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Problem-solving

Introduction

This research report has been prepared for the purpose of developing an understanding of corporate governance to be followed by Australian organizations. In this report, the case study of Australian and International Transportation Limited has been discussed which was previously a Private organization and then converted into a public sector company. Further, in this case, there were many unethical activities conducted by the board of directors and the CEO of the organization. In this research report, the critical analysis has been made on such activities that how they were inappropriate. A discussion has been made in this research report explaining the inappropriateness of such activities in reference to the roles and responsibilities of board of directors and the CEO. Further, the appropriate business practices are also going to be discussed regarding these activities and the ethical characteristics of the CEO of companies in Australia.

Brief Overview of Corporate Governance and ASX principles

The corporate governance is characterized by systems, processes, the framework of rules, and relationships by virtue of which authority is controlled and exercised within an organisation. This describes the mechanisms by which organisation and the authoritarian people are held responsible. The corporate governance is important for bringing the investors in confidence which is vital for the companies while competing for capital (Tricker and Tricker,2015).

Coming on the ASX Corporate Governance Council Principles and Recommendations, they were first introduced in the year 2003. Their main aim is to establish the well-elaborated corporate governance practices in corporations (Council, 2013). These are crucial for achieving good governance and meeting the expectations of the investors in the majority of situations. There are different governance approaches that can be adopted by a different organisation based on their history, size, corporate culture, and complexity. There are eight central principles of ASX that are discussed below (Tricker and Tricker,2015):-

  • Lay Solid Foundation for Management and Oversight: This principle states that every corporation enlisted in ASX should establish the roles and responsibilities of its board and management. In addition, the same should be clearly disclosed along with the performance evaluation and monitoring process.
  • Structure the board to add value:The listed organisation should have a well-structured board of an apt size, skills, composition, and commitment in order to carry out its duties effectively.
  • Act ethically and responsibly:The listed organisation should stay ethical and responsible.
  • Safeguard integrity in corporate reporting:the listed organisation should follow formal procedures that protect the integrity of its organisational documenting.
  • Make timely and balanced disclosure:A listed company is liable to disclose information related to all the matters concerning the organisation’s operations timely.
  • Respect the rights of security holders:The listed corporation should provide its security holders with enough details and information about the company as it is their right to know.
  • Recognise and manage risk:A listed company should have a good risk management framework. In addition to this, the framework should be reviewed regularly.
  • Remunerate fairly and responsibly: The listed organisation should give enough directors remuneration in order to attract highly-qualified directors in order to create values for security holders.

CLERP 9: Auditor and financial reporting obligations

CLERP stands for Corporate Law Economic Reform Program Act of 2004 which is an updated version of Corporation Act 2001. The up-gradation was done based on the proposals given in the CLERP 9 research paper and report published by HIH Insurance Royal Commission in 2003. The proposed reforms are:-

  • Providing ASIC the powers to carry out circulars regarding the infringement.
  • Changes regarding the fundraising provisions.
  • Amendments to financial reporting (Gitman, et.al, 2015)
  • Disclosing Management & Analysis (MD&A) in the Annual report.
  • A brief about the non-binding vote on the executive remuneration report.

The law is responsible for governing the corporate law in Australia. In this act, certain auditor’s obligations have been defined that are essential for the auditing officials to comply with. The auditors are obligated to notify ASIC of contraventions associated with Australian Financial Services (AFS) licenses, credited licences, and other suspected contraventions. Under the section 311 of the Act, it is mentioned that when an auditor gets to know about contraventions, he/she should notify to ASIC regarding the same as soon as possible or within 28 days of suspecting it. There should be some reasonable ground based on which the auditor should identify the contraventions. These grounds can be depending on the auditor's professional knowledge, judgement, past experience, information collected, other suspicious activities observed by the auditor while auditing.

In order to assist the auditor to identify whether a contravention is significant or not, the Corporations Act has given certain factors that are mentioned below (Coffee, 2014.):-

  • Level of fine and penalty associated with the contravention
  • The extent of the effect of contravention
  • The overall market credibility of the firm and the registered scheme.

In case the auditor thinks that the contravention is not as significant as others, the choice is on auditor whether to highlight the mention it in the auditor’s report or bring the contravention on the director’s table (Gitman, et.al, 2015).

