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(c) Define ‘market risk’ for Mr Allejandra and explain why Gluck and Goodman’s market risk exposure is
increased by failing to have an effective audit committee. (5 marks)
(c) Assess Mr Hogg’s belief that employing child labour is ‘always ethically wrong’ from deontological and
teleological (consequentialist) ethical perspectives. (9 marks)
4 Hogg Products Company (HPC), based in a developing country, was recently wholly acquired by American Overseas
Investments (AOI), a North American holding company. The new owners took the opportunity to completely review
HPC’s management, culture and systems. One of the first things that AOI questioned was HPC’s longstanding
corporate code of ethics.
The board of AOI said that it had a general code of ethics that HPC, as an AOI subsidiary, should adopt. Simon Hogg,
the chief executive of HPC, disagreed however, and explained why HPC should retain its existing code. He said that
HPC had adopted its code of ethics in its home country which was often criticised for its unethical business behaviour.
Some other companies in the country were criticised for their ‘sweat shop’ conditions. HPC’s adoption of its code of
ethics, however, meant that it could always obtain orders from European customers on the guarantee that products
were made ethically and in compliance with its own highly regarded code of ethics. Mr Hogg explained that HPC had
an outstanding ethical reputation both locally and internationally and that reputation could be threatened if it was
forced to replace its existing code of ethics with AOI’s more general code.
When Ed Tanner, a senior director from AOI’s head office, visited Mr Hogg after the acquisition, he was shown HPC’s
operation in action. Mr Hogg pointed out that unlike some other employers in the industry, HPC didn’t employ child
labour. Mr Hogg explained that although it was allowed by law in the country, it was forbidden by HPC’s code of
ethics. Mr Hogg also explained that in his view, employing child labour was always ethically wrong. Mr Tanner asked
whether the money that children earned by working in the relatively safe conditions at HPC was an important source
of income for their families. Mr Hogg said that the money was important to them but even so, it was still wrong to
employ children, as it was exploitative and interfered with their education. He also said that it would alienate the
European customers who bought from HPC partly on the basis of the terms of its code of ethics.
Required:
(a) Describe the purposes and typical contents of a corporate code of ethics. (9 marks)
Section B – TWO questions ONLY to be attempted
Five years ago, George Woof was appointed chief executive offi cer (CEO) of Tomato Bank, one of the largest global banks. Mr Woof had a successful track record in senior management in America and his appointment was considered very fortunate for the company. Analysts rated him as one of the world’s best bankers and the other directors of Tomato Bank looked forward to his appointment and a signifi cant strengthening of the business.
One of the factors needed to secure Mr Woof’s services was his reward package. Prior to his acceptance of the position, Tomato Bank’s remuneration committee (comprised entirely of non-executives) received a letter from Mr Woof saying that because his track record was so strong, they could be assured of many years of sustained growth under his leadership. In discussions concerning his pension, however, he asked for a generous non-performance related pension settlement to be written into his contract so that it would be payable whenever he decided to leave the company (subject to a minimum term of two years) and regardless of his performance as CEO. Such was the euphoria about his appointment that his request was approved. Furthermore in the hasty manner in which Mr Woof’s reward package was agreed, the split of his package between basic and performance-related components was not carefully scrutinised. Everybody on the remuneration committee was so certain that he would bring success to Tomato Bank that the individual details of his reward package were not considered important.
In addition, the remuneration committee received several letters from Tomato Bank’s fi nance director, John Temba, saying, in direct terms, that they should offer Mr Woof ‘whatever he wants’ to ensure that he joins the company and that the balance of benefi ts was not important as long as he joined. Two of the non-executive directors on the remuneration committee were former colleagues of Mr Woof and told the fi nance director they would take his advice and make sure they put a package together that would ensure Mr Woof joined the company.
Once in post, Mr Woof led an excessively aggressive strategy that involved high growth in the loan and mortgage books fi nanced from a range of sources, some of which proved unreliable. In the fi fth year of his appointment, the failure of some of the sources of funds upon which the growth of the bank was based led to severe fi nancing diffi culties at Tomato Bank. Shareholders voted to replace George Woof as CEO. They said he had been reckless in exposing the company to so much risk in growing the loan book without adequately covering it with reliable sources of funds.
When he left, the press reported that despite his failure in the job, he would be leaving with what the newspapers referred to as an ‘obscenely large’ pension. Some shareholders were angry and said that Mr Woof was being ‘rewarded for failure’. When Mr Woof was asked if he might voluntarily forego some of his pension in recognition of his failure in the job, he refused, saying that he was contractually entitled to it and so would be keeping it all.
