Auditor Standards Reforms Research Paper

Length: 7 pages Sources: 13 Subject: Accounting Type: Research Paper Paper: #11665169 Related Topics: Negligence, Internal Auditing, Audit, Auditing
Excerpt from Research Paper :

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)


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...


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 accounting bodies." (Report of a Working Party of the Ministerial Council for Corporations, 1997) In addition, the following recommendations were made concerning the level of practice needed by the auditor for registration: (1) Where an authorized accounting body has in place a competency standard in auditing that has been approved by the ASC, an applicant must satisfy the audit component of the competency standard in order to be registered; (2) The ASC must be satisfied about the appropriateness and workability of the audit component of an authorized accounting body's competency standard before that standard may be approved for use by the authorized accounting body as a basis for deciding whether an applicant meets the practical experience requirements for registration as a company auditor; (3) Where an authorized accounting body does not have an approved competency standard in auditing the level of practical experience required for registration as a company auditor should be: (a) at least 2,000 hours work in auditing over five years under the supervision of an RCA; and (b) a minimum of 500 hours of this time should be spent on work that involves a senior level of responsibility for audit." (Report of a Working Party of the Ministerial Council for Corporations, 1997) The 1993 report of the MINCO Working Party recommended a review be conducted based on the needs of institutional arrangements that "ensure that only adequately qualified and experienced accountants are registered as company auditors; and auditors are genuinely independent of the companies they audit." (Report of a Working Party of the Ministerial Council for Corporations, 1997)

III. Recommendations of the MINCO Working Party

The Working Party made recommendations that include the following:

(1) The work of all RCAs should be subject to periodic quality reviews conducted by authorized accounting bodies;

(2) Subject to privacy considerations, the Law should provide that all files in respect of audits that have been undertaken by an RCA must be available for inspection as part of a quality review. (Report of a Working Party of the Ministerial Council for Corporations, 1997, p. 17)

The Working Party is also reported to have made identification of the procedures of appointment of auditors by companies and measures to ensure the independence of auditors as important issues that required consideration. (1997, paraphrased) It was noted by the Working Party that auditor independence cannot be clearly defined as it is a "state of mind and that no specific restrictions or requirements can achieve independence." (Report of a Working Party of the Ministerial Council for Corporations, 1997, p. 18) However, there are some specifications noted that contribute toward this independence and as well toward the appearance of independence. There should be a level of indebtedness of an auditor to a client and prohibition should be placed on the company's debt to its auditor. The Working Party also recommended a mandatory rotation of the audit partner responsible fro the audit of listed companies according to the principles stated in the Statement of Auditing Practice AUP 32 -- on Audit Independence. The Working Party additionally recommends "the Law should not place any restrictions on an auditor or his or her firm performing non-auditing services for an audit client. However in the current review of ethical requirements by the accounting bodies, it is recommended that attention be directed toward the provision of additional procedures (including allocation of responsibility for the additional services to a partner other than the external audit partner) for application in the more contentious areas of accounting services, internal audit and specific and separate internal control reviews to strengthen independence in these areas" (Report of a Working Party of the Ministerial Council for Corporations, 1997, p. 18-19) Current disclosure requirements are stated to be needing expansion and to require a breakdown of the nature of those services and to include services that are entities and whose beneficial ownership is the same substantially as the firm of the auditor. There should be a review on an annual basis of non-audit services by the audit committee for the company. The method of auditor selection should not be restricted and the company's auditor should be given notice of the meeting where issues of relevance to the audit will be discussed. The Working Party additionally recommends that a Financial Reporting Review Board be established. (Report of a Working Party of the Ministerial Council for Corporations, 1997, p. 19)


I. The Role of Auditors…

Sources Used in Documents:


Allen, Gregory (2006) The HIH Collapse: A Costly Catalyst for Reform. Hein Online. Citation 11 Deakin L. Rev. 137-2006.

Australian Auditor Independence Requirements: A Comparative Review (2006) The Treasury. Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004. No. 103.

Chapple, LJ and Koh, B. (2007) Regulatory Responses to Auditor Independence Dilemmas -- Who Takes the Stronger Line? Australian Journal of Corporate Law 21(1).

Corporate Disclosure: Strengthening the Financial Reporting Framework (2002) Commonwealth of Australia.
Flynt, G. (1997) Non-Executive Directors General Law Duty of Care and Delegation of Duty: But Do We Need a Common Law Duty of Care? Bond Law Review. Vol. 8, Issue 2. 1 Dec 1997. Retrieved from:

Cite this Document:

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