This essay discusses about the corporate collapses in the new millennium. In recent years the Australian corporate sector has witnessed the failure of number of corporations, including HIH Insurance, Harris Scarf, One. Tel, Ansctt Australia. This paper focuses on the financial audit of HIH insurance, which collapsed on 15th March 2001. This was the largest failure in Australian business history. Royal commission was appointed investigate re-issue of HIH Insurance collapsed with debt estimated $5.3 billion Australian dollars (Mirshekary, S, 2005). A brief review of the incidence of corporate failure will be provided prior to an analysis of the collapse of Health International Holding (HIH) and the involvement of its auditor, Anderson. The issue of audit independence is of basic importance in the collapse of HIH. In order to give arguments it is mandatory for all professional auditors to comply with the joint code of professional conduct conventional by the Society of Certified Practicing Accountants (CPA) Australia and the Institute of Chartered Accountants Australia (ICAA). The collapse of the insurance giant HIH in Australia and Enron in United States has been mechanism for considerable changes in financial report auditing. Many of these changes focus on the presence and extent of the auditor independence. A major issue of the Auditor independence is the treats to independence are usually restrained and difficult to measure.
Overall scenario behind the corporate collapse in Australia
In recent years, the failure of Arthur Andersen as one of the biggest auditing firm and its involvement in the issue of the unexpected collapses in Australia(HIH) and USA(Enron and WorldCom). The reasons behind the corporate collapses were regulatory failure, gross fund mismanagement, their excessive discounting, management’s self interest, price cutting strategy, lack of transparency and integrity in the corporation etc; (Tina et al. 2005). During the year 2001, six months before Enron collapse, Australia had its own round of dramatic bankruptcies. The most famous were mobile telecommunications company One. Tel, national retailer Harris Scarfe and Insurance giant HIH. In 1995, HIH insurance merged with the large Swiss company with the name of Winterthur. During 1998, Winterthur Insurance sold its holding, at that time HIH Insurance was born and given the assurance to purchase FAI Insurance by Rodney Adler (the non-executive director of HIH). In year 1998, The directors of HIH Insurance Ltd. have purchased FAI Insurance to gain market shares and to expand the company. Although, this was the beginning of the drop of the company. In year 2001, HIH was removed as a listed company from the Australian Stock Exchange with approximately total debt of $5.3 billion. (Mirshekary, S, 2005) One. Tel was the Australian company has a problem of set in managerial incompetence, with a defective billing system leaving the company unable to collect all its revenue, at the same time the company eventually collapsed with A$2.4 billion in debts and losses. Harris Scarfe, went into voluntary liquidation following six years of inflated asset values and many other accounting irregularities (Robins, F, 2006).
Auditor Independence Issues and role of Arthur Andersen in HIH
Auditor’s independence is the key issue in the collapse of HIH. Independence in auditing means “the professional’s freedom from any bias in relation to an engagement” (book). Independence is one of the auditor’s most vital characteristics and is essential to the principles of integrity and objectivity. The Code of Ethics discusses independence in the context of freedom from any interest incompatible with integrity and objectivity. Section 324CA-324CC establishes a general requirement for auditor independence (Arens et al.2002, p.121). According to Sexton, 2001, it is the external auditor’s role ‘to provide an independent opinion as to whether the company has prepared...