Revision Kit | Ethics & Governance

Case Study Questions

CS.1 Ron King CPA is the chief executive officer (CEO) of Drastic Ltd, an Australian listed company. Last year, Drastic
reported record profits and Ron received a substantial annual bonus as a reward for the company's success. His
remuneration agreement for the current year, that will soon end, provides for a further annual bonus if profits are
increased above the level of the previous year. Ron is not certain whether profits will be higher this year, due to
difficult trading conditions in some markets.

Ron has a meeting with Alan Blandford CPA, the chief financial officer (CFO), to discuss a provision that the
company will have to make for the cost of litigation in a dispute with a customer. The company's lawyers have
informed Drastic that it is almost certain that the company will lose the case and will have to pay substantial
amount of money to settle the dispute. Ron tells Alan that the provision in the financial statements should be for a
small amount. When Alan asks him why, Ron says that it is important for Drastic to report increasing profits for the
current year, in order to maintain investor support.

Ron admits that a larger provision would probably be a more accurate estimate of the future cost, but in his view
reported profits must be higher than in the previous year and that Alan must agree that a favourable reported
profit would be in the best interests of everyone in the company. He persuades Alan to agree with him: Alan does
not want to annoy his boss, and he can see the sense in Ron's arguments. They are aware that under-statement of
a provision would be in breach of an accounting standard, but they agree on a line of argument to put to the
company's auditors.

Vicky Simms, a junior accountant in the company overheard much of the discussion between Ron and Alan as she
waited unseen at the door to hand in a financial report. She thinks she should report the intentions of Ron and
Alan through the company's whistleblowing procedure, but thinks that this course of action would result in her
dismissal from the company.

Q1. With regard to Ron King's proposals about accounting for the provision for litigation costs, identify two
fundamental principles in APES 110 Code of Ethics for Professional Accountants that will be breached by Ron
and identify two fundamental principles that will be breached by Alan. For both individuals, explain why they
will be in breach of the Code. (6 marks)

ANS: Ron will be in breach of the fundamental principle of integrity. He will try to ensure that the company reports a
provision for costs that is lower than the expected amount of the costs that will be incurred. This is dishonest.

Ron will also be in breach of the fundamental principle of professional behaviour, which requires that accountants
should comply with the relevant laws and regulations, and avoid any action that they know may discredit the
profession. Ron will knowingly breach an accounting standard and so fail to comply with regulations. If the matter is
eventually disclosed, it will bring discredit on the accounting profession.

If Alan has genuinely been persuaded by Ron to accept the view that the provision should be small, he may be in
breach of the fundamental principle of objectivity. He should apply an independent mind to the issue and should not
be unduly influenced by the opinions of another person.

Alan would also be in breach of the principle of professional competence and due care, because he should know that
this course of action would breach an accounting standard.

If Alan reached his decisions in the same way and for the same reasons as Ron, he would be in breach of the same
fundamental principles as Ron.

Q2. Examine the possible threats that Alan may be facing in relation to breaching the fundamental principles of the
Code. (3 marks)
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ANS: Alan may be facing the following threats to his fundamental principles:

i. Intimidation. In his attempts to 'convince' Alan, Ron is applying a degree of pressure given that he is
Alan's boss. Alan mentions in the case that he does not want to upset his boss, however it may go further
than this if he feels that failing to do as Ron asks would have negative consequences for his career.
ii. Familiarity: It may be that Alan allows himself to be influenced by the views of Ron simply as a result of a
long-standing working relationship. This could cause Alan to take a view that he would not have taken
himself due to being too sympathetic to Ron's interests or too understanding of his position.
iii. Self-interest: It is unclear whether or not Alan will also receive a bonus linked to the success of the
company, but if he does it could be that Ron's suggestion would personally benefit him too. This may also
drive him to do as Ron asks and record the small provision.

Q3. Giving your reasons, state whether in your opinion Vicky Simms will be protected as a whistleblower by the
Corporations Act 2001 (Cwlth) if she reported her suspicions about the intentions of Ron and Alan through an
appropriate person in the company. (2 marks)

ANS: The provisions of the Corporations Act 2001 with regard to whistleblowers apply to employees. The individual
must identify themselves and must not make the allegation anonymously, and there must be reasonable grounds to
suspect that an officer of the company has breached (or may have breached) the Corporations Act and associated
regulations (including accounting standards). The report must be made through an authorised person, which may be a
person authorised by the corporation's whistleblowing procedures. The Act provides job protection for an 'honest'
whistleblower and includes measures against victimisation of whistleblowers.

In many respects, Vicky would therefore be protected by the Act. However, Ron and Alan have not yet committed any
breach of the Act, even though they may be intending to. Vicky has no evidence to support her allegation, which Ron
and Alan would deny. She may therefore be at risk of disciplinary procedures if she makes an allegation against them
at this time. If in doubt she should seek professional legal advice.

