 |
GRE811S- CORPORATE GOVERNANCE RISK AND ETHICS- 1ST OPP- JUNE 2023 |
|
|
1 Page 1 |
▲back to top |
nAm I BI A un IVE RS ITV
OF SCIEnCE Ano TECHnOLOGY
FACULTY OF COMMERCE, HUMAN SCIENCESAND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING & FINANCE
QUALIFICATION: BACHELOR OF ACCOUNTING {HONOURS)
QUALIFICATION CODE: 08BOAH
COURSE CODE: GRE811S
LEVEL: 8
COURSE NAME: CORPORATE GOVERNANCE,
RISK AND ETHICS
SESSION: JUNE 2023
DURATION: 3 HOURS
PAPER: THEORY AND APPLICATION
MARKS: 100
FIRST OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINERS:
Kuhepa Tjondu
MODERATOR: Mr. M. Tondota
INSTRUCTIONS
• This question paper is made up of FOUR(4) questions.
• Answer All the questions and in blue or black ink.
• Show all your working in the answer sheet.
• Start each question on a new page in your answer booklet and show all your workings.
• Questions relating to this paper may be raised in the initial 30 minutes after the start of
the paper. Thereafter, candidates must use their initiative to deal with any perceived error
or ambiguities and any assumption made by the candidate should be clearly stated.
PERMISSIBLE MATERIALS
Non-programmable calculator/financial calculator
THIS QUESTION PAPER CONSISTS OF 8 PAGES {Including this front page)
1
|
|
2 Page 2 |
▲back to top |
QUESTION 1
[25 MARKS]
The LPM High School has 900 pupils, 40 teachers, 10 support staff and a budget of
N$3 million per annum, 85% of which represents salary and salary-related costs. The
Local Authority for LPM's area is responsible for 34 schools, of which six are high
schools (educating pupils from the ages of 11 to 18). The Local Authority allocates
National government funding for education to schools based on the number of pupils.
Pupils are allocated to schools based on where they live.
LPM can take a limited number of extra pupils in a particular year if demand for places
is particularly heavy. It ensures that the government-approved curriculum is taught in
all schools in its area with the aim of achieving national targets. All schools, including
LPM, are subject to an independent financial audit as well as scrutiny of their
educational provision by the Local Authority, and reports of both are presented to the
school Governing Body. The number of pupils determines the approximate number of
teachers, based on class sizes of approximately 30 pupils. The salary costs for
teachers are determined nationally and pay scales mean that more experienced
teachers receive higher salaries. In addition, some teachers receive school-specific
responsibility allowances.
LPM is managed on a day-to-day basis by the Head Teacher. The governance of each
school is carried out by a Governing Body comprising the Head Teacher, elected
representatives of parents of pupils, and members appointed by the Local Authority.
The principles of good corporate governance apply to school Governing Bodies which
are accountable to parents and the Local Authority for the performance of the school.
The Governing Body holds the Head Teacher accountable for day-to-day school
management, but on certain matters such as building maintenance the Head Teacher
will seek expert advice from the Local Authority. The Governing Body meets quarterly
and has as its main responsibilities budgetary management, appointment of staff, and
educational standards. The main control mechanisms exercised by the Governing
Body include scrutiny of a year-to-date financial report, a quarterly non-financial
performance report, teacher recruitment and approval of all purchases over N$1,000.
The Head Teacher has expenditure authority below this level.
The financial report (which is updated monthly) is presented to each meeting of the
Governing Body. It shows the Local Authority's budget allocation to the school for the
year, the expenditure incurred for each month and the year to date, and any unspent
balances. Although there is no external financial reporting requirement for the school,
the Local Authority will not allow any school to overspend its budget allocation in any
financial year.
LPM's budget allocation is only just sufficient to provide adequate educational
facilities. Additional funds are always required for teaching resources, building
maintenance, and to upgrade computer equipment. The only flexibility the school has
in budget management is to limit responsibility allowances and delay teacher
recruitment. This increases pupil-contact time for individual teachers however, and
forces teachers to undertake preparation, marking and administration outside of
school hours. LPM High School has recently been contacted by the National
2
|
|
3 Page 3 |
▲back to top |
Government's Education department and asked if it wants to become an Academic
Charter School. An Academic Charter School receives funding directly from the
National Government and can also obtain some money from private sponsorship.
Sponsors can include individuals, businesses or other organisations such as charities
or religious foundations. The School will no longer receive money from its Local
Authority and will be independent of Local Authority control. The School will be allowed
to select up to 35% of pupils by aptitude and increase numbers to a maximum of 1,200.
