Ramero Company, the UK Code of Conduct - Assignment Example

Ramero Case Study Table of Contents Introduction 3 Question 3 Question 2 9 Question 3 12 Question 4 14 Question 5 15 Reference list 16 Appendix 1: For Question 1 19 Appendix 2: Question 2 21 Introduction The UK Corporate Governance Code is mainly followed by the publicly listed companies in the UK (ICAEW, 2015; Ashe-Edmunds, 2014). Nevertheless, there are few non-listed companies, which have followed the codes voluntarily. The code was initially published by the financial reporting council, which was developed in order to encourage and support transparent corporate reporting and strong corporate governance; it was developed in 2003 by Financial Committee of corporate governance (The Financial Reporting Council Limited, 2014; The Financial Reporting Council Limited, 2015). In the Ramero Case study, many issues were observed in the internal control system of the company. The issues are vital enough to affect the system and are susceptible to fraud risks. The company thus failed to comply with the UK Code of Conduct. The following ten points highlights the circumstances in the internal control system of the company that does not comply with the UK Code of Conduct. Question 1 Circumstances Title of the principle Evidence from the Code of Corporate Governance Impact of non-compliance Appendix 1 Leadership UK Corporate Governance Code: UK Corporate Governance Code highlights that any company will possess an effective board for its success (Clarke and Branson, 2012; Mullerat, 2011). Hence, there should be division of responsibility and delegation of authority for running a business successfully. In case of Ramero Company, Mr James, chairman of the company does not delegate the authorities rather he does all the work alone (Deloitte, 2015; BBC, 2004). The work includes the responsibilities of the human resource department and auditors (The Financial Reporting Council Limited, 2014) Lack of delegation of authority Appendix 1 Division of responsibility It can be stated that Mr. James does not comply with the UK Corporate Code of Governance as it explains that the Chairman should form departments, which will divide the responsibilities and monitor it regularly (The Financial Reporting Council Limited, 2014). Lack of delegation of authority Appendix 1 Efficiency The Board of Director of a company should form an Audit Committee for establishing a transparent and formal arrangement for demonstrating the manner in which they conduct risk management and corporate reporting (The Financial Reporting Council Limited, 2014; ACFE, 2015). Under the Code of Audit Committee and Auditors, a Board of Director should establish a committee, which consists of two non-executive directors (in case of small firms). This audit committee has the responsibility to review the financial statements of the company and examine its integrity. Hence, the committee should evaluate the overall financial performance of the company and check whether the internal financial controls are efficient enough to support any financial risk. It should also review the audit report of the external auditor and check whether the audit process is effective enough to depict the overall financial performance of the company during a period of time. Lack of review of financial reports Appendix 1 Efficiency Company should from a Audit Committee Lack in duty of the external auditor Appendix 1 Accountability According to the UK Corporate Governance Code, a company should have a separate external audit committee, which have the sole responsibility to review the financial statements of the company. However, the Ramero Company has failed to form an audit committee, which will include the external auditor, Mr David. Moreover, the audit committee have the responsibility to review the reports of the external audit; but in this case there is no audit committee and Mr James acts as internal auditor. Therefore, it failed to comply with UK Corporate Governance Code Defective accounting system Appendix 1 Accountability UK Corporate Governance Code, the Board of Directors of a company should provide fair, understandable and balanced statement for assessing its financial position. Nevertheless, it is observed that Ramero Company failed to generate a fair value accounting system, where the interest shareholders are also considered. The board should establish an arrangement, which will assure that the information presented in the financial statements is fair and manipulated (Erkens, Hung and Matos, 2012). However, Ramero Company could not provide a clear financial statement as the payroll accounting was not working properly; as a result the salary of the employees was not calculated efficiently. Hence, a transparent financial data was not available for the company Inefficiency of the company to consider the interest of shareholders. Appendix 1 Relation with shareholders According to the UK Corporate Governance Code, Board of a company should determine the principle risks, which can become obstacles in the long run in achieving the strategic goals. The company should review the financial and strategic performance annually so as to understand whether they are fulfilling the demands and needs of the customers and shareholders. The board has the responsibility to control the internal system and risk management system efficiently so as to reduce or nullify the negative reputation of the company in the market. Therefore, Ramero failed to follow the UK Corporate Governance Code for operating successfully in the market Bad reputation of the company Appendix 1 Accountability The security issues should be considered as it may affect the business of the company in the long run. The leader should ensure that the strategic objectives are considered