College of Business, Hospitality and Tourism Studies

School of Accounting

ACC811 – Entrepreneurship, Ethics and Governance

Final Examination: Trimester I, 2015

QUESTION PAPER

FINAL EXAM

This examination constitutes 50% of total assessment of this unit and students must score
50/100 in this examination in order to pass this unit.

Instructions

1. Time Allowed: 3 HOURS with additional 10 MINUTES reading time.

2. All answers are to be written in the Answer Booklet provided.

3. Write your ID Number on ALL pages of your Answer Booklet and any extra sheets that
you use.

4. This is a closed book examination. You are not permitted to access any books, notes or
other forms of written or electronic materials.

5. Attach the extra sheets securely at appropriate place before handing-in the Answer
Booklet to the supervisor.

Sections Question Marks

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Section A: Case Study 3 Questions. All compulsory 35

Section B: Short Essays 9 Questions. All compulsory 65

TOTAL/WEIGHT 100/50%

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SECTION A CASE STUDY 35 MARKS

Question 1 10 Marks

Toyota Recalls: A Case for Crisis Management

The recent Toyota recalls have placed doubt and anxiety where quality assurance and reliability
once resided in consumer’s minds. This, in part, has much to do with the way Toyota initially
handled the recall crisis—opting to keep quiet, blame others, and deny when they should have
immediately stepped up, taken responsibility, and addressed consumers.

Time after time, the value of a public relations crisis management strategy has proven to be
critically important for both companies and celebrities to have in place. An article
inFortune compared Toyota’s crisis management to the way Tiger Woods handled his scandal,
making statements such as, “Like Toyota, Woods refused to make a public appearance to
apologize for his misdeeds (and still hasn’t), preferring to issue press releases instead.” And,
“Like Toyota, the news about Woods’ missteps was allowed to trickle out day by day without
being effectively refuted.”

Thankfully, Toyota has finally sprung into action, releasing TV, print and radio ads, posting
updates on the company web site, leveraging social media, putting the president of U.S. sales,
Jim Lentz, on the Today Show, and issuing a news conference in Japan where Toyota’s CEO
apologized for the safety problems and vowed to regain consumer trust. But is it too late?

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If there’s one lesson we can learn from the now famous Tylenol recall, it’s that quick action and
transparency can go a long way in repairing and reestablishing trust in a brand. While Toyota’s
actions were slow to start, how they handle the crisis going forward will determine whether their
reputation has been irreparably damaged.

Will you buy a Toyota after the crisis is over?

Required:

(a) Illustrate your understanding of Corporate Governance. (2Marks)

(b) Would shareholders take kindly to the news of the recalled motor vehicles? Explain.
(2 Marks)

(c) Should management at Toyota conceal the defective motor vehicles? What penalty would
Toyota face if they did not recall the defective motor vehicles? (2 Marks)

(d) Time after time, the value of a public relations crisis management strategy has proven to
be critically important for both companies and celebrities to have in place.

Why has public relations crisis management strategy become important? Explain.

(4 Marks)

Question 2 10 Marks

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Organizational culture provides the underpinnings and foundation for organizational
performance. Far beyond policies, procedures and process, organizational culture identifies and
measures the attitudes held by employees and the behaviours that are expressed as a result. It is
about people. It is about the impact their leaders have on those attitudes and behaviours. It is
about the reality that everyone owns culture and contributes to it with every action, every day on
the job. It is what allows winning organizations to attract and retain top talent. It is a key enabler
of the achievement of strategic objectives, and must be a primary ingredient in strategic
planning. The alignment of culture with strategy is essential for sustained organizational success.

To do this, constructive attitudes and behaviours related to achievement, innovation, professional

development and collaboration must become embedded in the everyday workings of the
organization. In our assessments, these attitudes and behaviours are coded as blue. At the same
time, the organization must reduce unhealthy levels of aggressive attitudes and behaviours
related to perfectionism, internal competition, power and opposition. These attitudes and
behaviours are coded as red.

In addition, passive attitudes and behaviours related to unhealthy levels of dependency,

avoidance, relying on convention and approval seeking must be addressed. These attitudes and
behaviours are coded as green.

The IT management team in this multinational insurance company was looking for a way to
align the culture of their division with a whole new strategic thrust that required a wholesale
change of their current technology. This caused a rift in the organization between “veteran
staffers” and the newly hired whose newer skill sets were seen as threatening.

Required:

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 (a) Organizational culture provides the underpinnings and foundation for organizational
performance.

Demonstrate your understanding of corporate culture. (2 marks)

(b) There a rift in the organization between “veteran staffers” and the newly hired whose
newer skill sets were seen as threatening.

