AUDITING INFORMATION SYSTEM

Name: Althea Louise S. Palac Course: BSAIS

Instructor: JT Punayan, CPA Year: 4th year

Case I. TESCO AND THE ACCOUNTING BLACK HOLE

Having a board of directors is essential in company. They bring skills and

expertise that are needed to be able to function efficiently and consistently in

a constantly changing environment. They bring expertise from Strategy,

Finance, Legal, Marketing, ICT and specialized industry / product related

skills. With their skills, expertise and experience they give value and direction

to the company (Patel, 2021). Hence, in the case of the TESCO Company

having a board of directors consisting of 12 members only two (2) of them has

a background on a retail company which is Chief Executive Officer (CEO)

Philip Clarke and Chief Finance Officer (CFO) Laurie McIlwee. While the

others don’t have the expertise, skills and experience related to retailing. This

caused them a very big problem in terms of their profit. Their sales continued

to deteriorate despite constant effort from their CEO. Also, this led to possible

conflicts, contrasting of opinions, and a change of perspective which made the

Chief Finance Officer (CFO) Laurie McIlwee resign from his post and left

Clarke the only board members who has experience and expertise about

retail.There was also a severe failure in corporate governance by not having

a Chief Financial Officer for five months. The company’s Audit committee also

disregarded the issues related to commercial income that PwC had raised

This was a very big contributing factor for me as to why the misstatement to
£263 million and past years’ manipulations of commercial income was not

discovered and investigated at an early age by then misstatements could

have been minimized. This also highlighted the lack of trust of the whistle

blower to its audit committee wherein he had to raise this issue via the

General Counsel.

The Corporate Governance Code outlines the standards for the expectations

for corporate boards in protecting shareholder investments. This applies to

corporations registered on the London Stock Exchange and are incorporated

in the United Kingdom. Overseas firms that are listed on the Main Market are

required to declare any significant differences in their corporate governance.

The U.K listed combine executives, independent and non - executive directors

( NED). Their code recommends that at least half of the board, excluding the

chairman, comprises the independent NEDs, also they recommended that

there is a clear division of responsibilities at the head of the company and so

practically all boards separate the roles of chairman and chief executive.

While in Singapore’s Corporate Governance Code, a listed Board will

generally have different classes of directors (executive, non-executive and

independent directors) with different roles. Executive Directors (EDs) are

usually members of senior management, and involved in the day-to-day

running of the business, Non-Executive Directors (NEDs) are not part of

Management. They are not employees of the company and do not participate

in the company’s day-to-day management but are expected to be familiar with

the business and stay informed of the activities of the company; and

Independent Directors (IDs) are NEDs who are deemed independent by the

Board, IDs have the duties of the NEDs, and additionally provide an
independent and objective check on Management. With that, I prefer the

Singapore’s Corporate Governance code’s board composition and

recommendation because it has much clearer and more defined roles and

responsibilities of a board member which will avoid confusions and will

promote a better segregation of duties.

A failure in corporate governance by not having a Chief Financial Officer for

five months (BBC News, 22 September 2014). CFO Laurie McIlwee left right

before the accounting scandal blew up, leaving with a golden parachute.

While the company was busy finding a better person to fill in the position that

the CFO left for five months, Laurie acted as an interim CFO which paid her a

salary then was doubled because of the “Golden parachute policy” which for

me is a failure on the boards directors to act upon to. A failure because for

the past months or years CFO Laurie Mcllwee has failed to do its job which

led to the scandal. He was not able to contribute on improvements, which was

one of the basis of the remuneration policy which is to compensate or reward

its employee for its contribution in the company. Also TESCO company has

failed in its succession planning wherein they failed to ready or train an

employee or board member to fill in the position that the CFO had left.

The city regulator of U.K Financial Conduct Authority (FCA) which appointed

audit firm Deloitte and law firm Fresh-fields for an internal review concerning

the accounting misstatements for me performed a good job in investigating

the case because in just over Three weeks Deloitte’s inquiry pointed to a

shocking overstatement of £118 million in Tesco’s 2014 financial half-year,

£70 million in the 2013/14 financial year, and £75 million in the prior year 39,

effectively extending the period and the amount of misreported profits. This
could have been discovered earlier if and only if the audit committee had

listen and took action when PWc informed them with possible irregularities.

For me I prefer the United Kingdom legal system in terms of shareholder

litigation because In United Kingdom, corporate litigation refers to the element

of UK company law that allows investors to sue a company's directors or to

vindicate another wrong committed by the firm, particularly when the board of

directors refuses to act.As a general authority of management, the board of

directors generally has the right to sue in the company's name. So, if the

corporation was wronged, the concept from the decision of Foss v

Harbottle was that the firm itself was the legitimate claimant, and it followed as

a general principle that only the board of directors could initiate claims in

court. A majority of shareholders would also have the power to file a lawsuit

by default, but a minority shareholder's interest was viewed in relation to the

majority's objectives. On the other hand, under the US legal system, A

shareholder derivative litigation is a lawsuit filed on behalf of a corporation by

a shareholder. In general, a shareholder can sue on behalf of a company only

if the corporation has a legal cause of action but has chosen not to pursue it.