by the employees and also review their performance. The performance appraisal helps in determining the areas where the employees are encountering problems. However, no such appraisals are made by Mr James on behalf of the management Security issues that affected the performance of the company Appendix 1 Leadership UK Corporate Governance Code, the leaders of the company should be skilled enough to treat their employees properly so as to motivate them to do their work. They should not feel biased towards any employee and devoid other from their fair share in money. The board of directors or the leaders should have the experience to discharge respective responsibilities and duties effectively. Hence, the leaders of Ramero Company failed to motivate the employees to do their work efficiently. Lack of leadership skills of the CEO and Chairman Appendix 1 Remuneration UK Corporate Governance Code explains that remuneration committee should balance between performance-related and fixed remuneration (Ingram, 2014; ISDA, 2002; Mellor, 2007; Rezaee and Kedia, 2012; Russo and Perrini, 2010; Thornburgh, 2004; Arcot, Bruno and Faure-Grimaud, 2010). The remuneration incentives are compatible with the risk systems and policies (Plessis, Hargovan and Bagaric, 2010). No such considerations are taken into account by the Ramero Company. De-motivation among the employees Appendix 1 Relation with shareholders UK Corporate Governance Code explains that a company should publish its annual report in the website (Wen, 2013; Mallin, 2013). The code of conduct in a company is very important for its success as it relates to the behaviour of employees and their activities for fulfilling the business objectives. The company does not have any annual report Question 2 COSO is regarded as the internal control system that is developed for the companies to assess their control system; the model is a benchmark for the companies. The framework was supported by 5 organisations such as American Accounting Association (AAA), Institute of Management Accountants (IMA), American Institute of Certified Public Accountants (AICPA), Institute of Internal Auditors (IIA) and Financial Executives International (FEI). The five main components of COSO model are control environment, control activities, risk assessment, monitoring and information and communication (The Financial Reporting Council Limited, 2014). The following 10 weakness are depicted in Ramero’s internal control system, which does not comply with COSO framework: Weakness Justification of weakness Component of COSO framework Justification of choosing the components Appendix 2 Ramero Company failed to monitor the financial data as the data entry system was not efficient enough to support successful operation. There was deficiency in the financial reporting system, which did not assist the company to make appropriate decisions regarding the purchase decision Monitoring Defective accounting system, which lacked adequate monitoring Appendix 2 The internal communication system of Ramero Company was not efficient as the CEO did not delegate the authorities to the lower management system. This created a gap between the employees and management as they could not take part in the decision making of the company Information and communication Improper communication among the employees and the CEO Appendix 2 The employees felt de-motivated in their job as they were not happy with the compensation structure and the rise in the annual pay. However, they did not get the opportunity to communicate with the management; as the company did not have any human resource department and the CEO controlled the employees Control environment De-motivation of the employees pertaining to the payment structure Appendix 2 The control activities of Ramero Company were weak as it failed to monitor the financial transactions and inventories. Inventories worth £50,000 were lost because of the unfortunate fire in the store room. This indicated the fact that the company lacked behind in internal control system Control activities Loss of inventory, which lead to loss of cash Appendix 2 The security of Ramero Company was also compromised as there were no security guards and the CCTV cameras were not working. This indicated that the company did not concentrate on improving its internal control system. Hence, there was risk associated with the theft of the products (COSO, 2015). Control activities Lack of proper security Appendix 2 Apart from the theft of the products, petty cash and cheques were also stolen, which was not monitored by the management until and unless it was identified by an employee. This highlighted the ethical issue that was experienced by the company. Monitoring Theft of petty cash and cheques Appendix 2 The payroll accounting software application was defected as it did not include the employee master file; hence, the quality of information pertaining to employees was compromised On-going monitoring Lack of proper payroll accounting system Appendix 2 There was lack of efficient audit committee, who had the responsibility to review the financial statements (COSO, 2015). However, the review operation was done by Mr James; hence the company did not have an audit committee (Keasey, Thompson and Wright, 2005). Control Environment Lack of efficient audit committee Appendix 2 The CEO of Ramero Company did not delegate the authorities to the lower level management, which is a vital condition of the COSO framework Control environment Lack of delegation of authority Appendix 2 Ramero Company did not send any Summary of Financial Statements (SFS) to the shareholders and thus they aim at concealing their financial status Control environment The company is not transparent enough to disclose its financial status Appendix 2 The company