The concerned agricultural company Far Faraway Pastoral Limited (FFA) has provided some information regarding its board of directors to Samantha Gabrielle, audit personnel of Samway Baker Fitzgerald (SBF). Based on the given information, it can be said if FFA has breached any Corporate Governance Principles and Recommendations as mentioned by the Australian Stock Exchange (ASX).
FFA has three non-executive directors, whose names the company has been provided to Samantha. Out of them, the person who is holding chair of the board is holding shares in FFA. However, according to the principles set by ASX, the person-holding chair of the board should be an independent director and a director being independent becomes doubtful if the person is a shareholder of that particular company or associated with any shareholder of that company. In this context, it can be said that it is the prior responsibility of the management of FFA to appoint an independent chair of the board that is free from any interests and to act accordingly for the best interest of the concerned company. This is because, an independent chairperson is vital to contribute to the openness in making various decisions of the concerned company.
The board of directors of FFA comprises of the three personals, one of them to hold shares of the concerned company and other person is a retired farmer who is also a major supplier to FFA. According to the principles and recommendations provided by ASX, the majority of the board members should be independent directors. The persons who are either holding shares in that particular company or are associated with a material type business, such as being a supplier of that particular company, are in a doubtful position of being independent directors (Safari, 2017). In this context, it is advised to Samantha in order to Inform FFA that it should appoint members of its board of directors who are independent, as it will strengthen the implementation of the decisions made by the board. It will also reflect the clear interests of the concerned company, and it will not be biased with the interests of the management.
FFA provided in its annual report for 30 June 2019 the personnel comprising the board of directors of FFA. However, they have not mentioned the roles of each personnel of the board. According to the principles set by ASX, a company should disclose the respective roles and functions of the members of its board. It should also disclose the matter reserved to the board that is being delegated by them. In this context, it is advised to Samantha to inform FFA about the matter as this implies breach of the principles of ASX, which can be sued later on. In order to avoid that, FFA must highlight the roles and functions of the members of its board.
The financial statements of FFA as provided by the company says that the method of revenue calculation the concerned company is using is questionable as it recorded that the sale of cattle by the concerned company constituted nearly half of all the revenues. The senior partner of the FFA audit informed Steve Barker, audit personnel of SBF, which FFA has been using the method for revenue calculation for many years and hence no change is required in the financial statement (Lama & Anderson, 2015). The audit personnel of FFA declined a proposal made by Steve to include a statement of discord in the audit working papers. As mentioned by Steve, the audit personnel of FFA also made some negative remarks about the audit manager of SBF regarding his future promotion as a partner.
It is evident from the behavior of the person that the person is associated with the reports that are false and misleading. It is clear that the person is trying to hold back some facts that are being illegally carried on by the company FFA. That is the reason why the person also refused to provide with a statement of discord in the audit papers. The statement made by the audit personnel of FFA is not acceptable as this is against the code of ethics of an accountant.
According to the code of ethics of the accountants, an accountant should not agree with and be associated with the financial statements that are misleading and false (Section 110). According to the code of ethics (Section 120) of the accountants, an accountant should remain truthful while pursuing his/her work and if the person encounters any type of fraud, the person may seek legal advice in determining what shall the person do in that case. According to the code of ethics (Section 150), an accountant shall not make any type of negative statement or false comparisons to the profession and work of others.
The person should be honest in professional relationships and deal with them truthfully (Simunic & Biddle, 2019). The accountant shall determine the appropriate actions required for the identified ethical issues. The professional accountants must not associate with any type of actions that bring disrepute to the person’s profession (Chandrakumara, McCarthy& Glynn, 2018). A professional accountant shall always conduct themselves with modesty towards all the people with whom the person comes into contact with while performing his/her work, the violation of which may lead to severe penalties (Sonnerfeldt & Loft 2018).
