ACADEMY OF FINANCE

ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

CHAPTER 11: Governance and ethics

Thu TRAN, PhD.
Nhung DAO, PhD.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

Contents
1. What is governance?
2. What is corporate governance?
3. Stakeholders’ governance needs
4. Symptoms of poor corporate governance
5. What is meant by ‘good practice’ in corporate governance?
6. The effect of types of financial system on governance
7. Governance structures
8. Ethics, business ethics and ethical culture
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

Learning Objectives
üThe reasons why governance is needed and the role of governance in the
management of a business;
üIdentify the key stakeholders and their governance needs for a particular
business;
üThe impacts of legal systems and business culture on corporate governance;
üSpecify the nature of ethics, business ethics, sustainability and corporate
responsibility;
üPolicies and Procedures a business should implement to promote an ethical
culture.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

Syllabus link
üAudit and Assurance and Financial Accounting and Reporting at the Professional
level & at the Advanced level;
üEthics covers all levels;
Assessment context
üMCQ;
üStraight tests of knowledge;
üApplications of knowledge to a scenario
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

uỷ ban ck mỹ yêu cầu independent board member

BOD
1. What is governance? agency problem giữa BOD và SHDs

financial manupulation => profit ↑, debt ↓

mark to market accounting => mới tạo plan chưa đi vào hđ đã ghi nhận doanh thu
off balance sheet => loss => debt => special purpose entity => chuyển lỗ cho cty sân sau
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

1. What is governance?
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

quản trị
1. What is governance? điều hành
vGovernance is the system by which an organization is directed and
controlled so that its objectives are achieved in an acceptable and
sustainable manner. strategy plan - decision
superasory => the management team
vGovernance vs. Management set up chiến lược lớn
vGovernance is concerned with “doing the right things” while
Management is about “doing the things right” thực hiện chiến lược theo detail
vGovernance refers to the “What-questions” while Management refers to
the “How-question”
vGovernance is concerned with overall control to ensure that the company
can achieve its objectives in an acceptable and sustainable way.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

1. What is governance?
vAgency problem/stewardship theory: shareholders and
management vấn đề người đại diện
vAgents and Principals
vContractual agreements manager
SHDs
vThe separation between ownership and control
vBenefit conflicts between the interests of those in control of the company
(agents) and those who own it (principals)
vManagers have better information and not sufficiently accountable for
their stewardship, decisions and actions => Making decisions to maximize
their own interests instead of acting on the shareholders’ perspective.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

2. What is corporate governance?

vDefinition
vA structured system by which a corporation is directed and
controlled
vSpecifies roles and responsibilities of key participants both
internal (BOD) and external (shareholders, external auditors)
vSpecifies rules and procedures for decisions about corporate
affairs
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

2. What is corporate governance?

 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

2. What is corporate governance?

vObjectives
vThe public policy perspective on CG
vThe company is a part of society. It doesn’t act in isolation.
vExpress the accountability for existing and future stakeholders
vCorporate governance aims at ensuring that:
vThe objectives of its shareholders
vThe interest of other individuals and groups with direct stake in the company
vThe interest of the public at large
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

2. What is corporate governance?

vObjectives
vThe stakeholder perspective on CG
vKeep balance between economic & social goals; individual & community.
vEncourage the efficient use of resources through efficient investment.
vRequire accountability from the company’s senior management.
trách nhiệm giải trình
vAim to align the interest of shareholders and companies with those of
other stakeholders.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

2. What is corporate governance?

vObjectives
vThe corporate perspective on CG
vBalance the interests of shareholders with those of other stakeholders to
achieve long-term sustained value for shareholders
vThe stewardship perspective on CG
vLegal regulations on the senior managers “act in the best interests of the
company”.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

3. Stakeholders’ governance needs

chủ thể quản lý
vReview: who are stakeholders of a business (1.3.pp 7,8)
vConflicts between stakeholders’ interests (symptom)
vFinancial collapse without warning (Enron in 2002) phá sản mà không báo trước cho SHDs
vDisguise the true financial performance such as ‘Dressing up’ the
published financial statements
vDisputes over directors’ remuneration’ such as huge salaries, bonuses,
pension schemes, share options
vEmpire building xây dựng đế chế riêng làm lợi cho bản thân
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