CS.2 Kemix Ltd manufactures a chemical compound which is widely used in industrial cleaning. The compound is made
from a small number of chemical products. One of these raw materials, Chemical X, is bought from a supplier in a
developing country. Chemical X is scarce and is available from only a few global suppliers. In its untreated form,
Chemical X is also toxic and can cause serious damage to the health of individuals who are exposed to it. It is also
known that the local environment around factories that produce Chemical X are subject to extensive
contamination.

A few months ago Kemix Ltd renewed a long-term agreement with the supplier for the purchase of Chemical X.
Senior management are aware of the health and environmental risks associated with Chemical X, but did not see
that these had any relevance to its own business. The toxic effects of the chemical are eliminated by its treatment
in the production process that Kemix uses to make its own chemical compound.

Following a major industrial accident one week ago at the main manufacturing site of the supplier of Chemical X,
there has been a widespread and intensive reporting campaign in the press and television. The dangers of
Chemical X have become a matter of widespread public debate, and a television program has identified Kemix as
a major user of the product. An action group has been formed that seeks to ban the import of Chemical X into the
country and for the closure of Kemix manufacturing sites.

The board of directors of Kemix Ltd believe that the public concern is excessive and unjustified, but the directors
now recognise that they should have done much more to report on the risks from Chemical X, and the measures
taken to deal with them, in their social and environmental report.

Q1. Explain the meaning of 'externalities' and determine two examples of externalities created by the supplier of
Chemical X, as described in the facts of the case. (3 marks)
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ANS: Externalities are factors whose benefits (external economies) and costs (external diseconomies) are not
reflected in the market price of goods and services. They are a gain or a loss arising for one section of society as a
result of the actions of someone else, without any compensation being paid to the losing party.

In this example, possible externalities are:

 The cost to employees and other individuals who suffer damage to their health from exposure to Chemical X.
This will be an externality to the extent that individuals are not fully compensated by the 'offender' for the
damage/harm they suffer.
 The cost arising from damage to the environment, from contamination of the local area. Damage to the
environment affects everyone living in it, because it affects the quality of their life and their enjoyment of life.
Even full detoxification and de-contamination of a site cannot eliminate all externalities from the effects of
having a chemical plant in a local neighbourhood.

Q2. Using organisational legitimacy as the basis for your suggestions, examine four alternative courses of action
that Kemix may take in response to the damaging media reports about its association with Chemical X and its
social and environmental dangers. (4 marks)

ANS: The basic premise of organisational legitimacy and legitimacy theory is that organisations will take action to
manage the perceptions of the community in order to ensure their survival. Organisations must appear 'legitimate' in
order to survive, and to do this they must communicate information that influences community views about them.

Actions that may be taken by Kemix include the following:

 Persuade the supplier to repair the damage at its production site, and take measures to help and compensate
the individuals affected. Kemix could then publicise the measures it has taken.
 Try to communicate views to the public which stress that Kemix is in no way involved with the accident at the
supplier's premises.
 Try to communicate the fact that its production process detoxifies Chemical X and helps to produce a product
of great importance to industry.
 Alternatively, try to divert public attention away from its association with Chemical X and towards other
socially or environmentally positive activities that it is engaged in.
 In the longer term, make sure that the risks from Chemical X, and the measures taken by Kemix and its
suppliers to minimise the risk, are reported every year in the company's sustainability report.

Other reasonable suggestions would be acceptable, but they should recognise that the basis of legitimacy theory is
the need to manage public perceptions, which means that communication is a key element in measures to preserve
an organisation's legitimacy in the opinion of the community.

Q3. Present three reasons in favour of reporting social and environmental risks in a company's sustainability report.
(3 marks)

ANS: Reasons in favour of reporting social and environmental risks in a company's sustainability report include the
following:

 The benefits of explaining the social and environmental policies of the company to shareholders and other
concerned stakeholders, who may want the information in order to make decisions. For example, investors
with sustainable investment policies may base investment decisions on the social and environmental policies
of companies.
 Company management may have strong views about their social and environmental responsibilities and may
want to explain these to stakeholders. In other words, the motivation to report may come from management,
not stakeholders.

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 Positive social and environmental reporting is a way of protecting the company's reputation. As explained in
the answer to question 2, reporting may help to protect the legitimacy of the organisation in the opinion of
the community.
 There is an argument to suggest that voluntary social and environmental reporting by companies may reduce
the risk of compulsory reporting under new laws and regulations that a government may introduce.

CS.3 TRAM Ltd (TRAM) is a listed company that specialises in the development of IT systems. It designs, develops and
installs new IT systems for major clients. The board of directors consists of a chief executive officer (CEO) and
three independent non-executive directors. The CEO Ted Grant has been absent from work for the past 12 weeks
following a car accident and is not expected to return for at least another 3 weeks. During his absence, the duties
of CEO have been undertaken by Gemma Day, the chief financial officer (CFO). During Ted's absence, Gemma has
been involved in a number of major decisions by the board with regard to the company's strategic objectives and
strategic plans.

