1.

Simon Mara established Lysus Surgical Supplies 20 years ago and has remained as its chief executive since
then. As a non-public interest entity, Lysus’s initial business activities include importing small surgical devices
such as syringes and bandages, and selling them to hospitals, clinics and medical facilities. The company’s
fortune took a turn for the better when Mr Mara identified the potential of a growing market in knee and hip
joint replacements as a result of aging population in many countries due to more effective, low cost medicines.
This prompted him to start manufacturing the surgical hip and knee joints used for most joint replacement
surgery fifteen years ago. Operating in a regulated industry means that Lysus has always been subject to
regulation and must complete compliance reports that are signed by two directors every year to certify that
surgical grade materials were being used in the products manufactured and also that the required level of
hygiene was observed.

Being a family-owned company, Lysus surgical supplies is owned jointly by Simon Mara, his wife and brother,
Mr Mara owns 55% of the shares, his wife, 15% and his brother 30%. They are all directors of Lysus surgical
supplies. Family members were brought in as much as possible in response to the growth in the company,
partly to provide them with jobs and partly to ‘give a feeling of family’ in the company. It was the culture of
the company to have its family members assuming the most senior positions and with only a few appointments
being made from outside the company. The rapid growth of the company had made the appointment of a
qualified accountant on the board of directors necessary to help with investment appraisals, costings, cash flow
management, compliance issues and financial reporting. Amy Tsang, a relatively inexperienced but ambitious
person, was subsequently appointed by Mr Mara as finance director and made a member of the board.

Simon Mara was notorious for his strong character and domineering management style. He was labelled as a
bully who was unable to discuss matters in a calm manner by some former employees. He was hot tempered
and known to intimidate even his senior colleagues so much so that they were unable to disagree with him
totally. Amy Tsang, the new finance director was a victim of such harassment. She found him overbearing and
impossible to challenge. She ended up being a ‘puppet’ to Mr Mara and performed tasks against her own
wishes.

As more competitors entered the joint replacement industry, Mr Mara resorted to reducing the company’s unit
costs to stay competitive by substituting the surgical-grade materials used in manufacture with a cheaper
industrial grade instead. He was confident that such a switch would not be detected by the surgeons using the
artificial joints but nevertheless would increase the risk of fracture and deterioration once the replacement
joints were used in a patient. Amy Tsang in her capacity as the accountant and finance director was pressured
by Mr Mara to approve the investment and oversaw the changes in manufacturing and the purchasing processes
with total knowledge that the changes were both illegal and unethical. The fact that many of the senior
employees were family members coupled with his ability to dictate Amy Tsang, Mr Mara was certain that the
switch to industrial grade material would not be revealed.

The issue only came to the knowledge of the public after some time when the substandard joints began to take
effect and immobilise previously mobile patients. The severity of the matter saw some infection and death in
patients caused by the effects of the product failure.

John Qua who was an investigative journalist whistleblew the problems at Lysus to national attention. He did
so because of the ordeal his mother went through after receiving a Lysus hip joint which caused her to
experience a great deal of side effects including blood poisoning. Even thought she was fortunate to have the
substandard joint safely removed and replaced, the same could not be said for other patients. Mr Qua attributed
the problems that arose to the probity risk and that the main cause of it was on the part of Mr Mara and Amy
Tsang. John Qua’s reporting had led to the discovery of the usage of inferior materials in the joints by the
regulatory authorities.

