CONFIDENTIAL AC/JULY2020/CRG650/520

UNIVERSITI TEKNOLOGI MARA

FINAL ASSESSMENT SERIES 2

COURSE : BUSINESS ETHICS AND CORPORATE

GOVERNANCE
COURSE CODE : CRG650/520
EXAMINATION : JULY 2020
TIME : 2.15 - 4.15 (2 HOURS)

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of: 2 Structured Essay Questions (Question 2 and Question
3)

2. Answer ALL Questions in the specific platform required by Teaching Lecturer

3. Answer ALL questions in English Language.

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QUESTION 2
The Reveals of the Unexpected
Gayya is a multinational company having 300 operated stores worldwide. From the year
of its establishment, it continues to provide iconic brand image by serving the upper
class customers with premium quality of goods, generating billions of revenue every
year. However its good name has came under fire after eight former employees publicly
revealed about the inhumane working conditions and unethical labour treatments. The
report went viral and widespread discussions aroused among internet users.

One letter was written by the eight former employees addressing the occupational
diseases served at workplace. The letter revealed some shocking information on the
treatments served to employees. It stated that, due to excessive working hours, two
miscarriages cases were reported, the staffs were not paid with any compensation for
the hardship and suffers. The employees’ behaviour was also excessively controlled.
Employees must obtain official permissions before they can go for a break, to get drinks
or snack. A strict time limit was also applied on toilet time. Other than that, employees
must be responsible for all products that were stolen and went missing. Even though
the products had already been insured, the employees on duty were compulsory to pay
for the amount of the missing product. The workforce required everyone to clock off at
certain time to establish false electronic records on the attendance, however no
overtime payments were paid.

The following misconducts were also reported by the former employees. The accounts
department was facing several chronic issues especially on how to reconcile the correct
information on sales and salary payments to employees. The concerns of top
management were mainly focusing on profit-making and customer’s satisfaction. These
two agendas were part of daily reminders instilled to all employees. According to Luqmi,
a former accountant at Gayya, he was directed to perform superficial window dressing
to figures of financial statements. Due to the pressure, Luqmi then decided to resign
from the company.

Required:

a. Explain two (2) possible reasons that have caused Gayya to serve unethical treatments
to its employees at workplace.
(5 marks)

b. You are to advise Gayya on the ethical treatments it should serve its employees on the
aspect of employees’ rights at workplace.
(5 marks)

c. Analyse the decision made by Luqmi to the following fundamental principles in the
International Federation of Accountants (IFAC) Code of Ethics; (i) Integrity (ii)
Objectivity (iii) Professional Behaviour.
(10 marks)

d. Suggest two (2) possible outcomes that may have happened to Luqmi as a professional
accountant if he chooses to continue working and be a blind loyalty accountant to
Gayya.
(5 marks)
(Total: 25 marks)

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QUESTION 3
The Enron Audit Committee
Enron’s audit committee seemed to fulfil all of the requirements of ‘best practice’. It
consisted of seven well-known and highly qualified board members who were all non-
executive directors of the company. But like many things at Enron, the reality was quite
different.

One member of this committee, John Wakeham, had in place a USD 72,000 per year
consulting contract with Enron. Two other committee members had been employees of
universities that had received significant charitable contributions from Enron or its
chairman, Kenneth Lay (Lavelle 2002).

Specifically, one of these members, Jon Mendelsohn, was also president of the M. D.
Andersen Cancer Centre at the University of Texas. Lavelle (2002), reported that this
centre had received USD 332,150 from Enron and Lay since 1999. Under disclosure
rules at the time, it was not necessary to disclose this relationship to Enron’s
shareholders and there was no voluntary public disclosure of these arrangements.

Another committee member, Wendy Gramm, was an employee at the Mercatus Centre
at George Mason University. According to the university’s records, USD 50,000 was
collectively paid by Enron and Lay to this centre from 1997. Moreover, Wendy Gramm’s
spouse, Senator Phil Gramm (Republican, Texas), received USD 80,000 in political
campaign donations from Enron and its employees from 1993, when she became a
director of Enron (Lavelle 2002).

It should also be noted that the chair of Enron’s audit committee, Robert Jaedicke, was
aged 72 years at the time of Enron’s collapse. While he was eminently qualified for the
role he had worked at Stanford University as an accounting professor until his
retirement some 10 years earlier his advanced age and the complexity of Enron’s
finances and operations called into question his competence for this high-level role
(Lavelle 2002).

There were also concerns about the lack of action taken by the audit committee against
questionable accounting practices by management. The minutes of an audit committee
meeting held in February 1999 indicated that the senior audit partner had told the
committee that accounting work relating to several areas, including ‘highly structured
transactions’, was considered ‘high risk’.

The accounting firm’s (Arthur Andersen) legal counsel later testified that this risk rating
was designed to convey to the audit committee that the company was ‘using accounting
practices that, due to their novel design, application in areas without established
precedent or significant reliance on subjective judgements by management personnel,
invited scrutiny and presented a high degree of risk of non-compliance with generally
accepted accounting principles (COGA 2002). The audit committee seemingly chose to
ignore these warnings.

The Enron case demonstrates that good governance is about far more than establishing
board committees. The members of each committee need to demonstrate
independence and be prepared to stand up to management in the event of questionable
practices. Moreover, they need to adopt a sceptical view of management submissions
and be prepared to delve deeper when they do not receive the answers they want or
they suspect something is not quite right. Clearly, the individual members of an audit
committee are required to be competent, experienced and even courageous in
adequately performing such a key role.

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(Source/Reference: CPA Australia – with amendments)

Required:

a. What is one major issue that arises from an agency relationship, where powers of
control are delegated? Discuss.
(6 marks)

b. Explain the role of both the CEO and the board, and give examples of the types of
activities the CEO and the board should perform.
(6 marks)

c. Assess the Enron audit committee role and independence issues in light of the
above illustration.
(5 marks)

d. Evaluate the effectiveness of the committee and what would you recommend to
improve the Enron audit committee in this situation.
(8 marks)
(Total: 25 marks)

END OF QUESTION PAPER FOR SERIES 2