Overview of the Problem

The given problem highlights the corporate governance problem of Australian and International Transportation Limited (AAITL). Initially, the company was named as Wilson Transportation Pty Ltd., named after Richard Wilson, the founder, and CEO of the company. The organisation was trading internationally in the UK and USA by acquiring existing companies in these regions. Later on, the company got listed in ASX and became public sector enterprise. This obligated the corporation to follow ASX Corporate Governance Best Practice Principles and AISC’s CLERP 9 provisions. In the due diligence report of 2017, it was described that the company does not follow the rules and regulations described for the public sector enterprise. The internal auditing team colleague has formulated a list of 30 matters and practices that violate the provisions given in the CLERP 9 and principles of corporate governance given by ASX. The violations are related to the actions or inactions of the CEO, the board of the AAITL, and with the decision-making body of the company.

Rule: As the company transformed into a public sector from a privately owned corporate entity, it is obligated to operate its functions under the guidelines and provisions mentioned in the Corporate Law Economic Reform Program Act of 2004. Along with this, the principles and recommendations are given by the Australian Securities Exchange (ASX) context of good corporate governance.

Analysis: In the summary report, it was highlighted that there were no clearly defined guidelines for CEO's authority in areas, such as donations, investments, payments, and gifts to staff. In addition to this, the CEO’s account was intermingled with that of the organisation and this was not disclosed to the directors. This comes under non-compliance with the accounting standards and violation of principle 3 of the ASX associated with the ethics and morale. Sections like s308 (2) and 309 (2) empower the auditor to report this finance-related incompliance activity. This was not the only case of non-compliance with accounting guidelines as the non-executive director approved a non-collateral loan of $12 million to a corporation which is controlled by him only. This transaction was not reported to the board. The CEO's dominance in the company and providing favours to the friends and close associates on the board were also outlined in the report. This is the clear-cut case of fraudulent and related party transaction associated with the corporate entity. This comes under the most significant contravention and the auditor should investigate the same by making some inquiries and reasonable ground as governing by the s311 (4) (b). Once this is done, the auditor should notify to ASIC about this misconduct. If this is not the very significant issue for the auditor, then this should be either brought in the attention of the board of directors or should be mentioned in the audit report. Talking about the related party transition, the final decision-making powers were in the hands of the CEO. The closed associates and friends of the CEO can influence the decision-making of the board in order to earn maximum profits. In addition to this, the Carpenters audit firm is carrying out the company's audit from the past 45 years consecutively. In addition to this, one of the key partners of Carpenter is the board member of AAITL. His perks include $200,000 fee along with an office space plus secretary assistance. All these extra benefits have been kept secret from the board. In addition to this, one of the board members of the AAITL is also a member of the audit team who was later removed from the audit team after a meeting held between the non-executive director and the partner of the carpenter. This meeting was held without informing the senior management. Another misconduct done by the AAITL was related to extra payment for non-audit services. The information collected by the audit team outlined that the ratio of audit fees to non-audit fees was 55%:45% of total fees. All this indicates that the benefits are being provided to the related third party. This was a breach of the guidelines given in Chapter 2E of CLERP 9that obligate the corporate entity to approve and disclose the related party transaction. Another issue in the list was that CEO has by-pass the boards in key transactions and none of the board members oppose this action. This is a clear contravention of section 201A of the Corporations Act. This section outlines the composition of the board of directors and their powers. The CEO has contravened the provisions given in this section and dented the governance of the corporation. Therefore, the auditor should notify ASIC about the same. Another contravention noted in the company is related to record-keeping. The Corporations Act obligates every corporate entity to maintain a written financial and transaction records in order to have a fair annual audit. This was all mentioned in Section 286 of the Act. The board relies on the senior management for the financial information. Apart from this, the financial records, business plan, long-term strategies were not complying with the standards given in Section 297 of the Act. As it was determined that the CEO has never submitted the long-term plans to the board, there is a clear contravention of the act. In addition to this, the company is failing consistently in meeting the budgetary targets and this information is kept secret from the stakeholders. The board did not disclose the considerations associated with the decision related to the expansion in the UK. After the establishment of an operational unit in the UK, the company has suffered a loss of $750 million in the past 1 year. Another blunder done by the boards is associated with the acquisition of a US business without any risk analysis by the management that cost them $550 million. This is a clear contravention of the principle 2, 4 & 7 of the ASX that is related to financial reporting.

The matters and activities have been grouped in accordance with the ASX’s principles and CERPLA 9’s requirement.

ASX principles

Grouping concern matters, practices, and activities related to

Principle 1: “Lay solid foundations for management and oversight”

· CEO’s dominance in making the relatives and friends a part of the board.

· Long-term plans haven't ever submitted by the CEO to the board

Principle 2: “Structure the board and add value”

· No structured policies to define limits CEO’s authorities in areas such as donations, investments, etc.

