KINGJEWELS: ETHICAL LEADERSHIP IN PARCTICE

A case study

CASE POINTS:

 While Wong successfully turned Kingjewels into a highly competitive business, he left
Kingjewels internal management to Clement Tam, Operations Director.
 In January 2006, after the year-end closing, the company discovered that a key staff
member had accepted advantages in return for manipulating KingJewels’ records,
approving the use of substandard gemstones, bribing subordinates to cover up the
matter, and, possibly, accepting rewards from suppliers.
 Wong and other directors of the Board were unaware of these events until Chan Ming,
business services manager, informed Wong.
 Tam Wai Man, finance manager and a chartered accountant at KingJewels. In the
course of her work, she had discovered that the operations director of KingJewels, Clement
Tam, who was also her brother, had accepted advantages from several suppliers over the
course of 30 months in return for substandard gemstones, that he had failed to disclose the
correct quality of gemstones purchased, that he had misplaced business documents to
support the receipts of goods purchased, and that he had bribed his subordinates into
silence.
 At the impending Board meeting, Wai Man had to decide whether to give a report on
the malpractices she had discovered and how these could have taken place without
her knowledge. In question was her professionalism as an accountant and
department head, while her relationship with her brother had taken a beating and
caused emotional havoc. As she considered the contents of her report, she tried to
divorce herself from her personal concerns and look at the circumstances
objectively.
 Its mission was to become “the best jewellery maker in the region”.

Entrepreneurial Leadership
 Wong believed a good vision and direction were critical leadership qualities. As
he always said, “You do not achieve commitment to, or an understanding of, a
company’s vision and mission without actively pursuing and practising it at
every opportunity.” This was a hands-on leadership style that motivated staff.
 Since late 2003, he had spent most of his time travelling to the US and Canada,
and taking care of business development and marketing. Being an ambitious
man, he set a clear mission for himself to turn KingJewels into “the best
jewellery maker in the region”.
Key Personnel
 Sharing this mission was Clement Tam, a close friend of Wong’s who had
become his right- hand man in the company. Tam’s primary responsibility
was worldwide gem sourcing. He was both the operations director, almost
overseeing the whole company, and the head of the gem sourcing
department. Despite his basic secondary-school education, he worked hard
 to gain recognition while continuing in night school to substantiate his 15
years of work experience, mostly acquired at KingJewels.
 Tam Wai Man, Tam’s sister and a chartered accountant from the Hong Kong
Institute of Certified Public Accountants (“HKICPA”) with six years of work
experience with Deloitte Touche Tohmatsu, joined the company in 1998. She
was put in charge of the company’s accounting and finance functions. As a
certified public accountant (“CPA”), she strongly believed in maintaining high
standards of governance and adhered to the HKICPA’s codes of professional
ethics.
 Chan Ming, the head of business services, looked after the Hong Kong
operations, including the wholesale and retail businesses. He had been with
the company since its inception. He had worked with Tam for over seven
years, and they regarded each other as trusted colleagues and good friends.
 Jonathan Ho, the head of production and authentication, was in charge of
the company’s manufacturing operations and gems authentication in
mainland China. Being an industry veteran with vast amounts of experience
in doing business in China, he was known
Warning Signs of Unusual Practice

 March 2004, customers Steven Wang and his aunt, Ling Fung, a woman
experienced in purchasing diamonds, were in one of KingJewels’ retail shops
looking for a necklace and an engagement ring.

 They were interested in the Bliss collection and chose a ring priced at
HK$12,000 and a necklace worth HK$50,000 from another collection.

 They were happy with their choices, but when Ling asked for diamond
certificates to verify the quality of the stones, the sales staff informed them
that the Bliss collection did not provide diamond certificates.

 The certificate was an independent grading report on the quality of loose

diamonds with the exact measurements of the 4c’s: clarity, colour, cut and
carat [see Exhibit 4].

 Steven and Ling were given verbal guarantees of the quality of the diamonds.
They were told that the ring was set with a half-carat diamond of high clarity
level, considered as E colour on the GIA colour grading scale, and had a pear-
shaped diamond cut.

 The incident was observed by Ming as he was inspecting the retail shop.

Digging Deeper
 Ming asked why diamond certificates were not given out to customers
purchasing from the Bliss collection. To his surprise, he was informed by the
two salesmen that this had been company practice since March 2003, on
instruction from Ho.
 According to the Rapaport List, the primary source of diamond price
information, the diamond prices were estimated in terms of carat, colour and
clarity. Cut was not included as all diamonds were assumed to be of a good
cut. Some diamonds used for the Bliss collection should have been sold at a
lower price, given their poorer colour and clarity.
 On further probing, it came to light that the company had claimed that the
Bliss collection consisted of E colour diamonds, when they were in fact F
grade diamonds.
 He made a prompt decision to remove those items from the stores. As a short
term solution, instead of reporting directly to Wong, Ming shared his findings
with Wai Man to see if she had any additional information and advice.
 After several discussions, they thought that Ming should initiate a discussion
with Ho, as he had overall responsibility for the manufacturing of the
products, including stringent quality assurance to ensure that products were
of the highest quality according to colour and carat.
 They were curious about how these lower quality and lighter stones could
have made their way to the manufacturing lines without Ho and other
experienced diamond cutters noticing.