Just before his accident, Ted agreed a contract with High Telecomm for TRAM to design, develop and install a new
IT system that should help High Telecomm to expand its business. The agreed fee for the contract was
exceptionally low, and the prime concern in Ted's mind when he agreed the price was how he might benefit
personally from his 20% ownership of High Telecomm shares. Ted did not refer the project to the board of TRAM
for approval, and negotiated the contract price personally.

TRAM finished the project on schedule, but made a substantial loss on it. High Telecomm gained immediate
benefit from the new system, and its prospective sales and profits have increased substantially. Following
announcement to the stock market by TRAM of a profit warning for the current year as a consequence of the
High Telecomm contract, the share price of TRAM fell immediately and substantially. The share price of High
Telecomm has risen in expectations of growth in sales and profits.

The other directors of TRAM became aware of Ted's shareholding in High Telecomm only after the agreement
with High Telecomm was made. The board has also been informed that Ted has sold all his shares in TRAM
recently, just before the big fall in the share price.

Q1. Should Gemma Day be regarded as a director of TRAM during the absence from work of Ted Grant? Defend
your answer with reference to the given facts. (1.5 marks)

ANS: Gemma has not been formally appointed as a director of TRAM but the question is whether she should be
regarded as a director nonetheless. This may happen where an individual is not officially a director, but is involved
directly in major board decisions, and is relied on by the rest of the board for their opinion and judgment.

Gemma is the only executive involved in board decisions during Ted's absence. These decisions have included
decisions relating to corporate objectives and strategy. As the only executive present at the board meetings, it seems
probable that the non-executive directors relied heavily on her views and judgment. (It is assumed that Ted has not
been closely consulted during his absence from work.) Gemma should therefore be considered a director during the
period of Ted's absence.

Q2. Identify four duties of company directors that have been breached by Ted Grant. In each case, analyse how Ted
has breached the duty, with reference to the given facts. (6 marks)

ANS:

 Directors have a duty to promote the success of their company. By agreeing to a contract at an exceptionally
low price, Ted was probably aware that the contract was uneconomic and would make a loss. On this
assumption, it should be concluded that Ted did not act in the best interests of the company by making the
contract with High Telecomm.

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 Directors should avoid a conflict of interest with the company. By negotiating a contract with High Telecomm,
Ted's personal interest in the profits and share price of High Telecomm came into conflict with the interests of
TRAM. Ted should not have allowed himself to get into this position, and should not have been involved in
any way in negotiating and agreeing the contract.
 Where a director has an interest in a proposed contract with another organisation, he or she should declare
the interest immediately to the rest of the board. Even if Ted had not been involved in the contract
negotiations with High Telecomm, he should have declared his (substantial) interest in its shares.
 A director has a duty of skill, care and diligence to the company. Ted may argue that he negotiated the
contract with High Telecomm in good faith, but the facts do not support this view. The agreed contract price
was exceptionally low. This suggests that Ted was either careless or deliberately negotiated a price that would
be insufficient to make a profit.
 It may also be argued that a director should not use his position to make a personal profit (or 'secret' profit).
By providing a service to High Telecomm at a low price, Ted may have known that the profits and share price
of High Telecomm would rise. This was therefore a breach of duty. This breach is linked to the duty to avoid a
conflict of interest.

Q3. Has Ted Grant been involved in insider trading? Defend your answer with reference to the given facts. (2.5
marks)

ANS: Insider trading occurs when 'insiders' deal in shares (or encourage others to deal, or pass on information that
others use to deal) when in possession of price-sensitive information.

Price-sensitive information is specific information that has not yet been disclosed to the public, but that could be
expected to have a significant effect on the share price if and when it is made public.

In this case, Ted sold shares in TRAM just before the announcement of the profits warning. To decide whether this was
insider trading, we need to consider:

 whether Ted was in possession of price-sensitive information at the time; and

 whether he would be considered an insider, given his absence from work for 12 weeks.

As he probably knew that the contract with High Telecomm would make a loss, and would therefore affect the
company's reported profits, Ted did probably have specific price-sensitive information. As a director of the company,
even though absent from work, he is probably an insider. If so, his sale of shares in TRAM constituted insider dealing.
However, given the uncertainty on the points of law, it would be advisable for the board of TRAM to obtain legal
advice before taking any further action.

CS.4 Yolanda works for a firm of accountants, Markby. She has recently taken on Welham Ltd as a client to complete
work on the company's financial statements and advise on improvements to its finance function, but she is having
a number of difficulties in respect of the client. Welham Ltd is a listed company with large operations in all of
Australia's major cities.

