Management Accounting : Recognized And Assessed Business

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Management Accounting : Recognized And Assessed Business

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Management Accounting : Recognized And Assessed Business

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Describe about the Management Accounting for Recognized and Assessed Business.

Business Risk and inherent Risk Assessments
Business is associated with many risk factors which need to be recognized and assessed properly. The major problem with HIH Insurance is that the risks were not identified and reviewed in time by the directors which lead to a loss amounting to 5.3 billion and effectively causing the company to collapse. So the assessment of HIH insurance will be on the operational and financial risk. Operational risk occurs from the company’s own in-house actions of the business. It analyses other risks such as legal, physical and environmental (Rose, 2013). A proper evaluation on the company’s work procedure and operations will assist in discovering the errors and rectifying it as and when required for it to develop and grow (Adams & Borsellino, 2015).
Financial risk is linked with the company’s financial activities and transactions and the outcome of financial operations involved in company’s work process (Bobtcheff et al., 2016) Proper identification of financial risk will safeguard the company from adverse financial situation and debts.
HIH insurance succumbed due to non-assessment of risks in proper time as it is imperative on a company’s part to identify, manage and reduce risks properly through proper managerial control (Betta, 2016). HIH insurance’s risk was broad enough to cause a severe damage.
There are several inherent risk factors effecting HIH at the financial report level like poor financial results, overcooking of cash and debtors figure and underpinning of creditors and bad debt amount to consolidate the position of balance sheet. HIH insurances’ poor financial result was due to the overstated sales figure which was done to show high profitability when the real story was something else. Inherent risk of HIH included the continuation of solvency margins, statement of sufficient premiums and the liquidity factor. HIH insurance entered areas which were prone to high risks such as marine insurance whose work practices differs logic than the normal insurance profession. The internal control system of HIH failed to identify or detect the material error. The detection risk is mainly associated with different auditing actions depending on performance which fails to recognize the material errors (Tricker & Tricker, 2014). HIH needed to plan good and in proper time to lessen the chances of not being able to detect material misstatement. In HIH insurance, the internal audit documents are lacking performance in its substantive measures which will ensure proper settlement in future income tax benefits and goodwill of the firm.
Legal Liability
The limited knowledge of auditors failed to identify the inherent risks with changes that took place the previous year. The focus is on the auditing reports signifying the concerns related with the HIH practices for increased risks. The cases are linked with adequate measures in auditing procedures with intended managed auditing risks. The issues are related to the inadequate auditor independence linked up with the presentation in the non audit services.
For clients: The focus has been on presentation to show up the inadequate preparation that relates to goodwill next to the deferred acquisition cost and
income tax benefits. If the client company is thinking of hiring the prior auditors, then it’s going to directly affect the independence of external auditing. The present auditors are hold in good position because of the power they possess.
For creditors: The creditors need to focus on the bare minimum solvency requirement which is based on the firm being solvent at the time of declaration of the director. The HIH desires to focus on the cash position where the extensive analysis is based on operational and financial activities. There is a need for prudential margins leading to the policy of reservation depending on the handling of the company.
The negligence action of HIH insurance is related to the acceleration of changes in the legislation. The crisis has been related to prices and the availability of insurance. These are mainly connected to law of negligence. The major issues which are related to charges are politically reinforced associated with the direct liability pattern of government and re-insurance.
– The non executive directors lacked freedom in their work as it is evident from the structure of HIH insurance. Arthur Anderson’s secretarial firm boasted of five members and the same were holding the board of director’s position in HIH insurance. For non-auditing services the company did expend $1.671 million and $1.7 million for auditing purposes. Fees arising from auditing services caused a great deal of distraction to the independent company directors (Tricker, 2015). The corporate governance was the guilty party in the negligence of the company.