The authorities’ subsequent investigation revealed that two directors namely Simon Mara and Amy Tsang had
signed the most recent compliance reports, confirming adherence to the material usage and quality standards.
 ACCA / PAPER SBL / Q / SEP 21
After witnessing how his mother and others had suffered, John Qua’s disappointment was totally
understandable. He was particularly upset with Simon Mara and Amy Tsang. Being a business journalist, he
specialises in writing articles on the behaviour and performance of listed companies. He was of the opinion
that producers of surgical supplies, such as Lysus ought to observe public interest no difference compared to
that of listed companies. In a recent article, he wrote:

…I was convinced that company’s issues such as that experienced by Lysus was the result of an absence of
robust way of embedding risk awareness and risk management. They are both critical to all public interest
entities and not restricted to just the listed companies. The way that Mr Mara’s malpractices had gone
undetected is most disturbing. He took advantage of the lax governance structure to pressure an aspiring
accountant, Miss Tsang, into highly unprofessional behaviour. The situation would have been very different if
a whistleblowing system or a separation of roles at the head of the company exists, Mr Mara would not be
successful in his abuse. The non-executive directors would have questioned him and told him not to be so
unethical and arrogant.

The consequences of such a high impact business risk were that innocent people working for Lysus may lose
their jobs whilst unsuspecting patients may have to endure the sufferings for many years to come.

Following the outcome of the investigation, Mr Mara was arrested and prosecuted for the illegal sale of non-
compliant surgical materials. Similarly, Amy Tsang was also prosecuted and investigated by her professional
accounting body. She was found guilty and subsequently removed from the members’ register, thereby
preventing her from practising as an accountant in the future. The company was liquidated after sales
plummeted to historically low level amid the reputation damage, and all 130 employees lost their jobs. Patients
continue to suffer the effects of the defective joint replacements and will do for several years into the future.

Required:
(a) The governance of a family-owned company like Lysus and a publicly listed company differs.
Explain how a governance structure similar to that of a publicly listed company could have
prevented Mr Mara from committing the offences he did.
(8 marks)

Professional skills marks are available for demonstrating commercial acumen skills in providing insight
on how the governance would differ if Lysus were a public listed company. (2 marks)

(b) Criticise Amy Tsang’s behaviour as the finance director and a qualified accountant and explain
how she acted against the public interest. (8 marks)

Professional skills marks are available for demonstrating scepticism skills in challenging Tsang’s
behaviour as the finance director and a qualified accountant. (2 marks)

(c) Briefly explain the influence of industry sector on risks and discuss why surgical suppliers like
Lysus are exposed to higher legal risk than in some other industry sectors. (6 marks)

Professional skills marks are available for demonstrating evaluation skills in assessing the significance
of legal risks to a company like Lysus. (2 marks)

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(d) Write an article for the specialist magazine Investors in Companies which covers the following points.
You may assume that the magazine has an educated readership.

(i) Discuss the potential benefits which an effective non-executive chairman could have brought
to Lysus. (8 marks)

(ii) Explain, in the context of the case, how risk awareness, including probity risk, might be
embedded in a company like Lysus. (10 marks)

Professional skills marks are available for demonstrating communication skills in clarifying the
matters for the magazine article. (4 marks)

(50 marks)