The Academic Charter programme has proved controversial and the Local Authority
in LPM's area is strongly opposed to it.
NOTE: In this jurisdiction a Local Authority (or council) carries out services for the local
community and levies local taxes (or council tax) to fund most of its operations. Many
of the Local Authority functions are regulated by the National Government and
considerable funding also comes from that source.
The range of Local Authority services includes education, community health, refuse
collection, and maintenance of footpaths and public parks.
Required:
(a) Assess the structure and workings of the governing body currently in place at LPM
High School, using corporate governance best practice.
(7 marks)
(b) Assess whether the governing body of LPM High School appears to be receiving
sufficient information to discharge its duties effectively.
(6 marks)
(c) Examine the decision-making and communication processes used by the
governing body to exercise control over LPM High School.
(6 marks)
(d) Discuss the extent to which LPM High School's agency relationships would change
if it became an Academic Charter School.
(6 marks)
3
|
|
4 Page 4 |
▲back to top |
QUESTION 2
[25 MARKS]
Etherial is a listed company that manufactures, markets and distributes a large range
of components throughout Europe and the United States of America, supplying
products to over 0.5 million customers in 20 countries. Etherial holds stocks of about
100,000 different electronic components. Two years ago Etherial established a
specialist components department ('SCD') to undertake the manufacture of
customised components, such as a microprocessor that has been programmed with
a specific set of instructions supplied by the customer. SCD can also make complex
parts and assemblies. SCD does not generate a large proportion of Etherial's revenue,
but it has been very profitable since it began three years ago because SCD can charge
high profit margins. SCD employs 17 highly skilled technicians who work in a
sophisticated electronics workshop.
Almost all of the work undertaken by SCD is 'jobbing work' ie for very small quantities,
sometimes only a single unit. This is because SCD's customers often build prototypes
of products that they plan to test before committing themselves to full-scale production.
If the prototype is successful and the customer then requires larger quantities of the
component SCD directs them to another division of Etherial.
SCD has been approached by DD, a specialist manufacturer of extremely expensive
high performance cars. DD is in the process of developing a new car that will be one
of the fastest in the world. The car will be designed to be driven on public roads, but
the owners of such cars often take them to private race tracks where they can be
driven at very high speeds. DD has designed an electronics system to enable an
average driver to drive the car safely at high speed. The system will monitor the
engine, brakes and steering and will compensate for errors that could cause a crash.
The system will, for example, sense that the car is about to skid and will compensate
for that. The electronics system will be based on a circuit board that DD wishes to
have built by SCD.
Building DD's circuit board will pose a number of challenges for SCD. The circuit board
will be subject to a great deal of vibration when the car is driven at speed. The cars
are expected to last for a very long time and so there could be problems if the circuit
boards deteriorate with age. The circuit board will be installed in an inaccessible part
of the car where it will be difficult to inspect or maintain. Many of the components on
the board will be manufactured by SCD, but some crucial components will be supplied
by a third party that has already been selected by DD.
DD is prepared to order a large number of circuit boards but only if they are hand built
by SCD. That is partly because the cars will not be built in sufficient volume to make it
possible for another division of Etherial to mass-produce the boards and partly
because DD wishes to be able to update and modify the design of the circuit boards
in response to feedback from owners. SCD's Production Manager believes that the
DD contract will create sufficient work to keep seven technicians almost fully occupied.
SCD will have to recruit and train additional staff in order to service this contract.
When notifying the board of this significant opportunity, Etherial's chief executive
emphasised the importance of thorough risk assessment, and reducing the risks
4
|
|
5 Page 5 |
▲back to top |
associated with the high-profile project to levels that were as low as reasonably
practicable. However a newly appointed non-executive director pointed out that it
would be difficult to measure many of the risks, and wondered if Etherial should focus
on managing risks that could be measured precisely.
Required:
(a) Assess four significant risks associated with accepting the order from DD.
(9 marks)
(b) Explain the ALARP principle and advise the board on the steps it can take to reduce
the risks identified in (a) to levels that are as low as reasonably practicable.
(9 marks)
(c) Explain the difference between subjective and objective risk perception, and
criticise the non-executive director's view that the board should focus on managing
risks that can be measured precisely.
(7 marks)
5
|
|
6 Page 6 |
▲back to top |
QUESTION 3
[25 MARKS]
In a major policy speech, Government finance minister Mrs Verii Tjikotoke said that
the audit and assurance industry's work should always be judged by the effect it has
on public confidence in business. She said that it was crucial that professional services
such as audit and assurance should always be performed in the public interest and
that there should be no material threats to the assurer's independence. Enron and
other corporate failures happened, she said, because some accountants didn't
understand what it was to act in the public interest. She stressed that it was important
that firms should not provide more than one service to individual clients. If a firm
audited a client then, she said, it shouldn't provide any other services to that client.
