Business risk and Inherent Risk Assessment, Legal Liability, Ethics Essay Example

Question 1

A. The business risk for HIH Insurance Limited was very high. This is on the premise that HIH Insurance Limited failed in a very short period of time. The policies and strategies which HIH Insurance Limited adopted were inappropriate. Lack of clear decision and domination of the top management in taking different decisions clearly showed that the business was risky. HIH Insurance Limited carried out business on the philosophy of having low premiums and long trials for claims. This hit the business strongly as the business had to write off huge debts leading to a financial shortage. This impacted the business strongly as the business was in no position to be able to garner a policy through which better business decisions can be taken.

The degree of business risk can be further seen from the fact that corporate governance policies were not given importance. The top management looked for their own personal gains and withdrew a lot of money through remuneration. Along with it the termination payment for senior management was high (Elias, 2005). This made the business risky as the financials were used for purposes which didn’t increase the shareholder wealth. In addition to it the different decisions which the top management took was taken without carrying out the required research. This backfired as the decisions were inappropriate and impacted the overall business adversely. The risk for the business increased immensely and the business was unable to find out the mechanism through which control can be exercised.

The consideration for the HIH Insurance Limited is that despite having a very risky business environment decisions were taken which further intensified the overall risk. This had an adverse impact on the business and resulted in further intensifying the risk and thereby making it difficult to control the business. The overall situation clearly denotes that the overall risk for the business was very high and the business was operating in a risky environment.

B. The failure of HIH Insurance Limited is attributed due to different inherent factors which resulted in inappropriate financial reporting. The different inherent factors impacted the overall degree of risk and thereby impacted resulted in the failure of HIH Insurance Limited. Some of the inherent risk factors which impacted the financial level reporting are as

  • Under pricing & under reserving: HIH Insurance Limited underestimated its liabilities and over estimated its assets. Along with it the premiums that they charged were low and claims were long. Over a period of time the policy resulted in increasing the overall risk for the business as improper management led towards total failure of the organization.

  • Corporate Governance Failure: The corporate governance policy in HIH Insurance Limited was not followed. There was little or no control with regard to the performance of senior management, the Board of HIH Insurance Limited, the remuneration which was paid to senior management, payments made while terminating the job, inability to solve conflicts, and giving little importance to strategic matters. Lack of corporate governance policies resulted in increasing the overall risk for the business as the overall risk for the business increased.

  • Mismanagement: Poor business decision and mismanagement of the different resources also led towards the failure of HIH Insurance Limited. Lack of proper decisions increased the overall risk for the business as the business was unable to take proper decisions through which effectiveness in working could be achieved. Ultimately this led towards the failure of HIH Insurance Limited.

  • Acquisition of FAI: The decision to acquire FAI was incorrect as FAI was facing a financial turmoil. The price which the business paid for acquiring FAI was higher than the true value. This was on the premise that the senior management didn’t carry out the process of due diligence which could have provided the correct acquiring price (Bailey, 2003). The process ultimately led towards a financial loss which thereby increased the degree of risk and led towards the failure of HIH Insurance Limited.

  • Ill fated international ventures: The different international ventures which HIH Insurance Limited carried out in US and UK didn’t fetch them the expected returns. Instead the business over a period of time had to write off losses which impacted the financial condition of the business (Westfield, 2003). The different avenues which HIH Insurance Limited used in different international arena were not fetching the expected returns. This increased the overall risk for the business which ultimately led towards the failure of HIH Insurance Limited.

  • Inadequate auditing: The auditing process which was carried out by HIH Insurance Limited was not done in the desired process. The auditing process was not rigorous and the focus was on accounts and not identifying risk management framework. This impacted the business as people started to use the different opportunities for their advantage. This led towards increasing the degree of risk for the business as poor management and lack of proper policies led towards the failure of HIH Insurance Limited.

Question 2

A. Different case and hearing have highlighted that creditors and clients are part of the partnership and have the right towards the claims. The partnership deed and different findings highlights that both the creditors and clients have right over assets and they can claim for the losses which they have incurred. The following cases will help to highlight the same

Lord Esher MR, stated in Re Griffin; Ex parte Board of Trade (1890) 60 LJQB 235 at 237: that since a business transaction has been carried out more than once and has not been done in isolation it results in a transaction. Since, the transaction is being carried out more than once by the same client and creditor so they become part of the partnership. This thereby implies that they have right over claims and can look towards recovering their funds from the business. The business becomes liable to pay for the damages and losses which the client and creditors have incurred.

In another case Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 it was seen that the company entered into contracts with Australian singers. Later in the future when the equity of the company grew then the singers had right over the equity as the growth was contributed by the singer’s contribution towards the organization. The court stated that a partnership was entered into thereby giving them a legal right over assets and liabilities. In a similar manner the clients and creditors have contributed towards the business by contributing the required finance and other held. This thereby transforms into a partnership and provides them the right over assets and liabilities.