This frequently occurs when the defendant in the lawsuit is a company insider,

such as a director or corporate official. If the lawsuit is successful, the money

goes to the corporation rather than the shareholder who filed it.

All in all, accounting practice for some are Controlling financial strategy and

planning, preparing a budget, controlling costs, evaluating staff performance,

and preventing errors and frauds are all tasks that must be completed. With

this accounting standards are provided to better perform the accounting

responsibilities which serves as a guiding principle for every individual or

institution that needs to comply with the accounting standards. They should

practice it by ensuring improvement in Audit Committee effectiveness by

appointing members with accounting and auditing experience, as well as

industry knowledge and experience in the specific business. Also,

Transactions that are overly complicated should be avoided as much as

possible. Where such transactions are unavoidable, the organization must

clearly define and supervise how they are handled. Lastly, • Particularly in the

areas of revenue recognition, accounting estimates, allowances, and reserve

and loss accruals, better and more practical auditing standards are required.

Furthermore, businesses must set clear rules for how these standards should

be applied, and external auditors must guarantee that these principles are

followed during annual audits and interim reviews.

 Case II. VOLKSWAGEN: THE EMISSION SCANDAL

The executive directors of the management board (Vorstand) in Germany's

mandated two-tier structure decide on the company's objectives and

implement the appropriate steps. Meanwhile, the supervisory board's non-

executive directors (Aufsichtsrat) keep an eye on these decisions on behalf of

third parties. dual board structure of directors is a model of corporate

governance, as well as a system of monitoring in which two boards with

different responsibilities work together. The supervisory and management

boards are separated in the two-tier model, and their mandates are kept

separate. So, under the two-tier approach, the executive functions are

completely segregated from the control and monitoring activities. (Aluchna,

2013). One of the advantage of the dual structured board is Both boards are

kept separate and meet separately, therefore all supervisory boards have a

clear division between them. Non-executive directors are those who are not in

charge of the company's operations. In this way, there is less chance of

executives giving instructions or exerting too much power over others.

Furthermore, the supervisory board may discuss all issues independently.

While its disadvantage is that its its controlled access to corporate data and

information of supervisory board directors. Directors of the supervisory board

do not have full access to corporate information and documents and must

depend on the materials given by executives. And the separate meetings

hinders communication and information flow among the management and

supervisory boards (Aluchna, 2013). On the other hand, All types of directors

are represented on a one-tier board, including executives and non-executive

directors, independent and affiliated directors, and outside as well as inside

directors.The Supervisory Board of Volkswagen is made up of an equal

number of employee and shareholder members. The Porsche and Pich

families (5 seats), the State of Lower Saxony (2 seats), and Qatar Investment

Holdings (2 seats) make up the supervisory board (2 seats). These

stockholders control nearly 90% of the voting rights in the company's stock.

Ms. Annika Falkengren, the only non-voting member of the supervisory board,

is the CEO of Swedish Bank SEB and an adviser to one of Volkswagen's 12

brands, Scania. As a result, this lone independent director is not completely

independent.This corporate structure, in which shareholders "have a

stranglehold over half of the board clearly leads in a breakdown of the

Supervisory Board's function, which is to monitor Management's activities and

choices. Hans Dieter Pötsch, Volkswagen's finance director at the time of the

scandal, had a close relationship with the Porsche-Pich family. This familiarity

leads to a lack of independence between the two tiers, constraining the

Supervisory Board's ability to independently supervise Management's actions.

The responsibility of regulator EPA in the emission scandal is that they are

responsible in detecting and preventing non-compliance in light duty vehicle-

sector. Noncompliance can and has resulted in increased pollution emissions,

which have significant and quantifiable harmful consequences for humans.

environmental protection and public health. The blame should be put in EPA

to the extent where if they were able to detect the defeated device earlier.

Which in result caused the successful deception of Volkswagen. This was also

because EPA relied on standard test cycles and had no controls to detect

VW’s sophisticated defeat device.

The possible reasons for the truth only being uncovered in 2015 could be

because The problem was only found by an independent organisation, the

International Council on Clean Transportation, which was investigating how

and why there was such a disparity between laboratory and real-world

performance for various VW diesel cars in Europe. VW claims that a series of

mishaps, not just the actions of rogue engineers, created the company's

emissions crisis.

Furthermore, Volkswagen can improve its corporate governance by changing

its corporate structure. This was the reason for the dysfunctional culture in the

company. The change of corporate structure may result to re-establishing of

once lost credibility of the supervisory board.