At her initial meeting with Welham Ltd's board of directors, there was a discussion about Markby's fees, which
had already been agreed between Yolanda and the company. A couple of the directors expressed a great deal of
animosity towards the accountancy profession in general and Markby in particular, arguing that the profession's
objective was purely to ensure scarcity of skills so qualified accountants like Yolanda could charge extortionate
amounts of money. They also claimed that following the 'numerous' financial scandals which had featured
accountants and which 'showed there was no longer any public trust in accountants', the least Markby could do
would be to reduce its 'extortionate' prices to Welham Ltd. Finally they expressed surprise that Yolanda had
accepted the engagement with Welham Ltd given that Markby has also performed similar engagements for the
company's greatest competitor, Neilson Ltd.

A separate meeting was scheduled for Yolanda with Welham Ltd's audit committee. At this meeting Yolanda was
surprised to find the audit committee consisted solely of the company's Chief Executive Officer and Chief
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Financial Officer. Together they made it clear to Yolanda that the committee was only created in order to be seen
to respond to the shareholders' questions about the company's corporate governance, and they did not expect
actually to do anything at all as committee members. They also revealed that the company only employed one
internal auditor, who worked three mornings each week.

Yolanda's day-to-day point of contact at Welham Ltd is Oscar, its Chief Accountant. Oscar consistently delivers
information late to Yolanda and expects her to complete her work on it within 24 hours. He has also asked her to
give him her professional opinion on some due diligence work that has been done by another accountancy firm
that works for Welham Ltd, Foresight, but has refused to supply her with all the information which Foresight had
to hand when it completed the work.

Q1. Prepare a response for Yolanda to present to Welham Ltd's board in defence of the accountancy profession.
Your answer should critique the attributes of a profession, the profession's objectives and service ideal, and the
profession's response to public perceptions of its credibility. (6 marks)

ANS: For: Board of Welham Ltd

Prepared by: An accountant

In defence of the accountancy profession

The board has made a number of damaging accusations about the accountancy profession which need to be
answered.

Attributes of a profession

There are traditionally three views of the accountancy profession and therefore of how it is regulated: that it has a
service ideal so exists to serve the public interest and therefore can be left to self-regulate in doing so; that it exists to
provide high-grade skills to the public and accepts regulation in order to ensure this; and the middle ground whereby
it can be left to be fairly autonomous provided that firstly it operates guidelines and disciplinary procedures for its
members and secondly it retains the public trust. In more recent times, and especially since about 2001, a fourth set
of perceptions has emerged: that the profession exists to create a monopoly serving the self-interest of accountants,
supporting their unfair pricing and allowing them disproportionate power.

As well as the public interest and the service ideal, the accounting profession also has the attributes of being based on
a systematic body of theory and knowledge and an extensive education process. It requires members to exercise
professional judgment, and it has a distinctive ethos or culture and a code of ethics.

Finally there is a governing body with a high degree of autonomy and independence.

The profession's objectives and service ideal

According to APES 110 Code of Ethics for Professional Accountants there are a number of objectives for the
accountancy profession based around these attributes. The key objective is that accountants seek to support the
public interest over their own self-interest, and the interests of their particular clients and/or their particular
employers to ensure the collective well-being of the community. The public interest comprises the interests of the
people and institutions that the members provide services for, be they clients, employers, lenders and other credit
providers, government, employees and investors. This service ideal is demonstrated in accountants pursuing
excellence, providing services to the community (often on an unpaid basis), behaving professionally whilst complying
with rigorous professional standards, and providing reliable information for effective decision-making.

The profession's response to public perceptions of its credibility

A renewed emphasis on ethics, on corporate governance and in particular on the effective understanding and
management of risk have been the profession's responses to the loss of public trust in accountants that began in 2001
and has been worsening since the global financial crisis in 2007/8. Almost a decade on, the accountancy profession is
still gaining back the public's trust. Increased regulation of auditing and reporting, and the international
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standardisation of these, have also been accepted by the profession, so that there is now a system of co-regulation by
the government and the profession, replacing the previous system of purely self-regulation by the profession itself.

Q2. With reference to APES 110 Code of Ethics for Professional Accountants, determine the issues that are facing
Yolanda in relation to: (8 marks)

i. Her fee
ii. Neilson Ltd
iii. The pressures placed on her by Oscar
iv. The work done by Foresight

ANS:

i. Yolanda's fee

In accordance with APES 110, Yolanda as an accountant in practice may charge whatever fee she deems to be
appropriate. There are no specific rules on the level of the fee. If it is higher than the client deems to be reasonable
then the client may decline the engagement. There is no suggestion that Markby is the only possible accountant that
Welham Ltd could engage and therefore it has to be assumed that the board as a whole are satisfied with Yolanda's
fee, even if a couple of individual directors believe that somehow the firm is extorting money from the company. This
would of course be unprofessional behaviour

ii. Neilson Ltd

Acting for two clients that are in competition with each other is a conflict of interest for Markby, creating self-interest
and confidentiality threats to professional behaviour. These threats may be dealt with by implementing appropriate
safeguards, such as having independent engagement teams and using confidentiality agreements. The scenario states
that Markby rather than Yolanda has performed similar engagements for Neilson Ltd, so presumably this is a situation
where Chinese walls within the firm are such that Yolanda is satisfied the conflict of interest has been sufficiently
dealt with.

