Hih Accounting Strategy Essay

I am exit to talk about HIH insurances Corporate story scandals. stage setting HIH insurance was formed as a small insurance beau monde in 1968. Its important business was to underwrite workers compensation insurance in Australia. The company expanded its operations into property, commercial and professional liability from the middle 1980s. During this period, it also moved into the UK and the US insurance markets. In the US, the focus was on workers compensation insurance. Public liability and professional indemnity insurance were its main specialisations in the UK.Corporate governance The HIH Royal guardianship Report attri just nowed the ill of the company to two key factors. First, claims arising from insured events in previous geezerhood were much greater than the company had provided for in its accounts, thus involveing to an enlargement of reported profits. This is known as under-reserving or under-provisioning. The flash factor concerns the elevate mismanagement of HIH through poorly conceived and badly executed encyclopaedisms. The insurance risks were non properly identified and managed.There was an environment where unpleasant information was out of sight from the Board or filtered or sanitised to reduce discomfort or un due question from the Board. And there was a lack of sceptical questioning and analysis by senior management, by the board and, arguably, by the auditors story issues Provisions for expected upcoming claims Evidence presented before the HIH Royal military mission indicates that the prudential margin approach is common industry practice due to the inherent uncertainties in predicting claims.Yet HIH almost always employed the interchange estimate and did non apply a prudential margin. The consequence was not only to take an overly optimistic view of claims provisions but to continually overstate reported earnings. Accordingly, if one assumes a lower sum of money of claims is likely to be do on outstanding polici es this will loosely make profits look more substantial than otherwise would be the case, given an inverse relationship between profits and provisions for next claims (that is, liabilities).According to Main (2003, p. 107) and Westfield (2003, pp. 38 and 43) the approach to profit determination at FAI and HIH was to chose a targeted profit number and to alter the provisions to effectively come at that arbitrary figure. Not only did this approach appear to dishonour the spirit of the accounting standard but it would eventually result in large losses being reported should real(a) claims exceed the amounts that were previously provisioned. Earnings management using reinsurance contractsHIH appears to have obscured its optimistic provisioning by get in into so-called financial reinsurance arrangements with other parties. Reinsurance is a process whereby a second insurance company, in return for a premium, agrees to indemnify a first insurer against a risk insured by the first ins urer in favour of an insured According to AASB1023, for a transaction to be accounted for as insurance or reinsurance, there must be a conveyance of risk to the reinsurer.The standard does not describe, either in qualitative or quantitative terms, what degree of risk transfer is required. Without examining the intricate details of the actual transactions entered into by HIH, these contracts, in effect, promised that no claim would be made on a specific reinsurance policy (Main, 2003, p. 115). The overall objective was to manipulation reinsurance to offset any likely increase in claims liabilities on the equilibrise sheet with a corresponding recovery under a reinsurance contract. method of accounting for goodwillIn acquiring the shares of FAI, HIH gave consideration which, in total, amounted to $300. 5 gazillion. This acquisition was initially recorded in 1999 in the consolidated financial statements of HIH as comprising $25 million of net tangible assets and $275 million of pu rchased goodwill. Subsequently, another $163 million of FAI-related goodwill was added to this intangible asset account so that by the grade 2000 this goodwill account had a balance of $438 million (HIH Royal Commission Report, 2003, Section 7. 1. 4).Justice Owen contended that the goodwill adjustments (and reinsurance transactions referred to earlier) became techniques for concealing under-reserving problems inherent in FAIs insurance portfolio. Conclusion In conclusion, HIH insurance has several factors lead the company collapses- 2 corporate governance problem and 3 accounting issues. under-provisioning and mismanagement are two factors of corporate governance. Provisions for expected future claims Earnings management using reinsurance contracts and Accounting for goodwill are 3 factors of accounting governance.