The Collapse of HIH - Solvency and Audit Risk
Following the collapse of HIH, considerable debate, comment and speculation have arisen regarding whether and at what point HIH became insolvent. When a company is close to insolvency, the risk associated with auditing that company is considerably higher than for one that is solvent. This report investigates methods of determining insolvency, the roles of directors and auditors, and the level of audit risk associated with HIH prior to its collapse.
There is general agreement that the concept of solvency relates to having the capacity to meet debts as they fall due. An insurance company is solvent if it is able to fulfil its obligations under all contracts at any time (or at least under most circumstances). However, assessing solvency can be a challenge, as accurate estimates of the liabilities at the balance date may be difficult to determine.
Analysis of company solvency can be made from two indications: financial indications and non-financial indications. Financial indications are used to assess commercial insolvency the company being unable to pay all its debts as and when they become due. Non-financial indications are used to assess regulatory insolvency, which occurs when the company breaks the requirements imposed by legislation, supervising regulations and other laws. Regulatory insolvency can lead to commercial insolvency .
Financial ratios, such as debt to asset ratio, current ratio and ratios calculated from the cash-flow statement can be used to determine commercial solvency, however care must be taken to ensure that that appropriate figures are used in the calculation. The HIH debt to asset ratio was 0.89 if the figures in financial reports were used; however if the PPE, deferred acquisition costs, intangibles and future tax benefits were disregarded, the ratio would be 1.01 a warning sign of insolvency! This ratio indicates a major long-term under-provisioning situation.
Operational indicators, such as strategic direction, deficiencies in the governing body, rapid or unplanned development of business, should be considered as non-financial indicators of insolvency . During the 1990s, the business environment for Australian insurers was challenging, and insurance companies had to change strategies. During this time, HIH put undue reliance on reinsurance to meet its future debts and embarked in high-risk insurance services such as the UK film investments and marine insurance business. The risky HIH investments in FAI and operations in the United States and the United Kingdom were decisions that should have indicated problems with the group's direction.
In this case, the reader learns that liquidity is a better than average. The ratio and cash on hand have been better than 2013 from the past years. Moreover, it shows that the hospital has a higher ability to meet its cash obligation because it has more security compared to other hospitals. Funding allows hospitals to control funds and limit investments. Not-for-profit organizations help provide more services and margin of safety. Therefore, creditors look for a margin of safety so that the community that financed a small portion of total financing can be returned to the owners by leveraging. Capitalization ratio measures the funds that were borrowed and the assets that have been used. The coverage ratio measures the number that time they fixed financial charges. The time's interest earned ratio shows the ability of the hospital to meet
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
A review of the chronology of key events, as published by the HIH Royal Commission, will show that the leadership of HIH Insurance has made a series of acquisitions both local and international. As discussed in Wikipedia online (2014), through 1997 and 1998, HIH Winterthur acquired a large number of companies both in Australia and globally, including Colonial Ltd General Insurance's operations in Australia and New Zealand, Solart in Argentina and Great States Insurance Co in the United States. HIH acquired the large Australian insurance company FAI Insurance, whose chief executive Rodney Adler became a director of HIH in 1999.
The debt ratio is calculated using short term and long term debt relative to the total assets of an organization. The higher this figure is, the riskier a financial investment the organization is. The industry average has a debt ratio of 55%, a more promising figure than Happy Hamburger had before its increases, 68%. The debt ratio would have been considered a weakness for Happy Hamburger, but with the increased figures taken into consideration, this figure is a strength for Happy Hamburger at 39%, a more favorable figure than the industry average and indicating the organization is a less risky
In order to make inferences about a company’s financial condition, its operations, and its attractiveness as an investment we have analyzed financial ratios and compare ratios derived from SVU’s financial statements (see chart 1).
Risk in a health care organization is the main focus of the health care organization through frugal search of solvency ratios. The purpose of solvency ratios is to take a long-term view. Additionally, it is to help determine if the organization has overextended itself throughout use of financial leverage. At times, these ratios can be referred to as leverage or capital structure ratios. Three common types of solvency ratios consist of “interest coverage ratio, debt service coverage ratio and “long-term debt to net assets ratio”. They all each compare one item to another and to determine if any risk involved. Nevertheless, has helpful the solvency ratios are the carefulness should be advised for improvement. From the creditor’s and organization’s standpoint, it varies if the organization needs improvement on risk and profits. If charity care helps expenses, but hurts profits the overall interest coverage ratio would be lesser. The debt service ratio coverage is to build interest coverage ratio and give broader complete look at the organizations ability to pay its long-term debt. The process requires to pull information from statement of operations and st...
Currently, HCA is approaching an all time high debt ratio of 70%, well above their established target ratio of 60%. The increase in debt ratio has attracted the attention of rating agencies who have clearly stated that in order for HCA to maintain their A bond rating HCA must return to their 60-40 capital structure. Now the question arises as to whether the A rating should be sought or should HCA move to a less conservative position. Some investors believe that a more aggressive use of leverage would present greater opportunities in the future. Others feel that with changes in Medicare/Medicaid reimbursement structure on the horizon, HCA should remain conservative. In order to decrease the debt ratio, HCA would have to 1) decrease the growth rate (inadvertently decreasing ROE) or 2) decrease debt/increase equity. The debt ratio is important for many reasons, but it should not be the basis of a company's future. The market will ultimately decide the value based on numerous facts, not just the bond rating.
Evaluating a company’s financial condition can be done by looking at its profitability or its ability to satisfy long-term commitments. These measures can be viewed through an analysis of a company’s financial statements, including the balance sheet and income statement. This paper will look at the status of Scholastic Company’s (Scholastic) ability to satisfy its long-term commitments and at the profitability of Daktronics, Inc. (Daktronics). This paper will include various financial ratio calculations and an analysis of the notable trends. It will also discuss the profitability and long-term borrowing positions of the firms discussed.
HIH Insurance was once Australia’s second-largest general insurer with net assets amounting 939 Australian Dollar. The company was placed into provisional liquidation with debts amount $3.6 billion to $5.3 billion. Failings in corporate governance, regulation and auditing and along with poor management decisions have been attributed to the cause of the collapse.
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories, profitability, asset utilization, liquidity and debt utilization ratios. The ratio analysis covered here consists of eight various ratios with at least one from each of these main categories. These ratios were used to compare and contrast the performance of Verizon versus AT& T over the years 2005 and 2006.
Among the study’s findings were that the deciding factor of the predictor of bankruptcy should not be only a few ratios, as the measure of a company’s financial solvency may differ as the firm’s situations differ. The important question is to which ratios are to be used and of those ratios chosen, which ratios are given priority weight.
Organizations use financial statements and ratio analysis assess financial performance viability. The ratio analysis are used to identify trends and to perform organizational comparison (financial) with other companies within same industry. Ratio analysis, using data reported on the financial statements, are divided into five major categories: common size, liquidity, solvency, efficiency, and profitability. This paper will assess the financial stability of John Hopkins Hospital (JHH) using the five ratio analysis.
Corporate governance changed drastically after the case of Andersen Auditors, Enron’s auditing service showed that they contributed to the scandal. Andersen was originally founded in 1913, and by taking tough stands against clients, quickly gained a national reputation as a reliable keeper of the people’s trust (Beasley, 2003). Andersen provided auditing statements with a ‘clean’ approval stamp from 1997 to 2001, but was found guilty of obstructing justice by shredding evidence relating to the Enron scandal on the 15th June 2002. It agrees to cease auditing public companies by 31 August (BBC News, 2002).
This is also a good indicator of financial health by determining financial strengths, weaknesses and ability to meet their obligation as they fall due.
This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such