Would you expect this behaviour in an organisation? Why? Explain. (2 marks)

(c) The IT management team in this multinational insurance company was looking for a way
to align the culture of their division with a whole new strategic thrust that required a
wholesale change of their current technology.

Is this kind of behaviour by companies normal? Why? Elaborate. (6 Marks)

Question 3 15 Marks

Tevita is a junior employee of Heng Ten Company (a large, listed company). Heng Ten is a
processor of food labelled as containing only high quality meat. The company enjoys the trust
and confidence of its customers because of its reputation for high quality products. One day,

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when passing through one area of the plant, Tevita noticed some inferior meat being mixed with
the normal product. He felt this must be unauthorised so he informed his supervisor, the factory
manager, who told Tevita that this was in fact a necessary cost reduction measure because
company profits had been declining in recent months. Tevita later found out that all stages of the
production process, from purchasing to final quality control, were adapted in order to make the
use of the inferior meat possible. The factory manager told Tevita that the inferior meat was safe
for humans to eat and its use was not illegal.

However, he told Tevita that if knowledge of the use of this meat was made public, it would
mean that customers might stop buying the products. Many jobs could be lost, probably
including Tevita’s own. The factory manager ordered Tevita to say nothing about the inferior
meat and to conduct his job as normal. Tevita later discovered that the main board of Heng Ten
was aware of the use of the inferior meat and supported its use in seeking to reduce costs and
maintain profits. In covering up the use of the inferior meat, the factory produced a fraudulent
quality control report to show that the product was purely based on high quality meat when the
company knew that this was not so.

When Tevita heard this, he was very angry and considered telling an external source, such as the
local newspaper, about what he had seen and about how the company was being dishonest with
its customers.

Required:

(a) When Tevita heard this, he was very angry and considered telling an external source,
such as the local newspaper, about what he had seen and about how the company was
being dishonest with its customers.

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Utilizing your understanding, explain the terminology ‘whistle – blowing’

(2 Marks)

(b) Is it wise for Tevita to whistle – blow? Why? Explain. (2 Marks)

(c) Should Tevita follow his supervisor’s directive? Why? (2 Marks)

(d) Would the shareholders approve the action of management? Why? (3 Marks)

(c) Explain how Tevita might act, in each case, if he were to adopt post-conventional ethical
assumptions according to Kohlberg’s definitions of this term. Your answer should include an
explanation of this term. (6 marks)

SECTION B SHORT ESSAY 65 MARKS

Question 1 6 Marks

Osvaldo R. Agatiello (2008) in his article,” Critically evaluates statement. Ethical governance:
beyond good practices and standards, Management Decision Vol. 46 No. 8, 2008,

pp. 1132-1145, Emerald Group Publishing Limited, he stated that:

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Economic theory and business practice view the manager as a trustee to the owner of the firm
who bears a stewardship responsibility for its assets, including satisfying clients with the goods
and services the firm offers; earning a fair return on its investments; creating new wealth and
jobs; promoting innovation, and the like (FT Management, 2002).

What is the role of the agent to the principal? Do agents owe stewardship responsibility to
stakeholders? Explain.

Question 2 12 Marks

Valelevu Company, a listed company, recently went into administration (it had become insolvent
and was being managed by a firm of insolvency practitioners). A group of shareholders
expressed the belief that it was the chairman, Miss Helen Kumar, who was primarily to blame.
Although the company’s management had made a number of strategic errors that brought about
the company failure, the shareholders blamed the chairman for failing to hold senior
management to account. In particular, they were angry that Miss Kumar, had not challenged
chief executive Robert Vesi who was regarded by some as arrogant and domineering. Some said
that Miss Kumar was scared of Mr Vesi.

Some shareholders wrote a letter to Miss Kumar, last year demanding that she hold Mr Vesi to
account for a number of previous strategic errors. They also asked her to explain why she had not
warned of the strategic problems in her chairman’s statement in the annual report earlier in the
year. In particular, they asked if she could remove Mr Vesi from office for incompetence. Miss
Kumar, replied saying that whilst she understood their concerns, it was difficult to remove a
serving chief executive from office.

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Some of the shareholders believed that Mr Vesi may have performed better in his role had his
reward package been better designed in the first place. There was previously a remuneration
committee at Valelevu but when two of its four non-executive members left the company, they
were not replaced and so the committee effectively collapsed.

Mr Vesi was then able to propose his own remuneration package and Miss Kumar, did not feel
able to refuse him. He massively increased the proportion of the package that was basic salary
and also awarded himself a new and much more expensive company car. Some shareholders
regarded the car as ‘excessively’ expensive. In addition, suspecting that the company’s
performance might deteriorate this year, he exercised all of his share options last year

and immediately sold all of his shares in Valelevu Company.

