Case Study 22

Intended audience: Professional Accountants in Business


You are the recently appointed interim Financial Director (FD) in a small listed company, ABC Ltd. The company produces parts for machines which are used in the mining industry.

ABC Ltd has been struggling of late as the mining sector begins to feel the impact of the worldwide downturn. The previous FD had left his post last month due to ill health. The company’s year-end had just passed and the company urgently needed someone to come in and fill the post on a temporary basis until the directors had the time to search for and appoint someone on a full-time basis.

Unfortunately, it would appear that the previous FD was not the most organised person and you are having difficulty tracking down a set of working papers to support the draft year-end accounts. After much searching, you finally track down the supporting papers and begin your review of the breakdown of the figures featured in the draft accounts.

During your review you discover reference to a small number of journals which have minimal supporting back-up. These journals, posted 8 months ago increase the sales figure significantly, 23% of the company’s reported turnover. The journals refer to the L project, of which you have never heard, but you remind yourself that you are new to the company and decide to raise this issue with Mr Y, the Chief Executive.

Mr Y welcomes you into his office and then explains that the L project relates to a one-off shipment of specialised parts to a company based overseas. He informs you that only a few people knew about this contract, as apparently a number of countries have placed an embargo on supplying goods of this nature to businesses within this country. That is also why the normal sales process was not followed. Those “in the know” included the former FD. You thank him for enlightening you but then ask why payment has never been received for this order. Mr Y advises that no payment has so far been received but that payment will be received in due course – the customers may be slow payers but they are very wealthy, and it is not in our interests to chase payment as this might impact on our healthy relationship and future orders. However, he asks you not to mention this to anyone else.

You leave the room but are somewhat mystified. Sales appear to have been inflated by transactions but for which payment has not yet been received. Have these sales actually taken place and if so has the company sold goods to an entity in another country which may have been blacklisted? Furthermore, will it ever get paid for the goods – if they have indeed been supplied? You are also aware that the Chief Executive has a very generous share options package which he will be able to exercise in a few months time – does this have any impact on the situation?

What do you do now?

Analysis of Scenario: What are the readily-identifiable ethical issues for your decision?

I. For you personally

II. Who are the key parties who can influence, or will be affected by, your decision?

‘You’; the Chief Executive; the other directors; the former FD; shareholders; potential investors; the auditors; customers; suppliers; and employees.

III. What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?

-          Integrity: How can you maintain your integrity without investigating this matter further?

-          Objectivity: Assumed, as you are new to the company. However, you must satisfy yourself that you are objective.

-          Professional behaviour: The need for you to investigate this matter further to arrive at the true position. Did the company make sales to an entity overseas? If so, there is a need to convince your Chief Executive that payment has to be chased or ultimately the debt may need to be provided for. The auditors will undoubtedly question these transactions.

IV. Is there any further information (including legal obligations) or discussion that might be relevant?

V. Is there a conflict between the ‘Guardian’ and ‘Commercial’ strands of an accountant’s responsibilities?

This case study was published by the Technical Policy Board of The Institute of Chartered Accountants of Scotland (ICAS), and adapted by the Institute of Singapore Chartered Accountants (ISCA) with the permission of ICAS.