Question 1
John Wang is a junior partner and training manager at Miller Dundas, a medium sized firm of auditors. He oversees the progress of the firm's student accountants. One of those under John's supervision, Lisa Xu, recently wrote in her progress and achievement log about a situation in an audit that had disturbed her.
On the recent audit of Mbabo Company, a medium sized, family-run business and longstanding client of Miller Dundas, Lisa was checking non-current asset purchases when she noticed what she thought might be an irregularity. There was an entry of $100,000 for a security system for an address in a well-known holiday resort with no obvious link to the company. On questioning this with Ellen Tan, the financial controller, Lisa was told that the system was for Mr Martin Mbabo's holiday cottage (Martin Mbabo is managing director and a minority shareholder in the Mbabo Company). She was told that Martin Mbabo often took confidential company documents with him to his holiday home and so needed the security system on the property to protect them. It was because of this, Ellen said, that it was reasonable to charge the security system to the company.
Ellen Tan expressed surprise at Lisa's concerns and said that auditors had not previously been concerned about the company being charged for non-current assets and operational expenses for Mr Mbabo's personal properties. Lisa told the engagement partner, Potto Sinter, what she had found and Potto simply said that the charge could probably be ignored. He did agree, however, to ask for a formal explanation from Martin Mbabo before he signed off the audit. Lisa wasn't at the final clearance meeting but later read the following in the notes from the clearance meeting: ‘discussed other matter with client, happy with explanation'. When Lisa discussed the matter with Potto afterwards she was told that the matter was now closed and that she should concentrate on her next audit and her important accounting studies.
When John Wang read about Lisa's concerns and spoke to her directly, he realised he was in an ethical dilemma. Not only should there be a disclosure requirement of Mr Mbabo's transaction, but the situation was made more complicated by the fact that Potto Sinter was senior to John Wang in Miller Dundas and also by the fact that the two men were good friends.
Required:
(a) Explain the meaning of ‘integrity' and its importance in professional relationships such as those described in the case.
- Key words for integrity
- Why integrity is important as accountant
- Why accountant need to be integrity compare to others?
(b) Criticise Potto Sinter's ethical and professional behaviour in the case.
- 5 threats
- looking what kind of threats (quote from case situation)
(c) Critically evaluate the alternatives that John Wang has in his ethical dilemma.
Question 2
MegaMart plc is a medium sized retailer of fashion goods with some 200 outlets spread throughout the UK. A publicly quoted company on the London Stock Market, it has pursued a growth strategy based on the aggressive acquisition of a number of smaller retail group. This growth has gone down well with shareholders, but a significant slowdown in retail sales has resulted in falling profits, as a consequence, its share price. MegaMart had been the creation of Rex Lord, a high profile entrepreneur. His dominance of the company was secured through his role as both Chairman and Chief Executive of the company. His control of his board of directors was almost total and his style of management such that his decision were rarely challenged at board level. He felt no need for any non-executive directors drawn from outside the company to be on the board. Shareholders were already asking questions on his exuberant lifestyle and lavish entertainment, at company expenses, which regularly made the headlines in the popular press. Rex's high profile personal life also was regularly exposed to public scrutiny and media attention.
As a result of the downturn in the company's fortunes some of his acquisition have been looked at more closely and there are, as yet, unsubstantiated claims that MegaMart's share price had been maintained through premature disclosure of proposed acquisition and evidence of insider trading. Rex had amassed a personal fortune through the acquisitions, share options and above average performance related bonuses, which had on occasion been questioned at the Shareholder's Annual General Meeting. His idiosyncratic and arrogant style of management had been associated with a reluctance to accept criticism from any quarter and to pay little attention to communicating with shareholders.
Recently, there has been concern expressed in the financial press that the auditors appointed by MegaMart, some twenty years ago, were also providing consultancy services on his acquisition strategy and on methods used to finance the deals.
Required
(a) Explain the nature of the agency problem that exists in MegaMart.
- What the agency is?
- Who is agent? Who is principle?
- What kind of duty agent own to principle?
- What problem of agency in the case? ( 1 main problem)
(b) Assess the extent to which MegaMart's corporate governance arrangements and situation fail to constitute governance best practice.
- Take the problem first then what it should be?
- Quote case study (report)
Question 3
The International Accounting Standards Board (IASB) has begun a joint project to revisit its conceptual framework for financial accounting and reporting. The goals of the project are to build on the existing frameworks and converge them into a common framework.
Required:
(a) Discuss why there is a need to develop an agreed international conceptual framework and the extent to which an agreed international conceptual framework can be used to resolve practical accounting issues. (20 marks)
- 5 reasons good to have good international conceptual framework
- 5 reasons bad
(b) Discuss the key issues which will need to be addressed in determining the basic components of an internationally agreed conceptual framework.
- 7 issues
Question 4
Ireka is a property development company. Although it has achieved 13.5% rise in underlying profit in the years of 2009-2010, and a forecast of a double digit growth for 2011, the market was not impressed. Against the 52 week high of $14.24, the price is now $12.91 only, which is due to lack of excitement, compared with its history as a glamour stock.
At $12.91, Ireka shares yield 4.4%, based on the 2009-2010 dividend of 57 cent. The payment is due to partly franked and the outlook is for more of the same. Chief financial officer Mr. David says that the about one third of the earnings come locally, the franking credits should be enough to provide 40-50% dividend franking on a 60-80% profit payout. This means investors need a higher yield than would be required from a comparable company paying fully franked dividends. The present price reflects this. As a result, the return looks reasonable, certainly if double digit earnings and dividend growth can be sustained.
(a) In trying to explain shareholders' subdued reaction to Ireka reported earnings, explain whether and/or how you could use the following approaches to accounting theory construction:
- Define the meaning
- Come out with respond
(i) pragmatic
(ii) positive accounting theory
(iii) normative theory
(iv) scientific approach
(v) naturalistic approach
(b) Which of the approaches described in answer to question (a) do you believe is most useful? Why?
(c) Are the approaches you described in answer to question (2) mutually exclusive, or can they be used to complement each other? Explain?