-insurance company’s process is greatly subjected by the risk management of the concerned group. HIH’s investment failed badly as witnessed in the presentation of risk management (Damiani et al., 2015). The director’s negligence played a role in the decision strategy’s setback which eventually led to the collapse (Carnegie and O’Connell, 2014).
-inadequate independent information was negligence on the part of the management as they did not provide relevant information to the non executive directors which have to be focused on. The non-executive directors did not enjoy the liberty in forming the view concerning the company’s financial statements.
The main spotlight has been on the lack of evidence in the alteration that have been made in different accounts before the release of the audit reports. The refusal to pay the increased auditing fees is based on the close relationship with non-auditing services. The company wants to hire prior members of its external audit team for various reasons:
The auditors are habituated enough to work with the company
They seem to have good knowledge about different financial matters
The management has decided on working with a proper process of audit and developing a strong bond with the auditors
The auditors need to uphold a professionalism approach that maintains proper goodwill of the company.
The auditors should be able to put their faith on the client executives to that extent which do not paralyses the work procedure of external auditors.
Most of the times the auditing companies do provide non-auditing services too with proper management consultancy and recommending in tax matters. The objective is based on conducting a report where a particular client’s information relies on his source of income. The auditors are always in the habit of holding reports and the changes for the different reports about the financial status of a company with maximum profits. Difference has been noted in the profitability margin of non audit services with those of traditional auditing. Traditional auditing has always been viewed as a service necessary for regulatory purposes which incurred a downward slide of the fees, whereas the growth of non-audit services activate the struggle for authority and control of the management. Using the same firm for both the auditing and consulting services helps the client in putting a check on the extra expenses and time, as the firm does not need to spend any extra moment or charge extra to get familiar with the process. In addition to that will be the service provider’s best ways of dealing with adverse conditions and situations that may arise accordingly and provide the best solutions from its significant experience in dealing within the same industry. Moreover many clients have restricted themselves in hiring accounting firms who deal with clients of the same industry to evade any loss of priceless information (Healy, 2013). There are other cost benefits too that goes with the theory of assigning a single accounting firm for both auditing and consulting services.
For auditors it is not possible to always believe their client executives. The auditors do their work based on auditing evidence Auditors do find it difficult at times when they confront managements who do not disclose everything that is required (Haines, 2013). HIH insurance highlights on different facts to check operations with regards to quantity. The employees need to put their best foot forward while dealing with customers and are set to bring highest ethical standards of behavior (J. Clout et al., 2013). Business should be carried out according to the appropriate laws and regulations with suitable codes and corporate standards that subsist in a country. The employees associated with an organization along with the contractors require meeting the highest level of ethical behavioral standards related to revelation of information in the accounting practices and dealings in Foster’s share.
The primary recommendations for audit reform proposed by the Ramsay report are:
A statement should be included in the Corporations Act that will present the auditors with freedom to work.
An auditor should make an annual statement to the Board of Directors that the auditor has retained their liberty in accordance with the act and rules given in the accounting bodies.
Outlining proscribed relationships involving the auditor and the client. Only employment related relationships are emphasized on among the client and the auditor and the auditing staff is viable. One relationship that was barred is a situation where a retired auditor partner joins a company’s Board of Directors team, something which was witnessed in the HIH insurance.
An auditory independence supervisory board is to be set up with the vast majority of the members in such a board will be autonomous of accounting profession. The independence supervisory board will be assisting in recommending and observing of independence issues of auditors.
The audit committee needs to make different perceptions about non-audit services, relation between auditor and client, audit fees and independence related to auditor’s work.