did not publish its annual reports in the website, which is an essential mode of communication with the customers and investors. Control environment Lack of information pertaining to financial status of the company Question 3 Circumstances Justification Type of internal fraud Justification Default in auditing Mr. James did not delegate the responsibilities to the lower level management, instead he does the duty of both human resource manager and an auditor Audit risk Mr. James did not delegate the responsibilities to the lower level management, instead he does the duty of both human resource manager and an auditor. He does not need a human resource department as he takes the interview of the candidates and selects the best one. Moreover, the finance department has only one accountant, who is responsible for preparing the financial statement after assessing the transactions of the business and Mr James reviews the financial reports (Pinsent Masons LLP, 2003). Hence, the company does not have internal auditor to review the financial statements and moreover, the external auditor, Mr. David is peer of the CEO. Therefore, Mr David always issued clear audit report, which did not include the misrepresentations of the financial statements made by the CEO himself. Weak internal system Ramero Company adopts aggressive financing policy for continuing its business in the long run and it only concentrates on wealth maximization than to include the interest of shareholders. This may affect the operation of the company in future to a great extent Shareholder’s risk The company concentrate on increasing its asset base rather than focus on the interest of the shareholders (B. Tricker, and R. Tricker, 2012). Negative articles The negative articles in the newspaper regarding overcharging of the customers in every sector had also affected the reputation of Ramero Company. The company even lost £50,000 uninsured inventories in the sudden fire in the store room. Moreover, the company failed to decipher the loss in the financial statements so that the shareholders are not aware of the devastating financial condition of the company. This may increase the risk of fraud in the internal control system of the company Risk affecting the reputation of the company Negative image of the company among he shareholders Wealth maximization Ramero Company does not publish Summary of Financial Statements to the shareholders; hence, the shareholders are devoid of the profit of the company. This strategy assists Ramero to maximize wealth in long run. However, it increases the risk of internal fraud in the system as the shareholders are quite aware of the financial performance of the company Shareholders risk The company aims at maximizing its wealth Lack of internal security The lack of internal security system may lead to devastating situation for the company as the stocks are piled in the store rooms, which does not have any security guards and the CCTV cameras are not working. Security risk Lack of security in the company Question 4 The five recommendations that are provided for managing all the issue related to the operation of the Ramero Company are discussed henceforth. The accounting system of Ramero should be modified so as to incorporate the financial data without any mistake. The modern financial system will help the company to record the transactions more appropriately so that the financial health of the same is highlighted (Bhugaloo, n.d.). The main motive behind these modifications is that the accounts are prepared manually by the accountant, which can give incorrect financial data. Moreover, an audit committee is needed, where there will be both internal and external auditor. Both of them will review the financial statements that are prepared by the accountants so that there is no misrepresentation. The company should also set up an efficient security system in the company to safeguard products and cash from thefts. The annual reports should be published in the website so that the shareholders are informed about the financial condition of the company (Financial Reporting Council, 2003). Ramero Company should consider the interest of the shareholders so as to sustain in the long run and also develop Corporate Social Responsibility (CSR) activities (Dallas, 2011). Question 5 The recommendations provided for reducing fraud risks are discussed henceforth. Ramero Company should employ efficient internal auditor so as to monitor the financial statements properly, whether the accountant is competent enough to prepare proper financial statement. The company should also appoint an external auditor to give an external review of the financial reports without making any biased decision. Ramero Company should develop an investor centre in the website so as to communicate with the shareholders. The company should develop customer care service desk in the website so as to register the complaints of the customers (Coffee, 2014). Ramero Company should create a human resource department in order to make appropriate decisions pertaining to human resource related issues (Lütz, Eberle and Lauter, 2011; Okhmatovskiy and David, 2012; Osemeke and Adegbite, 2014; Saad, 2010). Conclusion Ramero Company has not followed the rules and regulations that are depicted in the UK Code of Conduct. Hence, it can be stated that immediate changes are required in the upper management level. The CEO of the company, Mr James should delegate authorities to different departments so that communication between the employees improves. Thereafter, he should also adopt the modern financial system so that as to enhance the quality of financial statements and the audit committee should be set up so as to control the external and internal auditors. The reports from both the auditors are valuable for the company as they helps in reflecting whether the financial statements of the company are not misrepresented to the public. The UK Code of Conduct gives emphasis on the rights of the shareholders, which highlights that they should be informed regarding the financial health of the company before investing in its shares. Hence, it is quite obvious that Ramero Company needs improvement in its overall performance. Reference list ACFE, 2015. 