3. Stakeholders’ governance needs

vObjectives
vReflect their interests into the company’s objectives
vReduce the scope of conflicts
vGood practice in corporate governance
vGood business ethics
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

4. Symptoms of poor corporate governance

quyền lực
• Domination of the board
không có quyền lực
• No involvement by the board
• Inadequate control function: no internal audits
giám sát
• Lack of supervision of employees
• Lack of independent scrutiny by external or internal
không có vai trò kiểm toán trong kiểm soát DN
auditors
• Lack of contact with shareholders BOD & management
• Focus on short-term profitability
• Misleading financial statements and information
cung cấp thông tin sai sự thật về bctc
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

4. Symptoms of poor corporate governance – Models

vHorizontal two-tier (Germany)
vVertical two-tier (China)
vOne-tier (Vietnam)
vExample of Techpont plc (see Study Manual 2020 pp 321)
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

4. Symptoms of poor corporate governance – Models

vGermany and Japanese governance
vGerman corporate law defines the role of the board to govern the corporation
for the “good of the enterprise, its multiple stakeholders, and society at large.”
vIf a company endangers public welfare and does not take corrective action, it can
be dissolved by an act of state.
vLarge public German companies (more than 500 employees) are required to
have a two-tier board structure: a supervisory board that performs the strategic
oversight role and a management board that performs an operational and daily
management oversight role.
vThe essence of this two-tired board structure is the explicit representation of
stakeholder interests other than shareholders.
vNo major strategic decision can be made without the cooperation of employees
and their representatives.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

4. Symptoms of poor corporate governance – Models

vGermany and Japanese governance
vOwnership structure of German firms:
vIntercorporate and bank shareholdings are common
vOwnership typically is more concentrated: Almost one quarter of the
publicly held German firms has a single majority shareholder.
vBanks control a substantial portion of the equity in German companies.
vThe ownership structure, the voting restriction, and the control of the banks
imply that takeovers are less common in Germany compared to the United
States.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

4. Symptoms of poor corporate governance – Models

vGermany and Japanese governance
vJapanese Corporate Governance System
vKeiretsu: Multiple networks of firms with stable, reciprocal, minority equity interests
in each other. Firms in a keiretsu are typically independent companies, trading with
each other and cooperate on matters.
vKeiretsu can be vertical or horizontal.
vHorizontal keiretsu typically include a large main bank that does business with all of
the member firms and holds minority equity position in each.
vSingle-tier boards. A substantial majority of board members are company insiders,
usually current or former senior executives.
vOutside directorship is the main banks.
vThe interests of stakeholders other than management or the banks are not directly
represented on Japanese boards.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

4. Symptoms of poor corporate governance – Models

vGermany and Japanese governance
vSimilarities
vRelatively small reliance on external capital markets
vThe minor role of individual share ownership
vSignificant institutional and intercorporate ownership
vConcentrated ownership
vStable and permanent capital providers
vBoards comprising functional specialists and insiders with knowledge of the firm and
the industry
vImportant role of banks
vPoor disclosure
vConservatism accounting
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

4. Symptoms of poor corporate governance – Models

vGermany and Japanese governance F. Schumann
vertical => SHDset al.=> supervisor => manager

One-tier board structure Two-tier board structure

horizondal

Company A Company B

Management Supervisory
Board of Directors (BOD) giám sát hđ của manager
Board (TMT) Board (SB)

Executive Non-Executive Executive Non-

Non-Executive
Directors Directors Directors Executive
Directors

Fig. 1 One-tier versus two-tier board structure

 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

4. Symptoms of poor corporate governance – Models

Techpoint plc is a medium sized public company that produces a range of domination
components used in the manufacture of computers. The board of directors consists
of Chairman Max Mallory, Chief Executive Richard Mallory, and Finance Director
Linda Mallory, all of whom are siblings. There are five other unrelated executive
directors. All directors receive bonuses based on sales.flexible interest
sales => short-term profitability lack of supervision
The company’s sales are made by individual salesmen and women each of whom
has authority to enter on the company’s behalf into contracts unlimited in value
without the need to refer to a superior or consult with other departments. It is this
flexibility that has enabled the company to be very profitable in past years.
However, a number of bad contracts in the current year have meant that the
Finance Director has re-classed them as ‘costs’ to maintain healthy sales and to
protect the directors’ bonuses. misleading
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

