This helped manipulate and failure by the regulators in detecting the actual accounting position of the company (Westfield 2003).
• Absence of Due Diligence
  The motive of the company was to grow and thus multiple acquisitions were done of various insurance companies some of which were listed companies. But this policy of acquisition was not backed by proper due diligence (Westfield 2003). The acquisitions were not done prudently and to increase its market share the income was inflated with less provisioning and actual claims come to be higher than expected. The aggressive policy to grow at any cost has resulted in the loss of money from various insurers. The company which was incurring losses was showing huge profits in its books and thus the senior officials were drawing huge reimbursements from the company (Cernusca & Balaciu 2015). The company which was in requirement of the capital introduction, the capital was withdrawn in the form of reimbursements.
• Identification and impact of the scandal
  The scandal was identified in the last year of the fall down when some senior management personal left the company. The company was not handled properly and underlying problems were ignored. The information system of the company becomes unreliable and inadequate as it lagged the expansions of the business. All this came into limelight when the company appointed provisional liquidators on 15th March 2001. The board's intention against this was to get time for reviewing its operations and analyze its financial position (Kleinman, Anandarajan & Palmon 2012). The rumors were already spreading of the company incurring losses but the actual figure of the loss was too high and thus the company collapsed along with its 17 other controlled entities.

  The major creditors of the company included the Australian and state governments thus the government money was at stake. The retail policyholders were largely impacted due to non-payments of the claims. Even the claim for the Professional Indemnity, Public Liability, Home Warranty, Accident and disability as well as travel claims of the groups like professional, community, business owners, house owners, individuals were halted and not paid (Westfield 2003). There was no protection for policyholders and no compensation scheme was framed except for workers. This was the largest financial scam in Australia. It left many policyholders uninsured. The business of the company was continued for ongoing policies and no new business was undertaken during liquidation.

• Impact on the financial information
  The financial aspects which were most impacted were the income statement as two major reasons for the downfall were unregulated acquisitions and under-provisioning of the claims. The under-provisioning of the claims leads to higher income levels and thus supports additional acquisitions which again increase the market share and policy premium income of the company (Tepalagul & Lin 2015). Thus this will impact the profitability ratios of the company. Thus the ratios like earning per share, return on equity, return on assets and similar ratios were customized. If the company properly reported its financial position then such a downfall could be averted and revival of the company as possible.

Conclusion
The collapse of the company leads to many difficulties in the insurance sector. Many of the policies which were mostly covered by the company were not available or if available were at a high premium making it unaffordable for many. The policies most affected are Professional Indemnity, Public Liability, and Home Warranty Insurance. The insurers have to resort to unregulated insurance sectors to cover their asset. This also makes way for the introduction of various insurance reforms and regulating the insurance sector more stringently. The provisioning manner was redefined and even capital requirements were changed based on the risk covered. Some insurance core principles were introduced covering various areas such as the Suitability of the persons, Corporate Governance, Internal Control, Enforcement or Sanctions, etc. which provides guidelines over various issues related to the insurance sector. Thus these measures will make sure that in future such circumstances do not arise and public money is not kept at stake.

References
Andon, P., Free, C. and Scard, B., 2015. Pathways to accountant fraud: Australian evidence and analysis. Accounting Research Journal, 28(1), pp.10-44.

Cernusca, L. & Balaciu, D.E., 2015. The Perception of the Accounting Students on the Image of the Accountant and the Accounting Profession. Journal of Economics and Business Research, 21(1), pp.7-24.

Kleinman ,G., Anandarajan, A & Palmon, D 2012, Who's to Judge? Understanding Issues of Auditor Independence Versus Judicial Independence, Financial reporting assignment Accounting, Economics, and Law: A Convivium 2(1), pp. 1-50

Livne, G 2015, Threats to Auditor Independence and Possible Remedies. Available from: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full [Accessed 30 March 2020]

Murphy, G., 2015. A vision for the future: by using the most current technology and keeping their skills up to date, management accountants can enhance their careers and their organizations. Strategic Finance, 97(4), pp.62-64.

Tepalagul, N. & Lin, L 2015, Auditor Independence and Audit Quality A Literature Review’ Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.

Westfield, M 2003, HIH : The Inside Story Of Australia's Biggest Corporate Collapse. Available from: https://www.smh.com.au/entertainment/books/hih-the-inside-story-of-australias-biggest-corporate-collapse-20030315-gdgff3.html [Accessed 30 March 2020]