Required:
(a) Criticise the performance of Tomato Bank’s remuneration committee in agreeing Mr Woof’s reward package. (10 marks)
(b) Describe the components of an appropriately designed executive reward package and explain why a more balanced package of benefi ts should have been used to reward Mr Woof. (10 marks)
(c) Construct an ethical case for Mr Woof to voluntarily accept a reduction in his pension value in recognition of his failure as chief executive of Tomato Bank. (5 marks)
In June 2011 Mr Fang leased the same house to Ms Lee for a period of two years.
Due to the sudden change of the market and poor operation of his enterprise, Mr Fang was unable to repay the principal and interest as agreed when the loan matured at the end of January 2012. Credit Association filed a lawsuit in the people’s court and obtained a judgement in favour of its claim for the principal RMB 2 million yuan plus interest.
Credit Association then advised Ms Lee to leave the house, as it has been authorised by the people’s court to organise a public auction to sell the house for the enforcement of the judgement. Ms Lee refused to leave the house on the grounds that the lease agreement was an effective one between Mr Fang and herself and would last until the end of June 2013. In addition, Credit Association’s right of mortgagee should not affect her right under the lease agreement.
Required:
Answer the following questions in accordance with the relevant provisions of the Property Law, and give your reasons for your answer:
(a) state whether Ms Lee’s grounds for refusal to leave the house can be established. (5 marks)
(b) state how Ms Lee should deal with the current situation. (5 marks)
(a) Delhi Co, a potential new client, is a privately owned and rapidly expanding company which currently operates below the audit threshold in the country in which it is based. The company’s management is currently considering having either a full audit or a limited assurance review of their financial statements. The partner would like you to assist the management of Delhi Co by writing a response to them in which you:
(i) Explain the difference between an audit of historical financial statements and a limited assurance review. (4 marks)
(ii) Discuss the relative advantages and disadvantages to Delhi Co of having an audit of their historical financial statements as opposed to a limited assurance review. (8 marks)
Delhi Co was incorporated in 2005, with founder and chief executive Mr Nimesh Dattani as the sole shareholder. After a period of rapid growth, Delhi Co took out a ten-year bank loan facility in June 2007 to finance Mr Dattani’s ambitious expansion plans. This was supported by a further injection of financial capital in 2014 through a new issue of shares in the company. The shares were sold to Mr Robert Hyland, an ex-business partner of Mr Dattani. The sale gave Mr Hyland a 40% shareholding in Delhi Co. He has no involvement in the management of the company.
Until recently Delhi Co operated with a small accounting department, comprising one full-time member of staff and one part-time employee. Due to the expansion of the company and Mr Dattani’s plans to expand the customer base internationally, it has been necessary to increase the size of the accounting function to include two new full-time members of staff. Both of the new recruits are part-qualified accountants and Mr Dattani has committed to sponsoring them through their remaining training and ACCA examinations.
Required:
Prepare the response to the management of Delhi Co as requested by the partner.
Note: The split of the mark allocation is shown against each of the issues above.
(b) The audit committee of another client, Mumbai Co, has asked the partner to consider whether it would be possible for the audit team to perform. a review of the company’s internal control system. A number of recent incidents have raised concerns amongst the management team that controls have deteriorated and that this has increased the risk of fraud, as well as inefficient commercial practices. The audit report for the audit of the financial statements of Mumbai Co for the year ended 31 March 2016 was signed a few weeks ago. Mumbai Co is a listed company.
Required:
In respect of the request for Chennai & Co to review Mumbai Co’s internal control systems: Identify and discuss the relevant ethical and professional issues raised, and recommend any actions necessary. (8 marks)
We can conclude that accidents involving cars ______.
A. happened most often in New York City
B. do not happen as often as they did in the early days of the auto
C. have killed many more people since Mr Bliss was killed
D. were always the driver's fault
TQ Company, a listed company, recently went into administration (it had become insolvent and was being managed by a firm of insolvency practitioners). A group of shareholders expressed the belief that it was the chairman, Miss Heike Hoiku, who was primarily to blame. Although the company’s management had made a number of strategic errors that brought about the company failure, the shareholders blamed the chairman for failing to hold senior management to account. In particular, they were angry that Miss Hoiku had not challenged chief executive Rupert Smith who was regarded by some as arrogant and domineering. Some said that Miss Hoiku was scared of Mr Smith.
Some shareholders wrote a letter to Miss Hoiku last year demanding that she hold Mr Smith to account for a number of previous strategic errors. They also asked her to explain why she had not warned of the strategic problems in her chairman’s statement in the annual report earlier in the year. In particular, they asked if she could remove Mr Smith from office for incompetence. Miss Hoiku replied saying that whilst she understood their concerns, it was difficult to remove a serving chief executive from office.
Some of the shareholders believed that Mr Smith may have performed better in his role had his reward package been better designed in the first place. There was previously a remuneration committee at TQ but when two of its four non-executive members left the company, they were not replaced and so the committee effectively collapsed.