5. Good practice in corporate governance

vGood practice in CG is concerned with:
vRisk management and good internal controls;
vEthical and sustainable pursuit of the business’s strategy to ensure long-
term success;
vOpenness and transparency: disclosure information;
vIntegrity and probity;
vAccountability;
vReducing the potential conflicts;
vReconciling the interests of shareholders and directors as far as possible
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

5. Good practice in corporate governance

vKey elements:
The Board of Senior Shareholders External Internal Corporate The
Directors managers auditors auditors values and workforce
culture

Executive Put into effect Proactive at Work on Independent Affect the The policies
directors: the decisions the meetings behalf of Report to the behavior of and practices
creators of the board to ensure the shareholders Audit individuals towards its
board acts at Independent Committee of workforce
Non-executive Whistle-blow their best of of the the board or
tố cáo sai phạm
The workforce
directors on the activity interest directors NED raises
Committees of the concerns
company about a
company
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

6. The effect of types of financial system on governance

vBased on the factors:
vHow households prefer to hold their assets
vThe domination of financial intermediaries
vDirect investment vs. Indirect investment
vSources of finance: debt financing vs. equity financing
vTypes of financial system:
vBanked-based systems
vMarket-based systems
 Content Bank-based systems Market-based systems
1. How households
=> Bear risk little risk (risk adverse) more risk (risk taking/tolerance)
=> Prefer to hold assets cash CE (bank deposit) more equity, few deposit
=> Access to investment in
physical asset (Housing) less assets more assets, more choice
=> Level of indirect investment
via intermediaries lower level higher level
=> Influence of institutional less influential more influential
SHDs

2. Government intervention
more government regulation comparatively unregulated
3. How businesses are debt (bank lending) more equity
financed market are volatile and speculative market more important

4. Bank concentration more concentrated, more intergrated more fragmented, less intergrated

5. Banks vs businesses close - lending - borrowing

relationship - bank involment in business not close
=> holding equity (cross holding)
=> strategic involments
6. Dominant force in external banks institutional SHDs
finance
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

6. The effect of types of financial system on governance

vCharacteristics of Bank-based financial systems:
vHouseholds prefer to bear little risk and hold cash such as deposit with banks
vHouseholds have less access to investment in physical assets such as housing
vHouseholds invest in securities via intermediaries such as pension fund and
mutual funds => institutional shareholders are influential
vMore government regulation
vBanks are highly integrated and concentrated
vBank lending is main source of finance
vClose relationship between banks and business, cross-holding
vMarkets are volatile and speculative
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

6. The effect of types of financial system on governance

vCharacteristics of Market-based financial systems:
vHouseholds prefer to bear more risk and hold more equity than bank deposits
vHouseholds have greater access to investment in physical assets such as
housing
vHigh level of indirect invest via intermediaries such as pension fund and mutual
funds => institutional shareholders are influential
vUnregulated comparatively
vBanks are highly fragmented with less integration of bank and non-bank
services
vMarkets are more important than banks in financing businesses
vLess close relationship between banks and business, highly independent
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

6. The effect of types of financial system on governance

vThe impacts of legal system on corporate governance:
vCommon law (UK-US)
vAll laws resides in institutions
vCivil law (French-Germany)
vAll law is custom
vImpacts How about Vietnam?
vInvestor right protection
vGovernment intervention
vMarket transparency
vInsider trading
vAsymmetric information
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

6. The effect of types of financial system on governance

vImpacts of culture on CG:
vMasculinity vs. Femininity đọc thêm
vIndividualism vs. Collectivism
vPower distance
vLong-term orientation
vUncertainty avoidance
vIndulgence vs. Restraint
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