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2 MFP (Mutual Farm Products) was founded in 1910 as a co-operative shop network by farmers in the country
of Arboria. Over the years, a chain of small shops was opened across the country selling products produced by
Arborian farmers. To expand its business, non-farming products from a wide range of suppliers had started to
make entry to its network of shops, but it has remained true to its co-operative roots. Unlike profit making
organisation, all employees in the co-operative are shareholders and receive annual dividends. Customers can
also become shareholders and be rewarded in the same manner calculated based on the amount that they spent
in the shops. The growth in the number of customers becoming shareholders showed that there is an emerging
interest in the country in mutual organisations, such as co-operatives. MFP’s operation is restricted to only in
Arboria, a wealthy and prosperous industrialised country and it has no intention to replicate the success stories
overseas.
Supermarkets in Arboria
MFP opened its first store when supermarkets were first introduced in Arboria. Contrary to its more established
counterparts that focused on developing large out-of-town sites serving a large catchment population, MFP’s
supermarkets tended to be (and continue to be) smaller. It is the only company with a network of smaller shops
in the top-ten supermarkets of Arboria.
In 2012, MFP was ranked the eighth in Arboria with reported revenues of $10bn compared to the $40·5bn
revenue of the market leader, HypCo. MFP’s ranking dropped to the ninth position in 2016 with revenues of
$11bn, compared with HypCo’s $45bn. During this period, two new competitors, Super24/7 and Letto,
ventured into the Arborian market. They have a combined revenue of $50bn and are ranked fourth and eighth
respectively in the top ten Arborian supermarket chains. They are both foreign supermarkets operating a no-
frills approach to retailing. In the recent five years, the top ten supermarket chains reported an increase in
revenue from $300bn to $350bn.
The sector is competitive with the margin constantly under pressure. The large supermarkets had responded to
it by aggressively market their goods, highlighting price savings. Giving of customer incentives, such as loyalty
cards and account discount schemes is a norm in an attempt to retain customers. It does not help that price
comparison websites showing consumers the prices charged by competing supermarkets are easily available.
Being the only co-operative in the top ten Arborian supermarket chains, MFP does not have institutional
investors similar to those found in quoted companies and therefore is not under pressure to ensure significant
dividends and capital appreciation. Generally, suppliers to supermarkets are relatively small companies.
Rivalry is intense among them to have their products found on the shelves of the supermarket chains.
MFP is committed to observing a high level of ethics in its operations. Among the effort made includes the
efficient utilization of energy in the new shops and supermarkets. It also pays its employees significantly more
than its competitors which in turn led to excellent customer service performance. The recent ranking of MFP
as first for personal customer service in an independent survey of supermarket customers appeared to be a
testimony of its effort.
There is some evidence that people in Arboria are becoming disillusioned with their supermarkets and this is
reflected in Appendix A, an extract from an article by the journalist Liz Bones in the influential daily
newspaper, Arbor Today. Appendix B is an extract from an information sheet issued by the government to
companies trading in Arboria.
Management at MFP
Directors at MFP is fully aware of certain shortcomings in the company. The need to streamline its supply
chain and achieve cost savings were example of weaknesses that had been identified. It also acknowledges the
company’s failure to take advantage of technological advances in product control, movement and storage.
To ensure that the changes made will achieve the desired objectives, the management have appointed you,
Dennis Lillee, an experienced business consultant to advise the board on the strategic position of MFP and the
models that will be used to assess this position. In your report to the board, please include:
– An analysis which identifies macro-environmental opportunities and threats from a political, sociocultural,
environmental and legal perspective.

– An analysis of the market place.

