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GRE811S-CORPORATE GOVERNANCE RISK MANAGEMENT AND ETHICS-2ND OPP- JULY 2025 |
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nAmlBIA unlVERSITY
OF SCIEnCE Ano TECHnOLOGY
FACULTYOF COMMERCEN, UMANSCIENCESAND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING & FINANCE
QUALIFICATION : BACHELOR OF ACCOUNTING {HONOURS)
QUALIFICATION CODE: 08BOAH
COURSE CODE: GRE 811S
LEVEL: 8
COURSE NAME: CORPORATE GOVERNANCE,
RISK MANAGEMENT AND ETHICS
DATE: JUNE 2025
DURATION: 3 HOURS
PAPER: THEORY AND APPLICATION
MARKS: 100
EXAMINER:
MODERATOR:
SECOND OPPORTUNITY EXAMINATION
Dumisani R. Muzira
Marko Tandota
INSTRUCTIONS
• This question paper is made up of FOUR (4) questions.
• Start each question on a new page.
• Answer All the questions and in blue or black ink.
• You are advised to pay due attention to expression and presentation. Failure to do so
will cost you marks.
• Start each question on a new page in your answer booklet
PERMISSIBLE MATERIALS
Non-programmable calculator/financial calculator
THIS QUESTION PAPER CONSISTS OF 6 PAGES {Including this front page)
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Question 1
ZOOLTD
Background information
ZOOLtd is a large family-owned private company operating in the UK in the contract services
sector. The principle business that ZOOundertakes is project management on large, long-
term building projects in the UK. ZOOLtd has no overseas customers. The company provides
a complete project management service, enabling the customers to deal just with ZOOLtd.
ZOOdeal with all subcontractors. The business has been very successful in recent years and
as a result has become a potential acquisition target for a major international company,
Nama Inc, based in the US. Nama Inc is listed on the New York Stock Exchange and is
interested in furthering its businesses in Europe.
Some of the members of the family that own ZOOLtd (the Williams) are keen to dispose of
their shares and it is therefore expected they will sell to Nam a if a suitable price can be
agreed. The managing director of ZOO,Peter Smith (not in the William family), is currently
negotiating with the directors of Nama over a price for the shares.
Following the negotiation Peter will make a proposal to the William family. Peter and other
selected staff have already been offered positions in Nama if the acquisition proceeds.
Financing the acquisition
Nama Inc have a corporate policy of financing their acquisitions through loans. In previous
foreign acquisitions, they have used either US or foreign loans depending on their views on
economic and political factors in the US and in the foreign markets. They have no strong
views on where to raise finance. They expect to need to borrow in 4 months' time to finance
the acquisition.
One factor that the directors of Nama Inc do feel needs to be considered however is that
they are considering selling an existing UK division within a year and the proceeds are
expected to be in the region of the acquisition price for ZOOLtd. The disposal will definitely
occur after the acquisition of ZOOLtd, probably six months later.
Corporate governance
In anticipation of ZOOLtd becoming part of the Nama Group the group CFO,Bert Bailey, has
forwarded to Peter Smith a memo he sent last year to all divisional CEOson corporate
governance. He told Peter that the same process would operate for ZOOLtd, but with the
dates about a year on.
MEMO
To: Divisional CFOsand CEOs
From: Bert Bailey
Subject: SOXcompliance
Date: 15 January 2025
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As you are all no doubt aware, we are implementing Sarbanes-Oxley (SOX}this year. This
memo summarises the timetable; more detail on the processes and procedures required will
follow later.
Feb - May Document key financial reporting systems and controls. Decide key controls
and report any material design weaknesses in systems
Jun - July Divisional management to test key controls to confirm compliance and the
effectiveness of the systems
Aug - Sept Group internal audit to review documentation and testing, and report on
each division to the audit committee
Oct-Nov
External audit to conduct the majority of their attestation work
Dec
Management certification and assertions as required by sections 302 and
404.
The control framework the UScompanies will be using is the COSOframework. Overseas
companies can use a local framework, if desired, provided it is approved in advance by the
group SOXproject team. Documentation must be standard across the group.
Required:
Explain the risks that could exist for Nama in making the investment in ZOOLtd and discuss
how Nama could assesstheir likely impact on the company.
(25 marks)
Question 2
Tatenda Tan, a fund manager at institutional investor Sentosa House, was reviewing the
annual report of one of the major companies in her portfolio. The company, Eastern
Products, had recently undergone a number of board changes as a result of a lack of
confidence in its management from its major institutional investors of which Sentosa House
was one. The problems started two years ago when a new chairman at Eastern Products
(Thomas Moo) started to pursue what the institutional investors regarded as very risky
strategies whilst at the same time failing to comply with a stock market requirement on the
number of non-executive directors on the board.
Tatenda rang Eastern's investor relations department to ask why it still was not in
compliance with the requirements relating to non-executive directors. She was told that
because Eastern was listed in a principles-based jurisdiction, the requirement was not
compulsory. It was simply that Eastern chose not to comply with that particular
requirement. When Tatenda asked how its board committees could be made up with an
insufficient number of non-executive directors, the investor relations manager said he didn't
know and that Tatenda should contact the chairman directly. She was also told that there
was no longer a risk committee because the chairman saw no need for one.