6. The effect of types of financial system on governance

vImpacts of culture on CG:
vMasculinity vs. Femininity: aggressive or hard decision-making style with
a masculine approach, money and achievement focus. Feminine cultures
prefer policies on quality of life, balance and gender diversity.
vIndividualism vs. Collectivism: cultures that value individualism
encourage debate and expression of personal ideas, supports the mix of
directors. Those that promote collectivism try to maintain harmony and
less likely to support strong, diverse opinions and avoid argument.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

6. The effect of types of financial system on governance

vImpacts of culture on CG:
vPower distance: Cultures with a high PD score encourage bureaucracy
and respect for authority and person’s rank in an organization. Cultures
with low PD score encourage flatter organizational structure and more
value is placed on personal responsibility and autonomy. High PD believe
that power should be concentrated in a small group, less emphasis on
separating out the role of CEOs and chair, less need for independent
NEDs.
vLong-term orientation: Short-term view will seek to reward directors for
short-term performance. Long-term view restricts short-term bonuses and
encourage rewards for long-term performance.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

6. The effect of types of financial system on governance

vImpacts of culture on CG:
vUncertainty avoidance: Cultures with low uncertainty avoidance will not
seek to restrict or control risk-taking to the same degree as cultures with
high uncertainty avoidance. High uncertainty avoidance promote internal
controls, risk management and other rules to mitigate business risk to an
acceptable level, and make life as predictable and controllable.
vIndulgence vs. Restraint: Restraint culture controls the personal
gratification or anything that promotes it.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

7. Governance structure
vDefinition
pháp lý quy định
vThe set of legal or regulatory methods put in place in order to ensure
effective corporate governance
vClassification
vStatutes
vCodes of practice
vApproaches
vPrinciples-based
vShareholder-led
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

7. Governance structure
vPrinciples-based approach:
vTo adhere to a certain principles of good corporate governance
vOECD’s Principles of Corporate Governance (revised in 2015)
vPrinciple V: Accurate and timely disclosure and transparency regarding
financial performance and position, ownership and governance
vThe need for external audit
vThe need for an effective approach to the provision of analysis or advice by
analysts, brokers, rating agencies and others.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

7. Governance structure
vShareholder-led approach:
vIn the UK, the role of shareholders in CG is very important (Why?)
vInstitutional shareholders is a broad term for organizations which invest
money on behalf of other people.
vInsurance companies
vPension funds
vInvestment trusts
vInvestment managers who act as agents of the above bodies
vIn the UK, shareholder-led approach rather than principles-based
approach
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

7. Governance structure
vThe governance structure of the UK:
vThe company law sets out a great many of the rules
vThe BOD (a unitary board is required)
vPowers and Duties of directors
vThe relationships of the company with directors
vAccountability for stewardship and financial reporting via financial
statements
vRules on meeting and resolutions
vLarge companies listed on the Main Market of LSE are regulated by FCA’s
UKLA (Chapter 12)
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

8. Ethics, business ethics and an ethical culture

vDefinition of an ethical culture: văn hoá doanh nghiệp
vA business culture where the basic values and beliefs in a company
encourage people within the company to behave ethically
vTo be ethical is a conscious decision made by the owners or directors of
the business to develop an ethical culture
vReasons to be ethical:
vAn entrepreneur
vPressure of shareholders and other stakeholders
vIndustrial peer firms
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

8. Ethics, business ethics and an ethical culture

vEthic principles and values:
vIntegrity
vObjectivity
vAccountability Nolan principles
vOpenness Equality for all
vHonesty No discrimination
vRespect Freedom of
vTransparency information
Institute of
vFairness Business Ethics
vOpenness
vTrust
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

8. Ethics, business ethics and an ethical culture

vDefinition of business ethics:
vThe application of ethical values to business behavior and functions. Ethics goes
beyond the legal requirements for a business and is, therefore, about
discretionary decisions and behavior guided by values. (IBE)
vSociety’s expectations at three levels:
vAt the overall level of ‘what is the role of business in society’
vAt the level of a specific company, and what it can do to manifest business ethics
vAt the level of individuals within a company
vCorporate responsibility:
vExtend the importance of business ethics to the business making a commitment to
all its stakeholders cam kết đảm bảo quyền lợi cho stakeholders
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

