You are the Finance Director of a limited liability company. The company started trading with a handful of employees but now has a workforce of 200. You are aware that staff purchases of goods manufactured by the company are authorised by production managers, and then processed outside the accounting system. The proceeds from these sales are used to fund the company’s annual christmas party, organised for Directors of the company.
Required:
Discuss the possible actions that you will take in order not to breach the fundamental principles of the IFAC’s Code of Ethics. (10 marks)
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Integrity
You need to be honest and straightforward in exercising your integrity. Omitting income from staff sales will result in the financial statements being misleading. Again, this practice is dishonest, and what should be done is to formalise the current system employed for staff sales and funding of Christmas party.
Objectivity
The reputation of your company may be vulnerable, and you should discuss this ethical dilemma with your production managers and subsequently directors.
Professional competence and due care
You must ensure that the financial information that you produce for the company is in accordance with technical and professional standards.
Professional behaviour
You need to act professionally in such a way to protect your reputation as a Finance Director, and the accounting profession in general. In so doing, you need to consider relevant accounting standards and any applicable laws and regulations. You need to also determine the system currently employed for controlling and controlling staff sales and funding the directors’ Christmas party.
Conflict of interest
There appears to be conflict of interest. You must be objective in reporting fully on staff purchases of company goods.
Possible causes of action
- After bringing the issue to the attention of your partners and obtained the relevant details of the client’s system for accounting for staff sales, you should raise your concerns with the directors of the client company.
- You will also have to determine whether the financial statements of previous years are likely to be misleading and, if so, consider your responsibility (or that of your client) to inform the relevant authorities (including the tax authority).
- You should strongly advise the directors that a staff sales policy should be introduced to ensure that these sales are fully recorded in the company’s accounting system in the future.
- You should explain to the directors the implications of their actions, and that you are safeguarding the interests of the company and its staff in advising how the situation may be rectified.
- If the directors are co-operative, you should advise them of the recommended changes to the accounting system and how they might disclose the past undisclosed income to the tax authority.
- If the directors appear unwilling to change the system in respect of staff sales, you are obliged to disassociate yourself from any involvement with the company’s financial statements, and this will require you to resign as the company’s finance director.
- At any time, you may seek advice from your professional body.
- In view of this, you are obliged to consider your whistleblowing obligations, and may have to report the matter to one or more authorities. This will be in the public interest and does not amount to breach of confidentiality.
- As a last resort, you should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgement is challenged in the future. (Any 5 causes of action to be taken @ 2 marks each = 10 marks)