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SILENCE IS GOLDEN

CASE STUDY

CHU | GALABIN | MAQUILING | SAMPIANO

EXECUTIVE SUMMARY
Bonnieclyde Ltd. a large private construction company undertaking major construction
projects such as building new roads, motorways etc. The company had been very profitable but
the economic downturn has started to hit the company hard. To date, Bonnieclyde has an existing
significant debtor, Dudsareus Ltd., who is also holding an administrative position in the former.
Bonnieclyde is facing the issue with regards to the protest of Dudsareus on the quality of
work received thus affecting the amount they are willing to pay from its construction
engagement. This is one significant issue which requires to be discussed at the meeting with the
external auditors after three months of auditing.
The financial directors are in a dilemma whether to disclose such information because of
the pressure passed on by the Chief Executives. And with the recent economic downturn, their
jobs as well as the other 60 employees or so are at stake. The future of Bonnieclyde depends on
their decision.
The financial director finds it necessary to inform the auditors of the information
although it would greatly affect their opinion. And with the magnitude of the amount, it is
probable that they have discovered such irregularity. He has prepared the new information but
the Chief Executive stopped him from disclosing it saying it is not necessary and that no
adjustments should be made for its debtor who has gone into administration.
Informing the external auditors beforehand and be ready for the consequences is much
better than be caught off-guard and be accused of concealing necessary information. And if the
auditors have not discovered it, informing them beforehand would still be beneficial to the firm
to at least most of its stakeholders being transparent on its transactions or dealings. This would
be the most ethical action for Bonnieclyde.
With the issue on the conflict of interest between Dudsareus being in the administration
of Bonnieclyde, the Board should decide on whether to keep Dudsareus or not. Having a client

on administrative position means information that would have been confidential would be
exposed. Guidelines must be formulated in choosing candidates for such position especially
those with whom the firm is dealing with directly.
The risk of employee lay-off s depends on how well the company manages its finances.
Bonnieclyde could obtain new funding facilities through financing its receivables.
PRIORITIZATION OF ISSUES
Based on the Eisenhower Model as shown below, we prioritize the issues according to
urgency and importance.

Proper disclosure of
post-audit engagement
information
Conflict of Interest

Turnover of current
employees

I.

PROPER DISCLOSURE OF POST AUDIT ENGAGEMENT INFORMATION


The opinion of the auditors depends upon the information provided by the audit client

and from such opinion the stakeholders based their action or inaction.
The financial director finds it necessary to inform the auditors of the information that
would greatly affect their opinion. He has prepared the new information but the Chief Executive
stopped him from disclosing it saying it is not necessary and that no adjustments should be made
for its debtor who has gone into administration.

RECOMMENDATIONS
As financial director, we are required to disclose necessary information which could
greatly affect such opinion, whether such information happened during financial year or after
such period as long as it is before such opinion is being published.
The receivables from Dudsareus Ltd. amounting to 1,800,000 which is still due at
financial year-end should be presented as such unless there is significant doubt on its
collectability.
If there should be a need to allocate for allowance for uncollectible accounts, the
financial director should have discussed this matter with the Chief Executive and not merely rely
on his assurance to recover such.

II.

CONFLICT OF INTEREST
There has been a disagreement regarding the amount of collectible from Dudsareus due

to the latters protest as to the quality of work provided by Bonnieclyde.

One of the people of Dudsareus has recently been put into administration of Bonnieclyde
while also being the client of the latter. This made them possible to disagree with the quality of
work provided by Bonnieclyde, hence the actual amount due.
It was quite suspicious that a current client of Bonnieclyde and with an enormous existing
debt was put into administrative position without anything in return which is in conflict with
proper business ethics on objectivity and integrity.

RECOMMENDATIONS
The Board should decide on whether keeping Dudsareus is beneficial to the firm or not.
Having a client on administrative position means information that would have been confidential
would be exposed.
There must be guidelines or specific requirements in choosing candidates for such
position especially those with whom the firm is dealing with directly.

III. TURNOVER OF CURRENT EMPLOYEES


The current issue is rooted from the financial problems that the company is facing and if
unaddressed, would lead to future bankruptcy. Thus the company would be forced to gradually
lay-off majority of its employees.
Although this last resort of turning over employees can somehow mitigate the financial
problems through saving fixed costs of salaries, this solution also has its downsides in the short
run and in the long run.
Mainly, it can negatively impact the companys internal social bonds between the higher
management and its employees. For one thing by laying off people, they are unconsciously unmotivating their employees leading to low productivity of those that are retained. On the other
hand, if the company recovers from its current financial state, it will have troubles in rehiring and
training new employees.

This does not only affect the company as a whole, but also the emotional stability of the
laid off employees, adversely affecting its internal corporate social responsibility.

RECOMMENDATIONS
Turning over of employees is relatively inevitable in every business proceedings given
the changes in its internal and external situations. But as much as possible this should be the last
resort as to what Bonnieclyde should do. Before settling down to this last resort, it is
recommended that Bonnieclyde should make Dudsareus Ltd.s debt a collateral to the bank. In
this way, Bonnieclyde, through financing its receivables can have enough finances to provide for
its operations, including the salaries of its employees.