value of good corporate governance, The
Sometimes discipline investigations bring problems to light that emphasize the value of good corporate governance. In these cases, it’s clear that a more involved board of directors or audit committee might have kept members on the “straight and narrow,” thereby preventing complaints about their conduct.
In this fictionalized account, a lack of strong governance practices brought a case before the Professional Conduct Enquiry Committee (PCEC). Names and circumstances have been changed to preserve anonymity.
The situation Peter, the principal shareholder of a large, family-owned, private company, wanted rapid growth with minimum equity. Alfred, a CA and the company’s external auditor, could see problems ahead. He recommended hiring a CA as CFO, getting some independent directors to help steer the company’s expansion, and setting up an audit committee with a CA as chair.
Peter hired one of Alfred’s managers, a CA named John, as his first CFO. Peter knew John was light on industry experience, but felt John would learn quickly. Alfred agreed, but again pressed for some outside directors and a strong audit committee. Peter resisted. What happens John did learn quickly but soon had trouble dealing with Peter’s aggressive management style. As a result, Peter’s demands for more growth and profits began to cause cash flow problems.
John tried desperately to stretch the cash flow but was unable to keep up. Unfortunately, there was nobody within
the company he could turn to, and his pride prevented him from asking for outside support. John found a “solution” by accident. He’d
forgotten about a misplaced tax instalment cheque until it showed up in the month-end bank reconciliation. This oversight meant there was cash in the account to pay some irate suppliers. Vowing he would somehow replace the cheque, John took what seemed to be the easy way out. – Before long, the company was in another crunch. Staff prepared the monthly tax instalment cheques automatically, and John knew changing the routine would raise questions, so he decided to “hold” the cheque, this time deliberately. By yearend, he was holding four cheques and panicking about the annual audit. He decided to do nothing about his new “financing” scheme, and the four cheques remained outstanding.
The auditors missed the error. They. accepted the absence of payee names in the client-prepared outstanding cheque list, and John put off questions about the oldest cheque by saying it had been cashed three days earlier. When the auditor asked him for the CCRA remittance documents, John put him off with a promise to locate the misplaced file and forward copies to Alfred’s office. The outstanding matter was overlooked, and Alfred issued the audited statements. John signed the management representation letter without qualifying the positive assertions about the company’s tax filings and liabilities. At first John thought he’d been lucky, but he soon changed his mind. Peter interpreted the results as proof that an entrepreneur should ignore his accountants. Finding it increasingly difficult to keep CCRA at bay, John prolonged his agony by not filing the company’s tax return and by writing off the stale-dated cheques to miscellaneous income.
With another audit looming, John finally confessed to Peter. Peter was livid at both John and Alfred, realising that Alfred’s audit had failed to find the understated tax liability.
Peter filed a complaint with the Institute about their conduct.
The outcome The PCEC determined that John had breached Rules of Professional Conduct 201.1 (Maintenance of Reputation of Profession); 202 (Integrity and Due Care); and 205 (False or Misleading Documents and Oral Representations). for failing to file the company’s tax return and the related misrepresentations to Peter and the auditors. John agreed to accept an anonymous reprimand, attend certain PD courses, and pay costs and a substantial fine. The PCEC found that Alfred had
breached Rules 201.1 (Maintenance of Reputation of Profession); 202 (Integrity and Due Care); and 206 (Compliance ith Professional Standards) for excessive reliance on management representations, failing to obtain sufficient appropriate audit evidence, and not assessing information that contradicted John’s assertions. Alfred agreed to accept an anonymous reprimand, pay costs and a mid-range fine, and raise the issues with his firms standards partner.
The message We can only speculate about what might have happened had Peter accepted all three of Alfred’s earlier recommendations, but it would be reasonable to expect a challenging board of directors to tackle the funding issue, tie expansion to funding, and help John deal more assertively with Peter.
Furthermore, a conscientious audit committee would probably have brought John’s misconduct to light earlier. And while there’s no excuse for this misconduct, a stronger corporate governance regime might very well have nipped it in the bud.
By Chris Utley, CA
Comments or questions? Contact me at firstname.lastname@example.org.
Copyright Institute of Chartered Accountants of British Columbia Aug 2002
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