问题详情

‘Happyandhealthy’isatraditionalindependenthealthfoodbusinessthathasbeenrunasafamilycompanyfor40yearsbyKenandSteffiPotter.Asacoupletheyhavealwaysbeenpassionatecampaignersforhealthyfoodsandaremoreconcernedaboutthequalityofthefoodstheysellthanthefinancialdetailoftheirbusiness.Sincethecompanystartedin1970,ithasbeenauditedbyWatsonShreeves,alocalauditfirm.MrShreeveshasoverseenthePotters’auditforallofthe40yearhistory(rotatingtheengagementpartner)andhasalwaystakentheopportunitytomeetwithKenandSteffiinformallyattheendofeachaudittosignoffthefinancialstatementsandtoofferabriefingandsomefreefinancialadviceinhisroleaswhathecalls,‘auditorandfriend’.Inthesebriefings,MrShreeves,whohasbecomeaclosefamilyfriendofthePottersovertheyears,alwayspointsoutthatthebusinessisprofitable(whichthePottersalreadyknewwithoutknowingtheactualfigures)andhowtheymightincreasetheirmargins.ButthePottershaveneverbeentooconcernedaboutfinancialperformanceaslongastheycanprovideagoodservicetotheircustomers,makeenoughtokeepthebusinessgoingandprovidecontinuedemploymentforthemselvesandtheirson,Ivan.WhilstKenandSteffistillretainamajorityshareholdingin‘Happyandhealthy’theyhavegraduallyincreasedIvan’sproportionovertheyears.Theycurrentlyown60%toIvan’s40%.Ivanwasappointedadirector,alongsideKenandSteffi,in2008.
Ivangrewupinthebusinessandhashelpedhisparentsoutsincehewasayoungboy.Ashegrewup,KenandSteffigavehimmoreandmoreresponsibilityinthehopethathewouldonedaytakethebusinessover.Bytheendof2009,KenmadesurethatIvandrewmoresalarythanKenandStefficombinedastheysoughttoensurethatIvanwashappytocontinueinthebusinessaftertheyretired.
Duringtheauditfortheyearended31March2010,amemberofWatsonShreeveswasperformingtheauditasusualwhenhenoticedadramaticdropintheprofitabilityofthebusinessasawhole.Henoticedthatwhilstfoodsalescontinuedtobeprofitable,alargeamountofinventoryhadbeensoldbelowcosttoBarongCompanywithnofurtherexplanationanditwasthisthathadcausedthereductioninthecompany’soperatingmargin.EachtransactionwithBarongCompanyhad,theinvoicesshowed,beenauthorisedbyIvan.
MrShreeveswascertainKenandSteffiwouldnotknowanythingaboutthisandhepreparedtotellthemaboutitasapartofhisannualendofauditmeeting.Beforethemeeting,however,hecarriedoutsomechecksonBarongCompanyandfoundthatitwasaseparatebusinessownedbyIvanandhiswife.MrShreeves’sconclusionwasthatIvanwaseffectivelystealingfrom‘Happyandhealthy’toprovideinventoryforBarongCompanyatahighlydiscountedcostprice.AlthoughMrShreevesnowhadtorecommendcertaindisclosurestothefinancialstatementsinthismeeting,hismainfearwasthatKenandSteffiwouldbedevastatediftheyfoundoutthatIvanwasstealingandthatitwouldhavelong-termimplicationsfortheirfamilyrelationshipsandthefutureof‘Happyandhealthy’.
Required:
(a)Explainhowafamily(orinsider-dominated)businessdiffersfromapubliclistedcompanyand,usingevidencefromthecase,explorethegovernanceissuesofafamilyorinsider-dominatedbusiness.(10marks)
(b)MrShreevesisaprofessionalaccountantandauditor.Explainwhyheisconsideredaprofessionalbysocietyanddescribethefundamentalprinciples(orresponsibilities)ofprofessionalismthatsocietyexpectsfromhimandallotheraccountants.(7marks)

(c)DiscusstheprofessionalandethicaldilemmafacingMrShreevesindecidingwhetherornottotellKenandSteffiaboutIvan’sactivity.AdviseMrShreevesofthemostappropriatecourseofaction.(8marks)


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