Principle 3: “Promotion of ethical and responsible decision-making”

· CEO’s account was intermingled with that of the organisation

· The audit is being done by the carpenter's audit firm since last 45 years consecutively.

Principle 4: “Safeguard integrity in financial reporting”

· Extra payment for non-audit services to the audit firm.

Principle 5: “Make timely and balanced disclosure”

· the CEO has never submitted the long-term plans to the board

Principle 6: “Respect the right of shareholders”

· The Company is failing consistently in meeting the budgetary targets and this information is kept secret from the stakeholders.

· Providing extra benefits to key partners of Carpenter who is also the board member of AAITL. This information is kept the secret to the board.

Principle 7: “Recognise and manage risk”

· Establishment of an operational unit in the UK, the company has suffered a loss of $750.

Principle 8: “Remunerate fairly and responsibly”

· The CEO is not a part of the board’s remuneration and selection committee but he still attends all the meetings.  

· A requirement of senior executives has been discarded from the remuneration terms by the CEO.

· CEO’s performance appraisal is performed by the chairperson of the board only.

· CEO has by-passed the board members to make a key transaction and the chairperson allows this to happen.

CLERP 9 requirements

Failure to comply with accounting standards

· CEO’s account was intermingled with that of the organisation.

Fraud by officers or employees of the entity

· The ratio of audit fees to non-audit fees was 55%:45% of total fees. All this indicates that the benefits are being provided to the related third party.

Related party transactions

· Extra payment for non-audit services to the audit firm.

The composition of the board of directors and powers

· CEO has by-pass the boards in key transactions and none of the board members oppose this action.

Failure to keep books and records

· The board relies on the senior management for the financial information.

Ongoing failures to comply with a compliance plan

· The financial records, business plan, long-term strategies were not complying with the standards.

Conclusion: The overall analysis of the problem was done and the contravention of the two major Australian corporate legalities were inspected. The thirty matters and activities were analysed in accordance with different sections given in ASIC's CERPLA 9 and the eight principles and recommendations of ASX.

Appropriate business practices, and activities and ethical characteristics of the CEO and board.

In the given case study of Australian and International Transportation Limited (AAITL), there were different unethical activities occurred by violating the principles of the ASZ Corporate Governance Council’s principles for the good corporate governance. There were made approximately thirty unethical practices which were against the ethical principles. There was a requirement of appropriate corporate governance policies and practices and the corporate decision making for the public organization. The board of the company was not formed according to the laws and the people from friends and families of the CEO were taken to the board. There were no clear instructions and defined guidelines in the organization to be followed by the board of directors and CEOs. Different cases related to the investments, remunerations, Audit committees, board meetings, and the public disclosure and interest disclosure policies were being violated in this case (Sivathaasan, 2016).

In the given case study, The AAITL board was formed by the three former carpenter’s partners out of them one was appointed just after his resignation from Carpenters. These have audited the accounts of the firm for more than forty-five years and the chairman of both the Audit committee and AAITL board was the same person.

As per the corporate governance principles and duties of the directors in the public companies of Australia, there should be executed as well as the nonexecutive directors having the knowledge, skills, as well as the experiences and they, should have a chairman person. This chairperson should be an independent director and the same person should not act in the same business in any other capacity. Hence there should be a different chairpersonon the board of AAITL because they have the same person as chairman in Audit committee and the Board of Directors.

Further, in the case study, there were more unethical situations such as The CEO’s personal as well as the company funds were integrated and there was no proper disclosure of the income separately. Here although the CEO was not the member of the Board’s remuneration and the selection committee. In the case of AAITL, the chair of AAITL board was receiving the remuneration or the fees around $200000 plus adequate office space free. As per the Corporate Governance of Australia, the remuneration to be paid to the directors should be reasonable and should not include the commission or any percentage of the operative revenue (Pratheepkanth, et. al., 2016). There should be a remuneration committee in every organization as per the ASX corporate governance council and the principles to review and make recommendations on the incentive schemes and the packages of senior executives. Here in this organization, all the decisions related to the performance and remuneration of the senior executives were made and reviewed by the CEO which was unethical. There is a requirement of the remuneration committee to review such packages and incentives of senior executives.

In the given case study of AAITL, there were unsecured loans of $12 million which were used for different personal advantageous purposes by the nonexecutive directors without any information to the Audit Committee. There were different activities included such as purchase and sale of the shares of the company at cost without any individual assessment of the value of shares. As per the corporate governance and the duties of directors in Australia, There are many restrictions on the purchase and the sale of the securities of the company by the directors. Directors can be held liable of the insider trading due to using the nonpublic information of the company and buying selling the securities of the company to gain a personal advantage (Chan, et. al., 2014).