In case these issues remain unsolved, the accountant should if possible avoid to be associated with those matters that create these issues or consult with those persons within the company who are appropriate to give resolution (Samsonova-Tadde & Siddiqui, 2016). In cases of conflict within a company, the person shall consult with the governing bodies of the company.
The audit personnel Steve should warn about this matter to the auditor of FFA that it would lead to discrepancies in the financial statements. It is advised to Steve to inform and warn the audit personnel of FFA that in case the code of ethics is violated, the auditor of the concerned company shall be subject to penalties by the authority of the accountants (Coyne, Coyne & Walker, 2016).Steve must have warned the auditor of FFA to avoid doing such statements further, or the person may get suspended from his/her registration.
The report is based on the analysis of the conditions and opportunities of the accounting firm SBF; its client firm FFA, the subsidiary of the client firm TRC and its buyer firm McCarran Pastoral. The case study in this report focuses on whether SBF has undertaken correct auditing measures for TRC, whether FFA is guilty of not properly disclosing its financial statements and whether SBF owns any type of duty of care to McCarran Pastoral.
In the case study, it is evident that SBF has failed to exercise due care in doing the audit work of TRC. As observed by Dickins et al. (2018), for exercising due care, the SBF should have to use an acceptable and proper technical knowledge or skill while providing the audit work to TRC. It also implies that SBF should take necessary actions to avoid any type of loss while providing TRC with the service. From the case study, it is seen that SBF had appointed an independent auditor to perform the audit work of TRC. However, the case study highlights that TRC had been making losses for the past two years and suddenly it has upgraded its accounting systems. The financial condition of the firm highlighted a significant improvement within a year (William, Glover & Prawitt, 2016). The independent auditor appointed by SBF also concluded that the accounting system of TRC was reliable. This means that either TRC provided with wrong information or the auditor was negligent in his work. So, from the end of SBF there was negligence in exercising due care.
From the case study, it can be learnt that FFA has been providing with wrong and false financial statements to SBF. The concerned company has misled SBF with wrong revenue calculations for the accounting year 2019 and has confirmed about the false statements. As mentioned by Payne et al. (2018), the audit a personnel of FFA has been reluctant in providing with correct financial statements and avoiding any type of actions that may reveal the illegal proceedings of FFA. Though questioned by SBF audit personnel, the auditor of FFA said that no adjustments are needed in the statements and they are correct from all aspects. The person was also reluctant to provide a statement of discord for the false statements when they were asked to be given by the audit personnel of SBF. Hence, it can be said that FFA was guilty of contributory negligence.
As per the provided case study, it can be seen that SBF is directly related with McCarran Pastoral. TRC has been purchased by McCarran Pastoral, which has been owned by FFA before. However, McCarran Pastoral has not paid the full settlement to FFA. As stated by Voss (2018), the reason for McCarran Pastoral’s non-payment is that there were errors in the accounting system of TRC that has led the accounting statements of TRC to be misstated. In return, FFA has been planning to sue SBF for this condition. In the background, it can be seen that the independent auditor appointed by SBF for reviewing the accounting system of TRC has concluded that the accounting system of TRC was reliable, which was discovered later to have errors in them. This led to misstated financial record of TRC noticing which McCarran Pastoral has withheld its payment to FFA. Therefore, it can be said for the negligence of SBF, the whole thing occurred. In case SBF had crosschecked the accounting system of TRC, this would not have occurred.
After analyzing the provided case study, it is recommended that, SBF should recheck the financial system of TRC so that there is correct evaluation of the financial statements of TRC. In case the correct financial statements is provided, and if a consideration is held with McCarran Pastoral regarding the settlement of TRC, then only there is a way out from the sue to be made by FFA. SBF should take necessary actions against the independent auditor who provided with the false statements to SBF and do the necessary things to compensate with the loss incurred by FFA in the selling process of TRC.
From the case study, it can be concluded that SBF has shown negligence in its accounting procedure of TRC which has led to many discrepancies in the selling process of TRC to McCarran Pastoral. This could have been avoided if SBF had done its duty properly at the beginning.
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