Mr Oliver Murundu, a financial journalist who had worked in audit and assurance for
many years, was in the audience. He suggested that the normal advice on threats to
independence was wrong. On the contrary in fact, the more services that a
professional services firm can provide to a client the better, as it enables the firm to
better understand the client and its commercial and accounting needs. Mrs Tjikotoke
disagreed, saying that his views were a good example of professional services firms
not acting in the public interest.
Mr Murundu said that when he was a partner at a major professional services firm, he
got to know his clients very well through the multiple links that his firm had with them.
He said that he knew all about their finances from providing audit and assurance
services, all about their tax affairs through tax consulting and was always in a good
position to provide any other advice as he had acted as a consultant on other matters
for many years including advising on mergers, acquisitions, compliance and legal
issues. He became very good friends with the directors of client companies, he said.
The clients, he explained, also found the relationship very helpful and the accounting
firms did well financially out of it.
Another reporter in the audience argued with Mr Murundu. Ivan Nangula said that Mr
Murundu represented the 'very worst' of the accounting profession. He said that
accounting was a 'biased and value laden' profession that served minority interests,
was complicit in environmental degradation and could not serve the public interest as
long as it primarily served the interests of unfettered capitalism. He said that the public
interest was badly served by accounting, as it did not address poverty, animal rights
or other social injustices.
6
|
|
7 Page 7 |
▲back to top |
Required:
(a) Explain, using accounting as an example, what 'the public interest' means as used
by Mrs Tjikotoke in her speech.
(5 marks)
Requirements (b) and (c) below concerns ethical threats. It is very important for
professional accountants to be aware of ethical threats and to avoid these where
possible.
(b) (i) With reference to the case as appropriate, describe five types of ethical threat.
(5 marks)
(ii) Assess the ethical threats implied by Mr Murundu's beliefs.
(8 marks)
(c) Assess Ivan Nangula's remarks about the accounting profession in the light of
Gray, Owen & Adams' deep green (or deep ecologist) position on social responsibility.
(7 marks)
7
|
|
8 Page 8 |
▲back to top |
' f"
QUESTION 4
[25 MARKS]
Namibia Railway Company (NRC) was considering two options for a new railway line
connecting two towns. Route A involved cutting a channel through an area designated
as being of special scientific importance because it was one of a very few suitable
feeding grounds for a colony of endangered birds. The birds were considered to be an
important part of the local environment with some potential influences on local
ecosystems.
The alternative was Route B which would involve the compulsory purchase and
· destruction of Frekkie Stein's farm. Mr Stein was a vocal opponent of the Route B plan.
He said that he had a right to stay on the land which had been owned by his family for
four generations and which he had developed into a profitable farm. The farm
employed a number of local people whose jobs would be lost if Route B went through
the house and land. Mr Stein threatened legal action against NRC if Route B was
chosen.
An independent legal authority has determined that the compulsory purchase price of
Mr Stein's farm would be N$1 million if Route B was chosen. NRC considered this a
material cost, over and above other land costs, because the projected net present
value (NPV) of cash flows over a ten-year period would be N$5 million without buying
the farm. This would reduce the NPV by N$1 million if Route B was chosen.
The local government authority had given both routes provisional planning permission
and offered no opinion of which it preferred. It supported infrastructure projects such
as the new railway line, believing that either route would attract new income and
prosperity to the region. It took the view that as an experienced railway builder, NRC
would know best which to choose and how to evaluate the two options. Because it
was very keen to attract the investment, it left the decision entirely to NRC. NRC
selected Route A as the route to build the new line.
A local environmental pressure group, 'Save the Birds', was outraged at the decision
to choose Route A. It criticised NRC and also the local authority for ignoring the
sustainability implications of the decision. It accused the company of profiting at the
expense of the environment and threatened to use 'direct action' to disrupt the building
of the line through the birds' feeding ground if Route A went ahead.
Required:
(a) Use Tucker'.s 'five question' model to assess the decision to choose Route A.
/
•·
;•
• , ••
r
1
I 'HI • •
(10 marks)
(b) Discuss _theimportance to NRC of rec9gnising all of the stakeholders in a decision
such as deciding between Route A and Route B.
(8 marks)
(c) Explain what ~.sta~e.h'older\\laimi i~'.:and critically assess the stakeholder claims
of Frekkie Stein, the -loc'a'Igove~'r,ment.authority and the colony of endangered birds.
(7 marks)
THE END
8