iii. The pressures placed on Yolanda by Oscar

The fact that Oscar delivers financial information late to Yolanda yet expects her to complete her work on it to a
professional standard within a very short timescale suggests that Yolanda may find it difficult to safeguard her
professional competence and due care, and also her integrity if, as a result of the pressure, she becomes associated
with misleading information. She needs to implement safeguards in this case, perhaps by insisting that she has at
least one week from when she receives the information to complete the work with the diligence it requires.

iv. The work done by Foresight

In this case Oscar is asking Yolanda for a second opinion on the work performed by Foresight. To complete this work
properly Yolanda needs to be confident that she has the same information as was available to Foresight in forming its
opinion. Without this she is facing a threat to her professional competence and due care. To address this threat, a
suitable safeguard would be to discuss with Oscar why the information is not now available and evaluate his answer,
and/or to ask Oscar if she can contact Foresight. If she is not happy with the responses she receives then she should
consider whether it is appropriate to provide the opinion sought.

Q3. In regard to its audit committee and internal audit function, analyse how far Welham Ltd is displaying good
corporate governance. (5 marks)

ANS: Board committees are designed to help improve the board's effectiveness, to deal with matters where conflicts
of interest for the executive directors may arise, and to spread the board's work load. A board is free to set up
whatever committees it sees fit but some are requirements for good corporate governance, including the nomination
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committee, the remuneration committee and the audit committee. More is required to having an audit committee
than just the lip service that Welham Ltd appears to be paying. In Australia the audit committee should comprise only
non-executive directors, a majority of whom are independent. It is clear that Welham Ltd, by having the CEO and the
CFO only on the committee, is non- compliant here. The committee is supposed to oversee the company's financial
reporting process, review the financial statements before their approval by the whole board, review the audit process
and the effectiveness of internal audit, review the system of internal control and risk management, protect the
independence of the external auditors and make recommendations on the appointment, re-appointment or removal
of the external auditors.

The role of internal auditors is to monitor the company's controls and risk management. They should report to the
audit committee, though as employees (generally) it is not possible for internal auditors to be independent in the way
that external auditors are. The problem with Welham Ltd's internal audit function appears to be that as a listed
company with many geographically diverse sites, the resources devoted to it by the company (one person working
part-time) would appear to be woefully inadequate. This raises questions about the effectiveness of internal controls
and risk management and therefore again suggests that the company is not compliant with good corporate
governance.

CS.5 Leonard is the Chief Financial Officer of a newly-listed company, Personia Ltd, which operates a chain of retail
outlets in Australia and Hong Kong. The company has grown very rapidly having been founded only three years
ago. The board of directors has been made aware by ASX that its corporate governance is perceived as weak. This
has also been mentioned by various other regulators which take an interest in Personia Ltd's operations. In
addition, articles have appeared in the press suggesting that the company has been engaged in poor treatment of
employees and in price-fixing in collusion with its main competitors.

Leonard wishes to help improve the company's corporate governance and legal compliance but is unclear about a
number of issues.

Q1. Identify Personia Ltd's stakeholders and analyse the nature of the interests they have in the company. (6 marks)

ANS: Personia Ltd's stakeholders include:

 its shareholders, who wish to see a good return on their investment and a stable future
 its employees, who wish for a steady job and decent pay/conditions
 its directors and managers, who wish to comply with their responsibilities as well as having similar interests
to other employees
 its customers, who are consumers looking for appropriate, safe and reasonably priced products plus excellent
customer service
 its suppliers, who will most likely be wholesalers interested in sales volume and price, fair payment terms and
long-term relationships
 it competitors, who are keen to ensure there is vigorous but fair competition in the market
 its lenders and financiers, who are keen for security and to see repayment of their investment in line with the
agreed terms
 its regulators, who wish to see the company complying with relevant rules and engaging with ideas for
further improvement
 government in both Australia and Hong Kong, who wish to see a stream of tax income plus a company which
is a good corporate citizen
 the community, both locally and at large, who are interested in the company providing employment, and
preserving/supporting the environment.

Q2. Explain to Leonard what is meant by good corporate governance, including the problems it is intended to
address. (5 marks)

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ANS: Good corporate governance is seen when an organisation is properly run. This means both 'performance' – it
performs well in terms of value creation, resource utilisation, risk management and development over time – and
'conformance', meaning it complies properly with relevant regulations, being accountable and able to assure its
stakeholders that they can trust the company and its reports. The company should operate in the best interests of its
stakeholders and retain the confidence of its shareholders and other investors by performing well economically. It
needs to achieve a balance between taking risks and being overly cautious and restricted in its decision-making.

Good corporate governance is intended to address the agency problem, namely that directors act as agents of the
company but may find a conflict of interests between what is good for the company and what is good for their own
self-interest. Directors are in a position to act in their own self-interest at the expense of shareholders and other
stakeholders.