Kohlberg’s Model of Cognitive Moral Development is used for three levels of the ethical concerns model which is related to unethical behavior and the characteristics and qualities of the personnel who have committed the breach of moral reasoning behaviors. This model of Kohlberg six stages which are further categorized into the three levels. These three levels are pre-conventional, conventional and post-conventional. Level one includes self-interest orientation and obedience & punishment orientation. Level two includes interpersonal accord and conformity and Authority and social order maintaining orientation. Level 3 posts conventional which include two other stages such as social contract orientation and universal ethical principles. The knowledge and the understanding obtained ineach stage of this model is retained in the later stages (Lama & Anderson, 2015).

It is necessary for the organizations to follow the guidelines and principles given by the ASX corporate governance council. There are already predefined roles and responsibilities of the chief executive officer and the board of directors of companies in Australia so these must comply.

Reflection on the Report

The report started with the general introduction of the corporate governance as defined by the ASX in its report. Then, it stated the purpose of ASX and its eight principles and recommendation. These principles cover almost all the aspects of business, such as ethical, record keeping, finance, organisational structure, etc. Another aspect that the report covered was related to the ASIC’s CERPLA 9. The law is responsible for governing the corporate law in Australia. The law consist of some obligations for the auditor that directs him/her to notify ASIC about the contravention of corporate governance in any entity. The case study was the best way of understanding the corporate governance, auditor’s role, different provision given in the CERPLA 9 and ASX’s 8 principles. To deepen the understanding of both legal aspects, a template was filled in which the matters and activities have been grouped in accordance with the ASX’s principles and CERPLA 9’s requirement.

Conclusion

This report has concluded that there are predefined roles, responsibilities and the principles of CEO and board of directors of the company. In this research report, the case study AAITL has been analyzed and critically evaluated. Different ASX practices have been discussed and analyzed to explain the inappropriateness of the different activities performed in the organization and along with the duties and responsibilities of the senior management as well as the directors. Extensive use for the different thinking skills such as ethical, critical and social methods have been made to identify as well as discuss the characteristics of the CEO and board of directors. There have been appropriate practices discussed in the report along with corporate governance principle of Australia.

References

  • Chan, M. C., Watson, J., & Woodliff, D. 2014. Corporate governance quality and CSR disclosures.  Journal of Business Ethics,  125(1), 59-73.
  • Lama, T., & Anderson, W. W. 2015. Company characteristics and compliance with ASX corporate governance principles.  Pacific Accounting Review,  27(3), 373-392.
  • Pratheepkanth, P., Hettihewa, S., & Wright, C. S. 2016. Corporate governance and financial performance: The case of Australia and Sri Lanka.  Corporate Governance,  7(1), 1-12.
  • Sivathaasan, N. 2016. Corporate governance and leverage in Australia: A pitch.  Accounting and Management Information Systems,  15(4), 819.
  • Carey, P., Knechel, W.R. and Tanewski, G., 2013. Costs and benefits of mandatory auditing of for‐profit private and not‐for‐profit companies in Australia.  Australian accounting review,  23(1), pp.43-53.
  • Fogarty, M. and Lansley, A., 2012. Sleepers Awake-Future Directions for Auditing in Australia.  UNSWLJ,  25, p.408.
  • Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis and opportunities for research.  Australian Accounting Review,  26(3), pp.226-242.
  • Council, A.C.G., 2013. Corporate governance principles and recommendations.
  • Tricker, R.B. and Tricker, R.I., 2015.  Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
  • Council, A.C.G., 2010. Principles of Good Corporate Governance and Good Practice Recommendations.  Exposure Draft of changes.
  • Gitman, L.J., Joehnk, M.D., Smart, S. and Juchau, R.H., 2015.  Fundamentals of investing. Pearson Higher Education AU.
  • Whincop, M.J., Keyes, M. and Posner, R.A., 2018.  Policy and Pragmatism in the Conflict of Laws. Routledge.
  • Du Plessis, J.J., Hargovan, A. and Harris, J., 2018.  Principles of contemporary corporate governance. Cambridge University Press.
  • Cranston, R., 2018.  Principles of banking law. Oxford University Press.
  • Coffee, J.C., 2014. Do norms matter? A cross-country evaluation.  University of Pennsylvania Law Review,  149(6), pp.2151-2177.
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