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Appendix A: Have Arborians fallen out of love with the supermarket? By Liz Bones
The current trend of supermarket shopping has started many years ago and there is no indication that it will be
changed any time soon. Increasingly, grocers, butchers, toy shops and bookshops have disappeared from the
high streets of our town amid the challenges from online retailers and expanding supermarkets. For instance,
you will probably find four grocers, three butchers, three toy shops, two bookshop and only two supermarkets
ten years ago in the high street of Milton Magna. Today, only one grocer and one butcher remain on the high
street while both supermarkets have been relocated to out-of-town locations. It is interesting to note that a total
of five out-of-town supermarkets are now serving the residents of Milton Magna.
However, the current development does not seem to be welcomed by the public. Increasingly, the public had
expressed dissatisfaction with supermarkets and look forward to the returning to the days when shops were
smaller and service more personalised.
Fiona McLean, of the department of sociology MidShire University, reported that, ‘our research revealed the
emergence of a large number of green consumers, who based their purchases of food and other products on the
environmental footprints that they created in the form of excessive and elaborate packaging of the goods and
the ‘food miles’ that these products have travelled before they reach the shelves of our shop or supermarket.’
Being financially well to do, these green consumers are willing to pay extra for products which are ethically
sourced or manufactured. Understandably, such consumers are furious by what they consider as the excessive
profits made by the large supermarket chains, the high remuneration packages paid to senior management and
the large dividends paid to their institutional shareholders. According to Fiona, ‘The general feeling is that
supermarkets are operate by greedy managers, bullying small suppliers to reduce costs so as to please the
institutional investors in their demand for high dividends.’, she said.
The newer entrants, Super24/7 and Letto, are not spared from the criticisms. The general consensus was that
these foreign supermarkets follow a low-cost, no frills approach, offer low priced products but with mediocre
customer service. In addition, the green consumers also criticise these supermarkets for offering below market
wage rate to staff.
In light of the developments, Arboria is perhaps undergoing a supermarket revolution! We should probably
heed the advice of Television personalities such as Alexis Piazzio to ‘think local’ and ‘shop local’. Perhaps
after all, small is beautiful when it comes to shopping!!!
Appendix B: Arborian government information sheet 4560 (extract)
Disability legislation (The Access Act)
The recent extension of disability access legislation is the government’s attempt to build a more caring society.
Under the now defunct legislation, shops and supermarkets are only required to provide disability access to the
store areas. This posed a challenge to many disabled customers as the goods were out of reach for them when
they shop in the store. The extension to the law has the effect of overcoming this shortcoming as all products
must now be reachable for a person who is in a wheelchair. Otherwise, a store attendant must be on hand to
help. Non-compliance is hefty as it will attract a fine of up to $1,000 per violation.
Pension reform
The new government reckoned that at the current rate of contribution to the state funded schemes, it will not
be adequate to fund the retirement of many employees. For this reason, it is proposing a mandatory deduction
of 5% of employees’ gross pay for contribution towards a pension scheme of their choice. Similarly, employers
are expected to match the amount paid in by the employees. With this reform, an employee who earns $10,000
per year will have $500 per year being deposited into her pension fund and the employer will be contributing
an equivalent amount into the same fund. It will be the duty of the employer to ensure that pension payments
are correctly made into government authorised schemes through automatic monthly deductions from the salary.
These proposals for pension reform are currently being studied by the government.

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 ACCA / PAPER SBL / Q / SEP 21
Required:
Write the report required by MFP management which:
(a) Analyses external factors from the political, sociocultural, environmental and legal perspectives.
The analysis should include an assessment of the likely effect of such factors in the context of the
strengths and weaknesses of MFP. (12 marks)

Professional skills marks are available for demonstrating analysis skills in considering the macro-
environmental forces in the context of MFP’s strengths and weaknesses. (3 marks)

(b) Analyses the market place (industry), assessing its implications for MFP. (12 marks)

Professional skills marks are available for demonstrating analysis skills in considering the market forces
that affect MFP. (3 marks)

(30 marks)

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3 The National Museum (NM) was opened in 1857. Its collection of art, textiles and metalware are
housed in the original building which is itself of architectural importance.

Forty years ago, the government began to categorise the museums according to the number of items
that they held which are deemed as significant Heritage Collections (HCs). HCs are collections that
are of extreme importance to the country. Initially, three HCs were identified at the NM which slowly
increased to seven after the museum acquired more items.

Funding and structure

The NM receives 95% of the funding from the government with the rest of its income being generated
from ticket sale and from private sponsorship of exhibitions. The funding receivable from the
government depends on many factors including the number of HCs held by the museum. NM arrives
at the income for the respective department based roughly on the previous year’s budget plus an
inflation percentage. The allocation between departments is in turn depending on the HCs which
means department with the highest number of HCs will be allocated the largest budget. The budgets
for 2017 and 2018 are shown in Figure 1.

Each collection section is overseen by a head who enjoys many benefits, including a large office, a
special section heads’ dining room and a dedicated personal assistant (PA). The heads of sections
which have HCs will automatically be granted the title of professor from the National University.