Q3. Recommend for Leonard an appropriate structure for Personia Ltd's board and its committees, and the
importance for the company of board diversity. (7 marks)

ANS: The main component of good corporate governance for Personia Ltd is a strong board of directors. Its main
board should consist of a number of directors with a range of experience and an acute appreciation of the legal and
governance responsibilities they bear. If the current membership of the board is non-diverse, for example if they are
all male, all under 30 and all with only retail experience, then this would be far from adequate.

Personia Ltd's main board should contain executive directors, such as a qualified Finance Director, a Retail Director
and a Managing Director with substantial experience (who is in overall charge of the company's operations). It should
also include non-executive directors (NEDs), who have no executive, managerial duties, their role being to bring
balance and a degree of impartiality to the board's decision-making and to defuse any conflict between executive
directors. NEDs are particularly important in relation to decisions about strategy, risk management, scrutiny of the
executive directors and the overall make-up of the board. A majority of the NEDs should be 'independent' of the
company, meaning they have no business or financial connection to the company, such as acting as a supplier or
receiving a pension, and they can make decisions impartially and without bias. Independent NEDs should be
appointed only for a specified term, since after a while it is difficult to maintain independence, and they should be
capable of taking independent advice.

Personia Ltd's main board should delegate authority for some specific areas to board committees. It should have a
nomination committee to make decisions about board appointments and renewal, and a remuneration committee to
determine executive pay. It should also have an audit committee to ensure the company's internal and external audit
functions are adequate. NEDs, especially independent NEDs, will play vital roles on these committees; indeed only
NEDs are allowed on the audit and remuneration committees.

While the board as agent of the shareholders may delegate some matters to board committees, and some executive
powers to managers, the board retains responsibility for direction and control of the company at all times.

Q4. Critique for Leonard the issues that arise out of the accusations regarding employee rights and price-fixing. (4
marks)

ANS: Personia Ltd has both ethical and legal responsibilities towards its employees. No employer should engage in
unfair treatment of its employees such as bullying, victimisation, harassment, bias, nepotism and favouritism. In an
ethical organisation there should be established procedures for reporting and dealing with such actions, and a code of
conduct so employees have a good idea of how they should behave. In addition the company should respect its
employees' fundamental workplace rights, including freedom of association, the right to free collective bargaining, no
forced, compulsory or child labour, and no discrimination with regard to employment or occupation.

Legally, Personia Ltd has obligations to abide by relevant laws and regulations for fair pay, employment protection and
health and safety. In addition, it should be careful to abide by its 'social contract' with employees to behave

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reasonably, for instance by allowing a work/life balance, access to superannuation and freedoms for trade unions
activities.

Competition policy is a branch of law that aims to protect markets for goods and services. A number of activities are
regulated, including abuses of market power, the procedures for mergers and acquisitions, exclusive dealing and
cartels. A cartel is an agreement between competitors to act collusively for their benefit, actions which by definition
cause detriment to consumers/customers. Personia Ltd has been linked to price-fixing, which is a classic form of cartel
activity and is illegal.

CS.6 Upstake Ltd offers a range of financial services to consumers and small businesses. It is listed on ASX and usually
its share price performs in line with market expectations, but its board has been criticised by shareholders at the
most recent shareholders' meeting. Although executive remuneration recommended by the directors was
approved at the meeting, a large number of shareholders present complained about the level of remuneration
enjoyed by directors and gave the company notice that the shareholders as a body would be looking at taking
action to reduce this, if necessary by removing some directors or even the whole board. Concerns were also
expressed that the company had questionable practices regarding the protection of consumers. Finally several
questions were asked about the company's regulatory compliance with regard to CSR and sustainability reporting.

Q1. Determine how far shareholders can improve the diversity of Upstake Ltd's board by (6 marks)
i. removing directors.
ii. voting against their re-election.
iii. implementing the 'two strikes and spill' regime.

ANS:

i. A diverse board is one with a mix of people that reflects the population of the markets that it is engaged in.
Too often a board of directors becomes a cosy, self-appointing club which is unwilling or unable to listen to its
stakeholders. A common consequence of this is a board which awards directors remuneration that
shareholders feel to be excessive. The board acts as agent for the company, not for the shareholders, so it
cannot be told directly by the shareholders what to do, for instance how much exactly to pay. However
shareholders do have the sanction of refusing to vote in favour of remuneration packages, and can also
remove directors. This is done simply by a 50% majority of the shareholders voting in favour of a proposal to
remove a director.
ii. An alternative method to improve diversity by removing a director is to vote against a director being re-
elected when he or she has to retire and offer themselves for re-election at a general meeting.