In another case Canny Gabriel Castle Jackson Advertising Pty Ltd was applied in Television Broadcasters Ltd v Ashton’s Nominees Pty Ltd (1979) 22 SASR 552 it was stated by the court that people entering into contracts have rights over profits but not over losses. This is applicable in case of clients and creditors as they have entered into contracts with the objective of being paid back. The contract is on profits and not on losses which thereby limits their losses as they don’t need to pay for the losses. This thereby makes the creditors and clients right over assets so that they can recover their sum as profit contract was entered at.

Thus, a few cases have been provided which can be used as evidence to protect the interest of the creditors and clients. The above cases can be used as previous examples which the court has to follow and would provide an opportunity to be able to garner benefit from it and thereby helping to ensure that the clients and creditors are properly compensated.

B. The different conditions which needs to exist so that the above action is considered correct are

  • Relationship between the parties should exist on a continuous basis. The transaction between the client and creditors should not be an isolate situation but instead should be carried out on a continuous basis (ASX Corporate Governance Council, 2003). This would justify that a partnership has been entered in and would provide a right over assets and liabilities of the business.

  • Co-ownership between the clients and business should be established. This will require that the client and creditors contribute towards the profitability of the business (ASX Corporate Governance Council, 2003). This will help to establish that co-ownership is present and would thereby ensure rights over assets and liabilities

  • A contract between the parties should have been executed. This will provide right over assets and liabilities as it will help to highlight that the both the parties have entered into mutual consensus to carry on business (ASX Corporate Governance Council, 2003). This will provide an opportunity where the client and creditor can act towards the being a part of the business and will thereby enable an opportunity to get rights over assets and liabilities.

The above conditions need to be met so that both clients and customers have right over assets and liabilities. This will help them to ensure that they their claims and can become rightful owners of the different assets and liabilities

Question 3

A. HIH Insurance Limited would have hired prior members of the auditing team in its board of directors so that they could guide them and provide better advice with regard to the manner in which business needs to be carried out. Having prior members can provide useful inputs regarding the areas which auditors look at and steps can be taken to ensure that all the legal formalities with regard to auditing is achieved. This can help HIH Insurance Limited to be able to ensure that all the legal requirements are met and the business doesn’t face any hiccups (Philomena & Cooper, 2005). Prior members can also provide advice on other important members and since they have the required knowledge and experience they can deal with any emergencies which the situation might unfold.

B. The advantage of having the same firm carrying out both the auditing and consulting services are

  • The business can bargain better as carrying out two services will provide an opportunity for the business to be able to get a better deal. This can help the business to save on finance would help the business immensely

  • Having the same client will ensure that the business will not have to spend time on explaining everything to both the parties. This will provide an opportunity to save time and would help to take better decisions.

  • Having the same client will improve decision making as the client will be better placed to take decision. The client will have all knowledge with regard to business and would thereby be better placed to take decisions.

C. HIH Insurance Limited by hiring prior members has violated the ethical standards because the knowledge and experience can be used for personal gains. Since prior members have knowledge with regard to auditing then the member can make changes in the financial statement and other statement so that it looks legal but in reality it has been manipulated (ASIC, 2003). This can thereby lead towards personal gains as the person can use the knowledge and make major ramifications which would be harmful for the stakeholders.

D. The primary recommendations for audit reform proposed by the Ramsay Report and CLERP 9 are better disclosure and timing (Mardjono, 2005). It is recommended that the disclosure is done on a continuous basis and any information which has a bearing on decision making should be clearly disclosed.

These changes will help to improve the process of auditing as it will ensure that all material information which has a bearing on decision making is disclosed. Continuous and better disclosure will help to ensure that all information is disclosed. The stakeholder as a result will be able to take better decisions as all information will be disclosed. Along with it the disclosure will be done on a timely basis which would ensure that all relevant information is provided at the correct time. This will help to provide adequate disclosure and will ensure that the different needs of ethical standards are maintained.


ASIC. 2003. Current corporate governance issues an ASIC perspective. Retrieved from$file/nt_bus&prof_women_corp_gov190903.pdf

ASX Corporate Governance Council. 2003. Principles of Good Corporate Governance and Best Practice Recommendations. Australian Stock Exchange Ltd. 2003, 1-79.

Bailey, B. 2003. Report of the Royal Commission into HIH Insurance. Retrieved from

Elias, D. 2005. Adler guilty on 4 charges. Retrieved from /2005/ 02/16/ 1108500154731.html

Mardjono, A. 2005. A tale of corporate governance: lessons why firms fail. Managerial Auditing Journal, 20 (3), 272-283

Philomena, L. & Cooper, B. 2005. The Mad Hatter’s corporate tea party. Managing Auditing Journal, 18 (6/7), 505-516

Westfield, M. 2003. HIH: The Inside Story of Australia’s Biggest Corporate Collapse. Sydney: John Wiley & Sons Australia,