 Wai Man separately initiated a chat with her brother, Tam, as she suspected
that sourcing might have had a role to play in the incident.

 She discovered that the stones in question had all come from two sourcing
companies by the names of SuraGems and DenpaStones.

 She also found that SuraGems and DenpaStones had only started doing
business with KingJewels three years ago, but their business volumes had
grown tremendously during that period. These two suppliers now combined
to represent more than 20% of KingJewels’ total annual spending on
gemstones, making them two of the biggest sourcing companies within
KingJewels’ portfolio.

 Tam cut short their conversation and ordered her to delay the investigation.
Before he left the room, he exclaimed, “The company’s ambitious growth
target of HK$600 milliion as total revenue and 2% of market share next year
can be met! Our annual bonuses are tied to the growth target isn’t it? I’ll
follow up the issue myself.”

 Working late into the evenings and on weekends to avoid detection, Wai Man
further discovered that KingJewels had been delivered a batch of gems of
lower colour grade and clarity, but was charged a premium price for them.

 She suspected that huge orders were placed with SuraGems and
DenpaStones because they agreed to pay Tam large rebates.

 She also presumed that her brother’s highly handsome salary was not the
only income source sustaining his family’s quality living. Having been in the
 industry for more than seven years, she knew that some aggressive suppliers
paid attractive rebates ranging from 10% to 18%.

 She had made company searches on the two suppliers and found that the
registered owner of SuraGems and DenpaStones was Peter Tam, her uncle
and a close friend.

 Peter was very close to Tam too, and they frequently dined at fancy
restaurants and clubs together. They also visited Macau on occasions and
engaged in excessive gambling. Tam claimed that Peter was a lucky man and
often had a lucky streak.

 On further checking of the accounting transactions with these companies,

Wai Man discovered that a few unusually large purchase transactions had
occurred near each quarter’s end, when bills of lading or reports of
shipments received were either pending or completely missing. The whole
situation made Wai Man suspicious of her brother.

 Feeling the pressure, Wai Man investigated the incident further in the hope
that she would find new evidence to refute her suspicion of her brother’s
involvement.

 To her dismay, she found that over the past few years Tam had been signing
off on lower quality stones and passing them on to the production
department.

 Her books showed that these gemstones represented only 20% of all gems
used by the production department to make jewellery.

 More interestingly, these gemstones bypassed Ho and the quality controllers

and found their way to the production line in mainland China.

 Having been in the company for several years, Wai Man knew the employees’
attitude well. Even if the employees were not involved, most of them would
be afraid to express their opinions or to question unethical and potentially
illegal business practices. Furthermore, such practices were common and
went unquestioned in China.

 Employees were handsomely rewarded for their efforts and it was of no

interest to them to report such incidents that could jeopardise their job
stability
GUIDE QUESTIONS:

1. If you were Wai Man, what action would you take? What could she have done to
prevent the incident from happening?
 Provided that Tam Wai Man strongly believed in maintaining high standards of
governance and adhered to the HKICPA’s codes of professional ethics, thus, she
should talk with the Board of Directors and with Andy Wong to provide all the
leading discoveries without having any final judgement. Let the decision rest
with the Top Management and provide a recommendation on hiring an external
auditors/investigator to discover all the unusual practice initially discovered by
Tam Wai Man. She should let herself out of the investigation process and rather
be part of the key persons to lead and provide information in relation to her
work as a Finance Manager and Accountant.
 Personal relationship shall be set aside in terms of work. All the unusual reports
or findings in the financials of Kingjewels whether small or huge shall be
reported to the board and to Andy Wong to avoid being an accessory in the
unusual practice of all the concerned personnel.

2. If Wai Man were to blow the whistle, what would happen to her, professionally and on a
personal level? How would this incident change the mindset and behavior of employees
with regard to committing and reporting fraud?
 Whistleblower policies are critical tools for protecting individuals who report
activities believed to be illegal, dishonest, unethical, or otherwise improper,
therefore, Tam Wai Man has the rights to request for protection in terms of
security and career jeopardy. She should be ready of all the possibilities that may
affect her relationship with her brother and other Family member, hence, her
career in the future will be protected and adheres to the ethical standards of her
profession.
 The incident will trigger honesty and loyalty to the workforce, this is due to the
sacrifices of Tam Wai Man if she will whistleblow all of her discoveries or
findings. Ethical practice in terms leadership shall prevail for the success and
growth of the Kingjewels.