It was noted that Mr Vesi spent long periods of time travelling away on company business whilst
less experienced directors struggled with implementing strategy at the company headquarters.
This meant that operational procedures were often uncoordinated and this was one of the causes
of the eventual strategic failure.

Required

(a) Was the structure of the reward package that Mr Vesi awarded himself ethical? Why?

(4 marks)

(b) Is Mr. Vesi working in the interest of the shareholders? Why? (2 marks)

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 (c) Critically analyse Miss Kumar’s performance as chairman of Valelevu Company.

(6 marks)

Question 3 6 Marks

According to Bruno Grbac and Dina Loncˇaric´(2009), in their article Ethics, social
responsibility and business performance in a transition economy published in the EuroMed
Journal of Business, Vol. 4 No. 2, 2009, pp. 143-158, Emerald Group Publishing Limited, that

Social responsibility of the firm is manifested in different forms. It is based on two principles:
the principle of philanthropy and the principle of managing the firm in such a way that the
interests of all stakeholders are taken into consideration

Is this the role of companies that management should follow? Should management consult
shareholders first before embarking on a social responsibility program? Why? Explain.

Question 4 15 Marks

Ashok and Associates is an established audit practice in Nab Town and has a large share of the
audit services market among local businesses. Because Nab Town is a relatively isolated area,
many clients rely on Ashok and Associates for accounting and technical advice over and above
the annual audit. This has meant that, over time, Ashok and Associates has also developed
expertise in compliance advice, tax, strategy consulting and other professional services.

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Because non-audit work is important to Ashok and Associates, staffs 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
Nab Town 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 Dickson Kumar 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.

Dickson Kumar said that he was thinking of beginning to offer a number of other services
including advice on environmental reporting and the provision of environmental auditing
services. He said he 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. He said he was confused by the nature of environmental reporting and so
was not sure about what should be audited.

Some corporate governance codes prohibit audit firms such as Ashok and Associates 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:

(a) Illustrate your understanding of the Sarbanes Oxley Act (2002) (2 Marks)

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 (b) Is it permissible under the Sarbanes Oxley Act (2002) for a firm to undertake both Audit
and Non Audit activities of the same company? Why? Explain. (3 Marks)

(c) Explain ‘public interest’ in the context of accounting services and why a client’s audit
committee is a suitable body to advice on the purchase of non-audit services from Ashok
and Associates. (10 Marks)

Question 5 5 Marks

Researchers have argued that if the Glass-Steagall Act of 1933 was still in place, the 2008/2009
financial meltdown would not have occurred.

What was the purpose of the Glass-Steagall Act of 1933? What lead to the Act being repealed in
1999/? Did this act in 1999 contribute to the 2008/2009 financial meltdown? Explain.

Question 6 6 Marks

Arash Shahin and Mohamed Zairi (2007) in their article, “Corporate governance as a critical
element for driving excellence in corporate social responsibility”, published in the International
Journal of Quality &Reliability Management, Vol. 24 No. 7, 2007, pp. 753-770, Emerald Group
Publishing Limited, stated that,

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Over the years, Corporate Governance has evolved from the traditional “profit-centered model”
to the “social responsibility model”.

Has this transformation really happened? Are firms moving away from their traditional role of
making profit? Elaborate.

Question 7 5 Marks

In the public sector it is said that the budget is a good measuring tool for gauging management’s
performance of senior civil servants.

Should civil servants Key Performance Indicator (KPI) be pegged against their respective
ministry budget? Why? Explain.

Question 8 5 Marks

Ellwood and Newbury (2006), in their article, A bridge too far: A common conceptual
framework for commercial and public benefit entities', Accounting and Business Research,
vol.36:1, pp. 19-32, stated that

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The government accounts should not follow the conceptual framework that is meant for the
private sector.

What is the principal purpose of an accounting conceptual framework? Should the public sector
follow the private sector accounting conceptual framework? Will this affect Fund Accounting’s
principal purpose? Why? Explain.

Question 9 5 Marks

Critics of the World Bank and the IMF are concerned about the ‘conditionalities’ imposed on
borrower countries. The World Bank and the IMF often attach loan conditionalities based on
what is termed the ‘Washington Consensus’, focusing on liberalisation—of trade, investment and
the financial sector—, deregulation and privatisation of nationalised industries. Often the
conditionalities are attached without due regard for the borrower countries’ individual
circumstances and the prescriptive recommendations by the World Bank and IMF fail to resolve
the economic problems within the countries

Do you agree with this claim? Will this draconian attitude of both the World Bank (WB) and
International Monetary Authority (IMF) hinder corporate governance in a global economy?
Why? Explain with an example.

END OF PAPER

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