This can be an effective method of removing a director but in many jurisdictions there is an interval of three
years before a director has to submit to this (in the UK and US directors of listed companies retire and offer
themselves for re-election every year). In Australia the managing director of a company does not have to go
through the re-election procedure at all, so cannot be removed this way.

iii. In Australia it is possible for shareholders to remove the whole board at once by implementing the 'two
strikes and spill' regime. Under this procedure, at least 25% of eligible shareholders, that is shareholders who
have no connection with the company's management, must have twice voted against the remuneration
package proposed by the board. If they are still unhappy with the package then at least 50% of shareholders
with eligible votes may vote to 'spill' the entire board.

Q2. Recommend to the board how it should improve its diversity so it is more likely to receive the full confidence of
shareholders. You do not need to discuss remuneration levels. (5 marks)

ANS: The key to ensuring diversity on the board is the nomination committee of the board. This should be charged
with the responsibility to build a strong board with a mix of skills, ages and backgrounds, including both independent
and non-independent non-executive directors. It puts forward candidates for appointment, whom the board as a
whole then approves. These decisions are then ratified by shareholders in general meeting. The nomination
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committee should consider succession planning and how to develop skills in board members, and it is also responsible
for monitoring how effectively the board operates. The aim of the nomination committee should be to achieve a
board that reflects the diversity of Upstake Ltd's workforce in respect of gender.

To achieve diversity more widely Upstake Ltd's board should improve its culture of good corporate governance
generally. It should also adopt plans and targets for diversity, considering age, minorities and disability as well as
gender. Career development programs, and programs that allow staff to remain connected during parental leave, help
to maintain diversity in the workplace, but recruitment is also key.

Fair remuneration policies and positive recruitment practices should be put in place.

Q3. Present to the board on the key issues for shareholders in relation to directors' remuneration in a listed
company. (5 marks)

ANS: Directors act as agents of the company itself, not the shareholders, and the nature of the agency problem means
that there is always a possibility that directors will act in their own self-interest rather than in the interests of the
company and its shareholders. Nowhere is this concern more manifest than in relation to executive remuneration.
Directors award themselves remuneration, which is then voted on by shareholders. Even if the company has a strong
remuneration committee, which does not appear to be the case with Upstake Ltd, shareholders may feel that
directors' remuneration is unjustified.

The nature of shareholders' concerns is often that the absolute level of remuneration is simply too high or 'excessive'
in relation to the levels of profit made by the company. In addition there may be relative concerns, that remuneration
is unfair in relation to the average pay of employees or the population as a whole. Other concerns focus on what the
remuneration is for: it is often felt for instance that senior directors who are paid off after resigning following poor
performance are simply being rewarded for failure 'going quietly'. Similarly, there is the possibility that remuneration
is structured so as to reward excessive risk-taking, or the achievement of short-term profits at the expense of long-
term sustainability.

While remuneration should incentivise good performance in the future, this performance should not come at any
price. Finally shareholders often feel there is a lack of transparency and openness in relation to remuneration.

A great many of these concerns would be addressed if Upstake Ltd had an effective remuneration committee.

Q4. Determine how Upstake Ltd may be affected by regulations relating to consumer protection. (4 marks)

ANS: In relation to consumer protection, no laws or other regulations replace the idea of 'caveat emptor', or 'let the
buyer beware'. This means that the basic law of the market applies, so the buyer has no special redress if all they have
done is enter into an agreement which is a poor one for them, but which was a fair one that they entered into
willingly and on the basis of full information.

However, certain consumer markets are more difficult than others and this is certainly true of the financial services
market, where the sellers, such as Upstake Ltd, are expert and in possession of good information while the
consumers, as individuals, are frequently underinformed and inexperienced. There is therefore more regulation in the
financial services market to ensure consumer protection, for instance licensing of firms, regulation of what is
contained in advertising, rules on giving and gathering information by the seller, and 'cooling-off' periods for the
consumer. Upstake Ltd must comply with such regulations or risk being prevented from trading. In addition, the
company is affected by the principle that it should not engage in 'unconscionable conduct' in any situation. This
means that, depending on the situation and the relative bargaining power of the two parties, a court will consider
striking out an agreement with a consumer by looking at whether contract terms were reasonable or more onerous
than others available in the market, whether the consumer understood relevant documents, whether the price paid
was unreasonable and whether undue pressure was applied by the seller.

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Q5. Analyse for the board how the Global Reporting Initiative's G4: Sustainability Reporting Guidelines may help
the company in reporting on its sustainable development. (4 marks)

ANS: The aim of the Global Reporting Initiative's G4: Sustainability Reporting Guidelines (GRI G4) is to encourage
company reporting of the 'triple bottom line' economic, social and environmental issues. If companies follow these
Guidelines then there is a common way of reporting that gains currency and the confidence of users. This method of
reporting follows common principles and the same broad structure, uses common performance indicator protocols
and facilitates benchmarking over time with other companies.

The GRI G4 principles define the report's contents in terms of the need for comparability, completeness, accuracy,
clarity, reliability and timeliness. They only require that material items related to economic, social and environmental
issues should be reported, and they aim for stakeholder inclusiveness. A key point is that the report should identify
the relevant interests that stakeholders have in the company, and then show how the company has responded to
their reasonable expectations. This means that the report focuses on the company's sustainable development.

