- 20 Marks
SCS – L3 – Q17 – Professional practice and codes of ethics
Question
At its recent Annual General Meeting, management of NTM was highly criticized for two major scandals that occurred in the organization during the year. In one case, newspapers reported that the management of the company connived with officials at the port to undervalue imports in order to pay lower taxes. In the other case, it was reported that the accountant leaked information to his friend who was bidding for a contract in the company. The Board Chairman, who is also the Chief Executive Officer of the company apologized for these incidents but did not disclose that the company had been sued in respect of the first case. He went on to promise the shareholders that the fortunes of the company would change dramatically by the end of the new year as the company was going to start exporting its products to Europe within the next few weeks.
Required:
(a) Identify and explain THREE situations that are in conflict with the International Federation of Accountants (IFAC)’s Code of Ethics.
(b) Explain FOUR disadvantages of the CEO acting also as the Chairman of the Board.
(c) Identify FOUR principal duties of a Board of Directors.
Answer
(a)
(i) In the first situation, the fundamental principle of integrity was violated. Accountants are required to act with integrity (honesty and truthfulness) while they are performing their duties. By allowing customs official to undervalue the imports, the accountant’s behavior which can be described as bribery of an official and cheating of the state pointed to his dishonesty.
(ii) The second situation was an issue of confidentiality. Any information that is withheld from the public during a bidding process is supposed to be kept as a secret. Revealing this information to anyone who is not supposed to have it violates the fundamental principle of confidentiality.
(iii) The CEO’s refusal to disclose information relating the court suit violates the principle of disclosure. Governance regulations and codes require that organizations make disclosures about the board, internal control reviews, going concern status and relations with stakeholders. (b)
(i) Combining the role of CEO and Board Chairman increases the workload of the individual making him or her less efficient.
(ii) The individual may become too powerful and overbearing on other members of the board, thereby dictating the pace of activities.
(iii) Conflict of interest situations are likely to arise where the CEO can easily force through his executive decisions at the board level though they may not be in the best interest of the organization.
(iv) Decisions taken by the board may not be based on well-deliberated opinions and as a result, may not be the best under some circumstances. (c)
(i) Provide continuity for the organization by setting up a corporation or legal existence, and to represent the organization’s point of view through interpretation of its products and services, and advocacy for them.
(ii) Select and appoint a chief executive to whom responsibility for the administration of the organization is delegated, including: to review and evaluate his/her performance regularly on the basis of a specific job description, including executive relations with the board, leadership in the organization, in product/service/programmed planning and implementation, and in management of the organization and its personnel and to offer administrative guidance and determine whether to retain or dismiss the executive.
(iii) Govern the organization by broad policies and objectives, formulated and agreed upon by the chief executive and employees, including to assign priorities and ensure the organization’s capacity to carry out products/services/programmers by continually reviewing its work.
(iv) Acquire sufficient resources for the organization’s operations and to finance the products/services/programmers adequately.
- Uploader: Salamat Hamid