3. Had the CEO been alerted to all facts, what action should he have taken? What would
be the implications of his chosen actions on:
 As Andy Wong Believed a good vision and direction were critical
leadership qualities and have a hands-on leadership style that motivated
staff, therefore, he shall hire a pool of expert to investigate and
confirmed all allegations with such bases. Consult with all the concerned
 personnel and have them informed of the unusual practice. All persons
involved having small or big liabilities shall be sanctioned according to the
law regardless of their interpersonal relationship for the sake of the
employees and the company and its stakeholders.

i. His respective professional and personal relationship with Wai Man, Ho, Ming,
and Tam?
 Personal relationship shall be set aside in terms of the work they’ve done
in Kingjewels. Wai Man, Ho, Ming, and Tam shall practice the ethical
leadership practice having a position in the company and adhere to the
ethical practice of their professions. Therefore, Andy Wong shall make a
decision regardless of their personal relationships and professional
involvement in the matter.

ii. Other staff at KingJewels?

 Andy Wong shall regain internal management given that he initially
believes that hands-on leadership style motivated staff. With this, he
must be consider all the voices of other staff from the low ranks up to
middle ranks to understand how leadership style shall be necessary.

iii. KingJewels’ suppliers and customers?

 Andy Wong must have a control in terms of reviewing all the
qualifications of their suppliers without having any personal interest from
the personnel of the Kingjewels.

iv. Internal control is part of the management control systems. What internal
control mechanisms could have been put in place to prevent this incident from
happening?
 Internal control is a process, effected by an entity's board of directors,
management and other personnel, designed to provide reasonable
assurance: That information is reliable, accurate and timely. Of
compliance with applicable laws, regulations, contracts, policies and
procedures (audit.ucsf.edu). Internal control, as defined by accounting
and auditing, is a process for assuring of an organization's objectives in
operational effectiveness and efficiency, reliable financial reporting, and
compliance with laws, regulations and policies (Wikipedia). Andy Wong
shall focus initially on the ADMIN AND HUMAN RESOURCE of Kingjewels.
All manpower shall pass by their qualifications and standards of the job
description. Also, in the FINANCE, all unusual transactions and financial
reports must be reported to the Top Management (Board of Directors
 and CEO) to avoid drastic effect in the company and to control whatever
issues or concerns that might been discovered.

v. Apart from problems with Tam and Ho’s professional behavior, identify and
discuss any structural and cultural issues contributing to the situation.
 The employees’ attitude that even if the employees were not involved,
most of them would be afraid to express their opinions or to question
unethical and potentially illegal business practices. Furthermore, such
practices were common and went unquestioned in China.

 Employees were handsomely rewarded for their efforts and it was of no

interest to them to report such incidents that could jeopardise their job
stability .

INSIGHTS OR KEY TAKEAWAYS:

Ethical leadership creates an environment where the goals and values of people working
in the organization align with its mission (Ann Skeet).

According to Western Governor University, ethical leadership is defined as “leadership

demonstrating and promoting ‘normatively appropriate conduct through personal actions and
interpersonal relations’.” When you boil it down, this really means that ethical leadership is
defined as putting people into management and leadership positions who will promote and be
an example of appropriate, ethical conduct in their actions and relationships in the workplace.

Leadership that is ethical is important for a variety of reasons, for customers,

employees, and the company as a whole. Leadership skills are crucial to help create a positive
ethical culture in a company. Leaders can help investors feel that the organization is a good,
trustworthy one. Customers are more likely to feel loyal when they see leaders in place in an
organization. Good press is likely to come when there are ethical leaders in an organization.
Partners and vendors will similarly feel they can trust and work well with an organization when
they see leadership that is ethical displayed.

In the short-term, ethical leaders can help boost employee morale and help them feel
excited about their management and their work. It can increase positivity and collaboration in
your organization and make everyone feel happier to be at work.

In the long-term, ethical leadership can prevent company scandals, ethical dilemmas,
and ethical issues. It can also help organizations gain more partnerships and customers, which
can lead to more money at the end of the day. Loyal employees are also a crucial element of
long-term success for a business.
 At the end of the day, Leadership with ethics and ethical principles have major short-
term and long-term benefits for organizations and individuals alike.

REFERENCES:

 https://www.wgu.edu/blog/what-is-ethical-leadership2001.html#close
 https://www.wgu.edu/blog/what-is-ethical-leadership2001.html
 https://en.wikipedia.org/wiki/Internal_control
 https://audit.ucsf.edu/internal-controls#:~:text=Internal%20control%20is%20a
%20process,regulations%2C%20contracts%2C%20policies%20and%20procedures
 https://nces.ed.gov/forum/dataethicscourse/additional-materials/sample-
whistleblower.pdf