Week 8 questions for ethics:

Q1 Distinguish between governance, management, and corporate governance.

- Governance relates to oversight and is a structure under which directors and managers
operate. Governance is about controlling the actions of a group of people in order to benefit
the community.

- Management relates to day-to-day operations of the organization.

- Corporate governance is a set of relationships between a company's management, its board,

its share- holders, and other stakeholders:

- Good corporate governance should provide proper incentives for the board and
management to pursue objectives that are in the interests of the company and its
shareholders and should facilitate effective monitoring.

Q2 Explain the different roles of directors and executive directors.

- A Director is a senior management figure who is in charge of a certain part of a company.
Directors often supervise managers and may help in the management of a department,
team, or project
- Executive directors are responsible for leading the organization and overseeing its
operations, similar to the CEO function in a for-profit business.

 Review overall business strategy, and in some jurisdictions take stakeholder interests into
account.
 Oversee the company's financial statements and recommend them to the board for
transmission to the shareholders.
 Monitor overall company performance

Q3 Discuss the circumstances where corporate governance works well.

When there is a good 'tone at the top' in that senior members of the organization elicit good
behaviour that is followed by everyone in the organization. When the code of conduct is not merely
a policy document but is followed and reinforced regularly so it becomes a part of the organization.

Q4 How can a company control and manage conflicts of interest?

Employees must be constantly made aware of potential conflict of interests and their consequences
through training and reinforcement. There must be a mechanism provided for clarification and
guidance including codes.

Q5 What is the role of an ethical culture, and who is responsible for it?
An ethical culture provides continual guidance to executives and other employees with regard to
appropriate patterns of behaviour, standards of conduct, and how decisions are to be made. It is a
vital part of the dissemination of company policies and of the internal control compliance
mechanism required by SOX of directors, the CEO and CFO.
External auditors have long relied upon an organization's internal controls for assurance that
transactions, records and reports are handled properly. Without an effective ethical corporate
culture, directors, executives and auditors are very much at risk. 

A corporation needs an ethical corporate culture to guide employees to do what the directors and
senior officers have decided to be appropriate behaviour. Codes of conduct are not always read or
understood well or comprehensively, so employees usually consider and emulate what they believe
to be appropriate norms or actions from informally observing their bosses and colleagues. An ethical
culture is one where those informal observations are intentionally integrated with formal ethics
program objectives and guidance. The informal signals given by senior executives are so important
to good ethical governance that directors are now expected to continually assess the ethicality of
the "tone at the top", and to hire/fire/encourage good role models. 

Consequently, the corporation's directors are ultimately responsible for the ethical culture, and in
turn so are the senior executives, as are auditors to some extent (for not finding obvious flaws). In
turn, executives and managers at lower levels are expected to be supportive. A corporate ethics
officer or advisor can be quite helpful

Q6 Use the eight (8) ASX Principles of Corporate Governance in the Learning Materials to identify
and explain failures in corporate governance in both the Sears Compensation case (from reading in
B&D, p. 261) and the VW emissions scandal which was previously discussed.

Sears Compensation Case

 Sears created a poor incentive system which focused on purely monetary rewards and set
that in their foundations of management.

VW Case
 Similarly, to Sears, VW embedded into the values the importance of producing a car that was
powerful instead of complying with the law and having any social responsibility. 

Q7 Case Study: Manipulation of MCI’s Allowance for Doubtful Debts (B&D pp. 314-315)

What are the relevant facts?

In the case of MCI, the credit policies were too lenient, and had not been reviewed or changed as a
result of economic conditions and sales volumes. The aging was being artificially manipulated
because there were inadequate internal controls to prevent Walt Pavlo and his team from:
 converting criminal accounts receivable to promissory notes,
 accepting common stock instead of cash
 lapping payments

Outline the possible reasons for failure in the corporate governance of MCI.
 Weak internal and external audit departments
 Given only guidelines on behaviour, with no checks and balances
 Performance targets too unrealistic which was a cause of the accounting fraud
 Lucrative commissions for sales personnel
 No 'tone at the top'
Q8 Case Study: Satyam (B&D pp. 318-319)
Use the ASX Principles of Corporate Governance to compare the failures in corporate governance in
Satyam and Enron. Identify the similarities.
Safeguard the integrity of corporate reports: A listed entity should have appropriate processes to
verify the integrity of its corporate reports.

Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of
all matters concerning it that a reasonable person would expect to have a material effect on the
price or value of its securities.

Respect the rights of security holders: A listed entity should provide its security holders with
appropriate information and facilities to allow them to exercise their rights as security holders
effectively.

Recognise and manage risk: A listed entity should establish a sound risk management framework
and periodically review the effectiveness of that framework.

Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to
attract and retain high quality directors and executive remuneration to attract, retain and motivate
high quality senior executives and to align their interests with the creation of value for
securityholders and with the entity's values and risk appetite.

Compare Satyam’s and Enron’s relationships with their auditors.

Both companies were too close to their auditors, and because of their friendly relationship with the
auditors, the auditors did not audit the financial statements carefully.

Should PWC be punished the same way as Arthur Anderson? Why or why not?
Possibly because they both gave clean audit opinions when there was serious accounting fraud
undetected. In general, external audits are not designed to detect fraud, but it seems that relatively
straight forward audit procedures such as thorough bank confirmations and reconciliations, as well
as other forms of asset verifications, would have uncovered the fraud.