The Ramsay report recommendations have found support from the accounting professional bodies. However, the Current Affairs in Auditing April edition exposed that HIH’s collapse led many observers of auditing believe that the Ramsay report recommendations did not go the distance. Ramsay’s recommendation report on independent and consulting services were deemed to be too weak to put into effect. They were totally demanding for a ban on the auditor’s contribution in providing consulting services to audit clients.
The recommendations of audit reform according to auditor’s liberty and the regulation of auditors was that an auditor’s independence is directly related to the reliability and consistency of auditor’s reports (Sirtes et al., 2016). The draft Bill draws on the HIH Royal commission report (HIHRC) and the Ramsay report in meeting upon the magnitude of an autonomous audit in capital market competence. This can be attained through adding importance to financial report by bettering the dependability which in turn should help in lessening the cost of capital by dropping information risk and upgrading the value to capital markets by intensifying the reliability of financial statements.          
According to CLERP 9 changes there are quite a few other disclosures related to auditors that are required to be made by the listed companies in their annual reports (Carey et al., 2014).
A copy of the Auditor’s independence declaration must be attached with the director’s report
The listed companies must reveal in their annual director’s report the fees charged by the auditor for providing service in each in each non-audit process, explaining in details the nature of the service (Houghton et al., 2013).
A statement should be issued in the annual director’s report that they are pleased with stipulation made in the non-audit service, as well as explanation of the service and it does not compromise freedom.
There are going to be several changes in the practice of auditing due to the recommendations made in the Ramsay Report and CLERP 9. The auditor should be given the required liberty to work freely without being influenced by the client company (Kuan, 2014). It is the responsibility of the auditor to present impartial and truthful professional opinion on the financial statements to the shareholders. The threats that are associated with the audit profession like intimidation threat, trust threat and familiarity threat will be reduced to a large extent if recommendations are put into practice.  There is requirement for independence as third parties and client of financial statements do not possess adequate information and facts to recognize the actuals of company’s annual reports (Crockett  & Ali, 2015). These parties depend too much on the assessment made by auditor. Public’s confidence on financial markets depends partially on the views and information presented by auditors in tandem with the financial audits.
Adams, M., & Borsellino, G. (2015). Is there a positive link between corporate governance and board diversity? Lessons from Asia. Journal of Business Systems, Governance & Ethics, 10(1)
Betta, M. (2016). Three Case Studies: Australian HIH, American Enron, and Global Lehman Brothers. In Ethicmentality-Ethics in Capitalist Economy, Business, and Society (pp. 79-97). Springer Netherlands
Bobtcheff, C., Chaney, T., & Gollier, C. (2016). Analysis of Systemic Risk in the Insurance Industry. The Geneva Risk and Insurance Review, 41(1), 73-106.
Carey, P. J., Monroe, G. S., & Shailer, G. (2014). Review of Post‐CLERP 9 Australian Auditor Independence Research. Australian Accounting Review,24(4), 370-380.
Carnegie, G. D., & O’Connell, B. T. (2014). A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s. Critical Perspectives on Accounting,25(6), 446-468.
Crockett, M., & Ali, M. J. (2015). Auditor independence and accounting conservatism: Evidence from Australia following the corporate law economic reform program. International Journal of Accounting & Information Management, 23(1), 80-104.
Damiani, C., Bourne, N., & Foo, M. (2015). The HIH claims support scheme.Economic Round-up, (1), 37.
Haines, F. (2013). Corporate fraud as misplaced confidence? Exploring ambiguity in the accuracy of accounts and the materiality of money.Theoretical Criminology, 1362480613502069.
Healy, J. (2013). The Paradox of Regulation: What Regulation Can Achieve and What It Cannot. Medical Law Review, 21(1), 161-165.
Houghton, K. A., Kend, M., & Jubb, C. (2013). The CLERP 9 audit reforms: Benefits and costs through the eyes of regulators, standard setters and audit service suppliers. Abacus, 49(2), 139-160.
Clout, V., Chapple, L., & Gandhi, N. (2013). The impact of auditor independence regulations on established and emerging firms.Accounting Research Journal,26(2), 88-108.
Kuan, K. T. C. (2014). Auditor independence: an analysis of the adequacy of selected provisions in CLERP 9.
Rose, H. (2013). How insurance companies can become good corporate citizens. Risk Management, 60(5), 38
Sirtes, G., Lo Surdo, A., & White, R. (2016). Corporations law and class actions: Court 
Tricker, B. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Tricker, B., & Tricker, G. (2014). Business Ethics: A Stakeholder, Governance and Risk Approach. Routledge.

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