GRI G4 sets out various types of performance indicator for the environmental aspect, including waste, emissions and
transport. For the social aspect, there are four areas in which companies are expected to report: labour practices and
decent work, human rights, society and product responsibility.

CS.7 Patrice is a senior audit manager in practice working for the medium sized Australian accountancy and audit firm
Wollocott. He has been asked by Wollocott's senior partner to direct a new marketing campaign for the firm,
using newspaper and magazine advertising. Although Patrice has no relevant experience or qualifications he has
accepted the task as his sister runs a marketing agency locally so he can ask her advice, plus he hopes his
willingness will improve his standing with the partners. Patrice has also been asked by the partners to consider
some information they have received on a proposed multilevel regulatory framework for the profession, and a
recommendation that Wollocott should implement APES 320 Quality Control for Firms. The partners are happy to
improve quality in the firm but are concerned that in the end this may be pointless since they believe the
recommendations made by the European Union (EU) on improving auditor independence will be implemented
soon by the profession making the audit sector uneconomic for Wollocott.

Q1. Determine three types of influence on the behaviour of individual accountants when making professional
judgments and decisions, and judge which of these influences appear to have been behind Patrice's decision to
undertake the marketing task. (4 marks)

ANS: The key sources of influence on the behaviour of individual accountants are individual (their stage of cognitive
development and their degree of ethical courage, both of which are heavily affected by personal relationships),
organisational and professional. Patrice has been affected in his decision to take on the marketing role by his personal
relationship with his sister, in which he clearly has confidence and which he believes will add value for the firm and
himself, though he must be wary of the familiarity threat to his objectivity that this presents.

He is also very much affected by Wollocott, the organisation in which he is employed. Clearly Wollocott has a culture
that supports professional development and stretching individuals, and Patrice has 'bought in' to that culture by
accepting the task despite his lack of expertise, experience or qualifications (which in itself threatens his fundamental
principle of professional competence and due care). It goes beyond his job description as a senior manager but
Patrice believes that as the senior partner asked him to do the task, and there is clearly an opportunity for him to
'shine', the decision is a good one.

Professional considerations also influence accountants. In this case the marketing role is one which is affected by
Patrice's professional code, which does not prevent his acceptance of it but to which he will have to pay attention.
Professionally Patrice obviously also believes it will benefit him both by currying favour with the partners and by
extending his skill set.

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Q2. Describe for Patrice how the marketing of professional services presents specific threats to his fundamental
principles, and present four specific recommendations to accountants in professional practice that are
contained in APES 110 Code of Ethics for Professional Accountants with regard to such marketing. (5 marks)

ANS: Marketing professional services is something that professional accountants must do in order to ensure the
development of the organisation which they own or work for, but the nature of marketing poses a self- interest threat
to the accountant's fundamental principle of professional behaviour. This is because the aim of marketing is to
persuade the client to choose the individual accountant or firm over others, and the most obvious way to do this is to
set out the qualities of the service offered by the accountant/firm. The temptation is to overstep the mark however, at
which point information given in marketing may become 'puffed up' and less than genuinely informative, plus it may
bring the profession into disrepute. By definition the information is not objective, which is again a fundamental
principle for accountants. Finally the marketing may cross a particular line and be inconsistent with the profession's
dignity.

For these reasons APES 110 Code of Ethics for Professional Accountants requires that the marketing of professional
services should contain only accurate, honest and truthful information about the services on offer. In order to
preserve the profession's dignity, there should be no exaggerated claims, and no disparaging references to or
unsubstantiated comparisons with the work of others. In addition, any person who has been in receipt of marketing
literature from an accountant, and who has asked for communications to cease, should have that wish respected.

Q3. Analyse the four aspects of the multilevel regulatory framework for the profession and determine the ways in
which APES 320 Quality Control for Firms aims to improve quality control. (6 marks)

ANS: The four levels of the regulatory framework for the accountancy profession comprise the profession:

 setting standards for accounting, auditing and ethics;

 ensuring that accountants conform with these standards;
 undertaking reviews of accountancy practices; and
 regulating accountancy firms.

The setting and implementation of APES 320 Quality Control for Firms are part of this multilevel regime. The standard
aims to improve quality control within an accountancy and audit practice such as Wollocott by requiring that the firm
should have written policies and procedures to ensure that:

 the independence of the firm and its employees is maintained

 engagements are performed in line with regulations and professional standards, and achieve consistency in
quality
 the firm has sufficient personnel with the competence, commitment and capabilities to perform in line with
these regulations and standards
 only appropriate clients are accepted for new engagements, and continuing client relationships are properly
managed and quality controlled.

The firm must also ensure that leadership responsibilities for ensuring quality within the firm are clear and carried
out, and that it properly monitors its system of quality control.

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