8. Ethics, business ethics and an ethical culture

vHow can an ethical culture be promoted?
vA combination of
vEthical leadership from the BOD
vCodes of ethics/ business conduct
vPolicies and Procedures to support ethical behavior
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

8. Ethics, business ethics and an ethical culture

vHow can an ethical culture be promoted?
vEthical leadership from the BOD
vUnethical behavior of BOD abolishes TRUST
vIBE identifies the following attributes and behavior of an ethical leader:
vOpenness: Willingness to learn, learning encourage
vCourage: Be determined and direct; actively stamp out poor behavior
vAbility to listen: aware of what is happening and do the right things
vHonesty: Be considerate and cautious in managing expectations
vFair mindedness: Be independent and Willingness to challenge the
status quo
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

8. Ethics, business ethics and an ethical culture

vCorporate codes of ethics
vA formalization of principles, values, responsibilities and obligations
vThe reasons:
vCommunication: codes of ethics communicate the standard of behavior expected of
employees.
vConsistency of conduct: the behavior employees can be standardized or made
consistent across all its operations and locations.
vRisk reduction: unethical actions will stand out and can be dealt with.
vObjectives:
vTo improve behavior
vTo build the company’s reputation and the trust of stakeholders in the company
vTo improve performance and build value
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

8. Ethics, business ethics and an ethical culture

vWhistle-blowing and complaints systems
vA key way for organizations to support ethical behavior
vTo enable employees to draw the organization’s attention to
unprofessional or unethical behavior that has occurred, or is currently
occurring in the workplace.
vHow to be facilitated:
vThe most common way is to set up an Employee helpline for employees to
call if they have any concerns.
vEthical audit: a process which measures the internal and external
consistency of a company’s value values base.
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

8. Ethics, business ethics and an ethical culture

vICAEW members and business ethics
vMarketing
vOperations
vProcurement
vHR
vIT
vFinance
 ACADEMY OF FINANCE
ICAEW – CFAB
FINANCIAL ANALYSIS DEPARTMENT
BUSINESS, TECHNOLOGY, AND FINANCE

Interactive question 2: Risk

In the UK households hold proportionately more of their assets in the form of
equity than in many other countries. What does this say about UK households’
attitude to risk?
Interactive question 3: Ethical pressure
In what areas of a business would you say there were the greatest pressure not to
behave ethically, and from what source does this pressure come?
Group assignment
PART I. INTRODUCTION
Brief introduction about the companies. No more than 300 words for each company. Please including:
- Full name of the company; address; core business lines.
- History and development.
- Scandal summary.
PART II. THE CORPORATE GOVERNANCE SCANDALS OF [X] AND [Y]
Please follow the above workflow of the main body to present your results and findings.
A. The corporate governance scandal of [X]
Details on the scandal of [X]
The consequences of the scandal of [X]
Reaction of related parties
Corporate governance problems of [X]
B. The corporate governance scandal of [Y]
Details on the scandal of [Y]
The consequences of the scandal of [Y]
Reaction of related parties
Corporate governance problems of [Y]
C. The scandal of [X] and the scandal of [Y] in comparison
The similarities
The differences
Group assignment
PART III. CONCLUSION
A. Overall assessment of corporate governance scandals

Make the overall assessment and come to conclusion of corporate governance scandals.
B. Discussion on the role of external audits/internal analysts in corporate governance
Discuss on the role of external audits in preventing a corporation from such scandals.
References

FORMAT

Main report (presented in Word, .docx)

- Length: No more than 20 A4 pages (excluding Tables, Figures, and Diagrams);

- Margin: Top (1.5cm), Bottom (1.5cm), Left (2.5cm), Right (1.5cm);

- Font: Times New Roman 13pt; Spacing before 6pt; Line spacing Multiple 1.5 pt.

- Reference Style: Havard.

