QUESTIONS 1

Professor Thila was about to finish marking her students’ examination papers
when she received an unidentified call. She decided to pick it up anyway.
“Hi Professor, I am one of your former students but I would rather not to tell you my
name because I need an advice from you”, said the voice on the other side of phone.

“What can I do for you?” she replied.

“I am concerned that the CFO of the company where I serve as finance

controller just provided our local bank fraudulently misstated financial statements. Can
I explain the whole story” the voice asked.

“Sure, I will see if there is some way I can help,” responded Professor Thila.

“I joined a privately-held, small, start-up company about four months ago. On

Friday last week, the company’s chief executive officer (CEO), and the chief financial
officer (CFO) met with representatives of the bank that funds the company’s line of
credit. One of the purposes of the meeting was to provide our most recent quarterly
financial statements. The company is experiencing a severe cash shortage, and the
bank recently halted funding the line of credit until we could present our most recent
operating results. It was at that meeting, just three days ago, that our CEO and CFO
knowingly submitted financial statements to the bank that overstated sales and
receivables accounts,” the voice explained.

“I got to know about this when the accounts payable clerk related to me the
incident that happened to him. Last week, the CEO instructed him to record entries the
CEO had handwritten on a piece of paper. The clerk has never worked with sales and
receivables. The CEO told him not to mention the entries to me. In the event that I
asked, the clerk was supposed to tell me that the entries related to new sales generated
by the CEO and that all was under control. These entries make up almost half of our
first quarter’s sales. Of course, given that these are quarterly financial statements,
they are unaudited,” the voice continued.
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“I am convinced that this is clearly a fraud and my CEO and CFO have been arm-
twisting the accounting staff to book sales transactions before sales occur. As a matter
of fact, the customers in question haven’t placed any kind of orders with our
company and no goods have been shipped to them. The CEO and CFO noted that
booking these kinds of credit sales transactions is a common business practice, even if it
is not technically compliant with the accounting standards given that the transactions
represent sales expected in the very near future, perhaps even next week,” the voice
explained further.

“What happened since the meeting with the bank?” enquired Professor Thila.

“Interestingly, the bank immediately started funding the line late Friday and, I
understand based on phone calls with my staff this morning, the bank is continuing to
fund the line this morning. I really think the earnings misstatements first occurred
this quarter and that the prior year audited financial statements are not misstated. One
of my accounts clerks resigned last week due to similar concerns. Anyway, I’m just not
sure what responsibilities I have to disclose the earnings misstatements to outside
parties. I am considering all sorts of options and thought I would see what advice
you could offer. What do you think I should do, Professor Thila?”

REQUIRED:

a) If the company does not have an internal whistleblowing policy, advise the
caller on the next appropriate or alternative course of action he can take. What
are the advantages and disadvantages of this alternative action?
(8 marks)

b) Recommend steps to be taken to establish an internal whistleblowing policy in

the caller’s company?
(12 marks)
QUESTIONS 2
Awang Aqil (AA) took helm of the TESB in 2013 after the previous Chairman stepped down
in the aftermath of a massive bribery and corruption scandal. Having worked in the company
for the past 15 years, AA seemed to be the perfect candidate to turn things around for TESB.
At the AGM a few vocal shareholders gave him a stern warning to at least break-even in
2014 and to ensure a consistent profit in the future or risk termination due to non-
performance. He made several visits to every department. The following is the record of
conversation with between AA and DD, the Chief Executive officer (CEO).

AA: I noticed that our overtime cost is very high. It made up about 40% of the total
manpower costs in 2013, which is a 10% increase from the previous year. Do you
have any explanation for that?
DD: Yes, I know but you need to understand our situation. We engage in mandatory and
voluntary overtime, which is the most convenience solution to understaffing due to
high staff turnover rate. I know that this is not a long-term solution but the shortage of
employees has led to many operational issues such as higher medical leaves and an
alarming number of workplace related injuries. In 2013 alone, there were twenty (20)
accidents, an increase of 35% compared to 2012, which were attributed to fatigue as a
result of working overtime.
AA: But is it not in breach of the Employment Act 1955?
DD: I know but my hands are tied. The employees are willing to work overtime because
they could earn additional money. Some employees can earn double the amount of
their monthly salary through overtime claim. So far, we have not received any official
complaints from the employees. I know that the loop hole in the system is due to lack
in supervision. One can easily forge signatures for attendance of another person,
therefore the high overtime claims does not mean the workers are working extra
hours. A Fingerprint Biometric Time Attendance Management System was tabled for
approval back in 2012 but it was rejected as the costs were too high and the Return on
Investment (ROI) was not justified.
AA: What is the staff turnover rate?
DD: The rate is 19% but we are still actively recruiting potential candidates. If you ask my
opinion, it is all about the money. Our salary is not competitive enough to retain
 talented and skilful employees. In comparison, the industry pays 36% higher than us.
We hired fresh graduates in the past but they left within a year.
AA: Are we not giving our employees enough opportunity to develop their skills and for
career advancement?
DD: We always organise training programmes for the employees but they are not
interested because they feel that the training programmes do not increase their career
value and help them to earn a higher salary. They are also concerned about the lack of
a clear succession planning in our company. Many of them are in the mid-forties but
we are not recruiting or retaining younger employees.

REQUIRED:

a) Describe stakeholder issues highlighted in the above case.

(8 marks)

b) Suggest how AA should address the stakeholder concerns in the context of

corporate responsibility.
(12 marks)

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