The Director of Art and Architecture together with two other professors who hold the Head of
Architecture and Head of Art posts have, in the past, convinced the individual members of the Board
of Trustees to pursue matters relating to their interests. The Director of Industrial Arts and the Director
of Media and Contemporary Art have also in the past bypassed the former Director General to
communicate with members of the Board of Trustees, television and the press directly to voice their
concerns. The television programmes featuring interviews with various heads of collections were
critical of changes proposed by the government.

NM has twelve main sections of the collection grouped into three departments, each of which has a
Director (see Figure 2). Together with the Director of Administration and the Director General, they
made up the board. The museum is under the care of a Board of Trustees comprising of eight trustees,
two of whom are new recruits by the government. The other six trustees are academicians from the
fields of museum’s collections.
Government change
The previous national government was voted out in the last general election. To relief the new
government of the heavy financial burden, the newly appointed Minister for Culture revised the
financial support extended to museums to make them more self-funding. In five years’ time, the
museum must finance 80% of its own costs and only 20% will be directly funded by government. In
determining the 20% government grant, considerations will be paid on the museum achieving certain
pre-determined targets such as disability access, social inclusion and electronic commerce and access.
To promote awareness of heritage, the government encourages museum attendance by lower socio-
economic classes and younger people. This is in addition to upgrading the access to museum exhibits
to allow physically disabled people to visit the museum site. For these reasons, the government have
instructed all museums to formulate strategies on how they would meet these financial, accessibility
and technological objectives and report subsequently to the former. The proposal to reduce the
museums’ reliance on the government funding was also agreed by the opposition party.

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Collection Number of HCs Budget ($000s) Budget ($000s)
sections 2017 2018

Architecture 2 125·00 130·00

Art 2 140·00 145·00
Metalwork 1 42·50 44·00
Glass 28·00 29·00
Textiles 1 50·00 52.50
Ceramics 40·00 41·00
Furniture 35·00 36·50
Books 40·00 41·50
Photography 20·00 20·50
Fashion 15·00 15·50
Jewellery 1 55·00 57·50
Sculpture 30·00 31·00
Administration 65·50 68·00
Total 686·00 712·00
Figure 1: Section budgets; 2017 and 2018

The respective sections and departments are given various administrative supports overseen by a
Director of Administration. Traditionally, the position of the Director General has always been a part-
time post. However, the new funding changes iniated by the government coupled with the need to
brainstorm a strategy document, has motivated the Board of Trustees to appoint a full-time Director
General to take advantage of the latter’s private industry expertise to assist in developing and
implementing a strategy to achieve the government’s targets. The newly appointed Director General
was previously the Managing Director of an established chain of groceries stores.

Employees were angry with the government’s new proposal. They were particularly upset with the
idea of aligning budgets to visitor numbers. They accused the government of not appreciating
historical significance by forgoing HCs as a basis for determining the financial funding.

The new Director-General had gone ahead with making some significant changes within the museum
aim at increasing revenue and to cut costs. However, his intentions were not well received by the
section directors and heads. Although they have no idea of his proposals, they appeared in a recent
television programme condemning his intentions. They were particularly critical of the lack of
consultation; ‘we are aware that certain strategies are being considered by the ex-grocer with no input
from museum staff’, said one anonymous contributor.

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Board of Trustees

Head of Metalwork

Personnel

Visitor numbers have been declining (see Figure 3) since 2014.

Visitor numbers 2017 2016 2015 2014

(000s)
Age 17 or less 100 120 150 150
Age 18–22 50 80 120 100
Age 23–30 100 150 200 200
Age 31–45 200 200 180 250
Age 46–59 350 350 300 300
Age 60 or more 400 350 350 300
Total 1200 1250 1300 1300
Figure 3: Visitor numbers 2014-17

Required:

The new Director-General has appointed you as a consultant.

Prepare a report for the new Director-General that includes an analysis of the current culture
of NM and an assessment of how the culture may need to be changed to align with the aims of
the government. (16 marks)
Professional skills marks are available for demonstrating evaluation skills in assessing the
implications of the changes needed in relation to the future culture of NM. (4 marks)