- Supporting documents: you must include or cite the sources of information used in your assignment.
Case study 1

WorldCom scandal: WorldCom, the second-largest telecommunication company in the US, is

best known for a massive accounting scandal that led to the company filing for bankruptcy
protection in 2020. At the peak of dotcom bubble, WorldCom’s market capitalization had grown to
$175 billion. When the tech boom turned to bust, and companies slashed spending on telecom
services and equipment, WorldCom resorted to accounting tricks to maintain the appearance of
ever-growing profitability. To hide its falling profitability, WorldCom inflated net income and cash
flow by recording expenses as investments. WorldCom filed for bankruptcy on July 21, 2002, only a
month after its auditor, Arthur Andersen, was convicted of obstruction of justice for shredding
documents related to its audit of Enron.
Case study 2

Enron scandal: Enron, a former giant of the energy sector and darling of Wall Street, suffered a
collapse that shook the busines world to its core in 2001. In August 2000, Enron had a market
capitalization of $70 billion and was outperforming the S&P by more than 200%. The situation
started in early 2001, when analysts questioned the accountants presented in the company’s
previous annual report. The SEC began to investigate and discovered that Enron was hiding billions
of dollars in liabilities through special-purpose entities, which enabled it to appear profitable even
though it was actually hemorrhaging cash. By November 2001, the company was bankruptcy.
Enron’s share price plummeted from $ 90.75 to $0.26 in a matter of months, leading to the filling of
a $ 40 billion lawsuit from the company shareholders. Enron ultimately filed for bankruptcy on
December 1st 2001 with $ 63.4 billion in assets, the single largest corporate bankruptcy in U.S.
history at the time.
Case study 3
Olympus Scandal: Olympus, established in 1981, was the third largest publicly listed
Japanese company in 2011. The company dominated the world’s medical endoscope market
with over 70%. However, suspicions discovered that the company engaged in improper
accounting practices for over 20 years. It had allegedly circumvented relevant laws and
continued to conceal its losses by transferring the financial instruments relating to its
unrealized losses to several funds which did not belong to the Olympus group. By 2012, the
Olympic scandal was one of the biggest and longest – lived losses-concealing financial
scandals in the history of Japanese corporations. In 2012, the former directors of Olympus
and its statutory auditor, were sentenced to suspended prison terms; but hundreds of
billions of Yen in shareholder value was wasted.
Case study 4

Tyco scandal: L. Dennis Kozlowski, who as CEO helped build Tyco into an
international conglomerate, and Mark H. Swartz, his financial adviser and second-
in-command, are accused of using the money to pay for everything from an
apartment on Park Avenue and homes in Boca Raton, Fla, to jewelry from Harry
Winston and Tiffany’s. The former chief executive and the former chief financial
officer of Tyco International Ltd. were indicted on Sept. 12, 2002 on charges that
they reaped $600 million through a racketeering scheme involving stock fraud,
unauthorized bonuses and falsified expense accounts. The company’s former
general counsel was also indicted, on charges that he falsified company records to
conceal $ 14 million in improper loans to himself.
Case study 5

Parmalat scandal: Parmalat was founded in 1961 as a family-run farm in

Northern Italy. In the following years, Parmalat became one of the largest dairy
and food companies in Italy and a multinational conglomerate. In 1990, the
company’s South American subsidiary began generating losses, which CEO Calisto
Tanzi chose to disguise in the company’s financial results. The company adopted
unethical accounting conventions and self-dealing to cover up losses. However, the
scam began to unravel in December 2003 when Parmalat defaulted on a 150
million Euros despite having reported 4 billion Euros in cash and short-term assets
on its balance sheet.
Case study 6

Luckin Coffee scandal: The Chinese company, Luckin Coffee, listed in the USA,
recently confessed to fabricating transactions worth RMR 2.2. billion and has
received a delisting notice from NASDAQ. The company was established in 2017,
went public in May 2019, and was one of the fastest companies in the world to go
from founding to IPO. However, Luckin shocked the market in April 2020 with the
disclosure that much of its reported sales were fabricated. Investors around the
world suffered the heavy losses when the market capitalization of Luckin plunged
from 12 billion USD in January 2020 to 350 million USD in June 2020.