Tatenda telephoned Thomas Moo, the chairman of Eastern Products. She began by
reminding him that Sentosa House was one of Eastern's main shareholders and currently
owned 13% of the company. She went on to explain that she had concerns over the
governance of Eastern Products and that she would like Thomas to explain his non-
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compliance with some of the stock market's requirements and also why he was pursuing
strategies viewed by many investors as very risky. Thomas reminded Tatenda that Eastern
had outperformed its sector in terms of earnings per share in both years since he had
become chairman and that rather than question him, she should trust him to run the
company as he saw fit. He thanked Sentosa House for its support and hung up the phone.
Required
(a) Explain what an 'agency cost' is and discuss the problems that might increase agency
costs for Sentosa House in the case of Eastern Products.
(7 marks)
(b) Describe, with reference to the case, the conditions under which it might be appropriate
for an institutional investor to intervene in a company whose shares it holds. (10 marks)
(c) Evaluate the contribution that a risk committee made up of non-executive directors could
make to Tatenda's confidence in the management of Eastern Products.
{4 marks)
(d) Assessthe opinion given to Tatenda that because Eastern Products was listed in a
principles-based jurisdiction, compliance with the stock market's rules was 'not compulsory'.
(4 marks)
Question 3
There has been a debate in the country of Beeland for some years about the most
appropriate way to regulate corporate governance. Several years ago, there were a number
of major corporate failures and 'scandals' caused in part by a number of single powerful
individuals dominating their boards. Business leaders and policymakers were sceptical about
a rules-based approach, and this led the Beeland stock exchange to issue guidance in the
'Beeland Code' as follows. 'Good corporate governance is not just a matter of prescribing
particular corporate structures and complying with a number of rules. There is a need for
broad principles. All stakeholders should then apply these flexibly to the varying
circumstances of individual companies.'
Given the causes of the Beeland corporate governance failures, there was a debate about
whether the separation of the roles of chairman and chief executive should be made a legal
requirement. This resulted in the stock exchange issuing guidance that whilst a rules-based
or 'box ticking' approach would specify that 'the roles of chairman and chief executive officer
should never be combined ... We do not think that there are universally valid answers on
such points.'
One company to take advantage of the flexibility in Beeland's principles-based approach was
Anson Company. In July 2010, Anson Company announced that it had combined its roles of
chairman and chief executive in a single role carried out by one individual. In accordance
with the Beeland listing rules, it made the following 'comply or explain' statement in its 2011
annual report.
'Throughout the year the company complied with all Beeland Code provisions with the
exception that from 1 July 2010 the roles of chairman and chief executive have been
exercised by the same individual, William Klunker. We recognise that this has been out of
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line with best practice. We understand the concerns of shareholders but believe that we
have maintained robust governance while at the same time benefiting from having Mr
Klunker in control. On 31 July 2012 Mr Klunker will step down as executive chairman,
remaining as chairman until we conclude our search for a non-executive chairman to
succeed him, no later than March 2013.'
Required
(a) Briefly distinguish between rules and principles-based approaches to corporate
governance. Critically evaluate the Beeland stock exchange's guidance that 'all stakeholders
should then apply these flexibly to the varying circumstances of individual companies.'
(12 marks)
(b) Explain why a separation of the roles of chairman and chief executive is considered best
practice in most jurisdictions.
(8 marks)
(c) Assessthe 'comply or explain' statement made by Anson Company in its 2011 annual
report.
(5 marks)
Question 4
Num and Moo is an established audit practice in Deetown and has a large share of the audit
services market among local businesses. Because Deetown is a relatively isolated area, many
clients rely on Num and Moo for accounting and technical advice over and above the annual
audit. This has meant that, over time, Num and Moo has also developed expertise in
compliance advice, tax, strategy consulting and other professional services.
Because non-audit work is important to Num and Moo, staff have 'business growth' criteria
strongly linked with bonuses and promotion. This means that many of the professional
accountants in the firm actively seek to increase sales of non-audit services to businesses in
the Deetown area, including from audit clients. The culture of the firm is such that
everybody is expected to help out with any project which needs to be done, and this
sometimes means that staff help out on a range of both audit and non-audit tasks. The lines
between audit and non-audit services are sometimes blurred and staff may work on either,
as workload needs demand. Managing partner Cherry Moo told staff that the non-audit
revenue is now so important to the firm that staff should not do anything to threaten that
source of income.
Cherry Moo said that she was thinking of beginning to offer a number of other services
including advice on environmental reporting and the provision of environmental auditing
services. She said she had spoken to local companies which were looking to demonstrate
their environmental sustainability and she believed that environmental reporting and
auditing might be ways to help with this. She said she was confused by the nature of
environmental reporting and so was not sure about what should be audited.
Required
(a) Explain 'ethical threat' and 'ethical safeguard' in the context of external auditing, and
discuss the benefits of effective ethical safeguards for Num and Moo. (8 marks)
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(b) Explain 'environmental audit' and assesshow environmental reporting and auditing
might enable companies to 'demonstrate their environmental sustainability' as Cherry Moo
suggested. (8 marks)
(c) Some corporate governance codes prohibit audit firms such as Num and Moo from
providing some non-audit services to audit clients without the prior approval of the client's
audit committee. This is because it is sometimes believed to be against the public interest.
Required
Explain 'public interest' in the context of accounting services and why a client's audit
committee is a suitable body to advise on the purchase of non-audit services from Num and
Moo. (9 marks)
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