Mr Smith was then able to propose his own remuneration package and Miss Hoiku did not feel able to refuse him.
He massively increased the proportion of the package that was basic salary and also awarded himself a new and much more expensive company car. Some shareholders regarded the car as ‘excessively’ expensive. In addition, suspecting that the company’s performance might deteriorate this year, he exercised all of his share options last year and immediately sold all of his shares in TQ Company.
It was noted that Mr Smith spent long periods of time travelling away on company business whilst less experienced directors struggled with implementing strategy at the company headquarters. This meant that operational procedures were often uncoordinated and this was one of the causes of the eventual strategic failure.
(a) Miss Hoiku stated that it was difficult to remove a serving chief executive from office.
Required:
(i) Explain the ways in which a company director can leave the service of a board. (4 marks)
(ii) Discuss Miss Hoiku’s statement that it is difficult to remove a serving chief executive from a board.
(4 marks)
(b) Assess, in the context of the case, the importance of the chairman’s statement to shareholders in TQ
Company’s annual report. (5 marks)
(c) Criticise the structure of the reward package that Mr Smith awarded himself. (4 marks)
(d) Criticise Miss Hoiku’s performance as chairman of TQ Company. (8 marks)
(a) Mr Xu, a domestic Chinese, is a designer. He is considering the following four options:
Option A: Joining Delta Ltd as a manager with a monthly salary of RMB40,000 and an annual bonus of RMB100,000 payable in December each year.
Option B: Providing services to Delta Ltd as a consultant for a consultancy fee of RMB50,000 per month.
Option C: Setting up his own sole proprietorship. He will pay himself a monthly salary of RMB20,000 from this sole proprietorship. For 2014 the net profit of the sole proprietorship after charging Mr Xu’s salary is expected to be RMB420,000.
Option D: Setting up a limited company, Xupa Ltd. He will pay himself a monthly salary of RMB20,000 from Xupa Ltd. For 2014 the net profit of the company after charging Mr Xu’s salary is expected to be RMB420,000. Xupa Ltd will pay enterprise income tax at the rate of 25% and distribute all of its profit after tax to its shareholder, Mr Xu, as a dividend.
Required:
Calculate the individual income tax (IIT) payable by Mr Xu for 2014 under each of the four options.
Note: Ignore value added tax and business tax. (10 marks)
(b) State, giving reasons, whether the following persons will be subject to individual income tax in China on their worldwide income in 2014:
(1) Ms Wang has her household in Xiamen and holds a China identity card. She has been studying in Australia since 2010 and has not returned to China for the last six years, including in 2014.
(2) Mr Beth is a US citizen, who has lived in China working for a non-government organisation since 2010. He has not travelled outside China for the last six years, including in 2014.
(3) Ms Ruth is an Australian citizen. She travelled to China and stayed in China for a total of 250 days in 2014. (5 marks)
Mr Oggon Mordue, a financial journalist who had worked in audit and assurance for many years, was in the audience.
He suggested that the normal advice on threats to independence was wrong. On the contrary in fact, the more services that a professional services firm can provide to a client the better, as it enables the firm to better understand the client and its commercial and accounting needs. Mrs Yttria disagreed, saying that his views were a good example of professional services firms not acting in the public interest.
Mr Mordue said that when he was a partner at a major professional services firm, he got to know his clients very well through the multiple links that his firm had with them. He said that he knew all about their finances from providing audit and assurance services, all about their tax affairs through tax consulting and was always in a good position to provide any other advice as he had acted as a consultant on other matters for many years including advising on mergers, acquisitions, compliance and legal issues. He became very good friends with the directors of client companies, he said. The clients, he explained, also found the relationship very helpful and the accounting firms did well financially out of it.
Another reporter in the audience argued with Mr Mordue. Ivor Nahum said that Mr Mordue represented the ‘very worst’ of the accounting profession. He said that accounting was a ‘biased and value laden’ profession that served minority interests, was complicit in environmental degradation and could not serve the public interest as long as it primarily served the interests of unfettered capitalism. He said that the public interest was badly served by accounting,as it did not address poverty, animal rights or other social injustices.
Required:
(a) Explain, using accounting as an example, what ‘the public interest’ means as used by Mrs Yttria in her
speech. (5 marks)
(b) This requirement concerns ethical threats. It is very important for professional accountants to be aware of ethical threats and to avoid these where possible.
Required:
(i) With reference to the case as appropriate, describe five types of ethical threat. (5 marks)
(ii) Assess the ethical threats implied by Mr Mordue’s beliefs. (8 marks)
(c) Assess Ivor Nahum’s remarks about the accounting profession in the light of Gray, Owen & Adams’ deep
green (or deep ecologist) position on social responsibility. (7 marks)