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What Caused Enron-A Capsule Social and Economic History of the 1990s. Cornell Law Review, 89(2), p. 1. COSO, 2015. Guidance on Internal Control. [online] Available: < http://www.coso.org/ic.htm > [Accessed 25 February 2015]. Dallas, L. L., 2011. Short-termism, the financial crisis, and corporate governance. Journal of Corporate Literature, 37, p. 265. Deloitte, 2015. UK Corporate Governance Code. [online] Available at: < http://www.iasplus.com/en-gb/projects/frc-projects/uk-corporate-governance-code > [Accessed25 February]. Erkens, D. H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), pp. 389-411. Financial Reporting Council, 2003. The combined code on corporate governance. Available at: [Accessed 25 February 2015]. ICAEW, 2015. UK Corporate Governance Code. [online] Available at: < http://www.icaew.com/en/library/subject-gateways/corporate-governance/codes-and-reports/uk-corporate-governance-code > [Accessed 25 February 2015]. Ingram, D., 2014. The agency theory in financial management. [online] Available at: [Accessed 25 February 2015]. ISDA, 2002. Enron: Corporate Failure, Market Success. [PDF] ISDA. [online]Available at: [Accessed 25 February 2015]. Keasey, K., Thompson, S. and Wright, M., 2005. Corporate governance: Accountability, enterprise and international comparisons. New Jersey: John Wiley & Sons. Lütz, S., Eberle, D., and Lauter, D., 2011. Varieties of private self-regulation in European capitalism: corporate governance codes in the UK and Germany.Socio-Economic Review, 9(2), pp. 315-338. Mallin, C., 2013. Corporate governance. Oxford: Oxford University Press. Mellor, J., 2007. The UK combined code of corporate governance and its application to smaller quoted companies. [pdf] Foundation GRE. [online] Available at: [Accessed 25 February 2015]. Mullerat, R., 2011. Corporate social responsibility: The corporate governance of the 21st century. Netherlands: Kluwer Law International. Okhmatovskiy, I., and David, R. J., 2012. Setting your own standards: Internal corporate governance codes as a response to institutional pressure.Organization Science, 23(1), pp. 155-176. Osemeke, L., and Adegbite, E., 2014. Regulatory multiplicity and conflict: towards a combined code on corporate governance in Nigeria. Journal of Business Ethics, pp. 1-21. Pinsent Masons LLP, 2003. The reach of the UK Corporate Governance Code. [online] Available at: < http://www.out-law.com/page-8214 > [Accessed 25 February 2015]. Plessis, J., Hargovan, A. and Bagaric, M., 2010. Principles of contemporary corporate governance. Cambridge: Cambridge University Press. Rezaee, Z. and Kedia, B. L., 2012. Role of corporate governance participants in preventing and detecting financial statement fraud. Journal of Forensic & Investigative Accounting, 4(2), pp. 176-205. Russo, A. and Perrini, F., 2010. Investigating stakeholder theory and social capital: CSR in large firms and SMEs. Journal of Business Ethics, 91(2), pp. 207-221. Saad, N. M., 2010. Corporate governance compliance and the effects to capital structure in Malaysia. International journal of economics and finance, 2(1), pp. 105-114. The Financial Reporting Council Limited, 2014. The UK Corporate Governance Code. [pdf] The Financial Reporting Council Limited. [online] Available at: < https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf > [Accessed 25 February 2015]. Thornburgh, D., 2004. A Crisis in Corporate Governance? The WorldCom Experience. [pdf] KL gates. [online] Available at: [Accessed 25 February 2015]. Tricker, B. and Tricker, R., 2012. Corporate governance: Principles, policies and practices. Oxford: Oxford University Press. Wen, S., 2013. Shareholder Primacy and Corporate Governance. New York: Routledge. Appendix 1: For Question 1 Circumstances Ramero Company does not have a proper organizational structure. The Chairman and CEO, is solely responsible for briefing the boards of directors. The same individual also carries out HRM activities such as conducting recruitment drives as well as setting standards for all levels of management. That is why the individual feels that there is no requirement for an HR department within the organization. In addition, the company has only one accounting manager who is responsible for preparing and reviewing the annual financial statements. The company does not have any addition financial manager who would crosscheck the authenticity and validity of the financial statements and reports. The chairman himself performs the work of an HR manager by interviewing new applicants and recruiting them for a vacant post. That is why the individual has shown reluctance towards having an additional HR manager in place. The chairman also does the work of reviewing the financial statements after they are prepared by the accountant. That is why the company does not have any proper financial managers or an auditor in place. Given the fact that Mr. James himself does the work of reviewing the financial statements after they are prepared by the accountant, Ramero Company neither has an audit committee nor an internal auditor to prepare audit reports that highlight accounting misrepresentations. This is one particular area which can be considered as a breach of the UK corporate governance code. Mr. David was appointed as an external auditor for Ramero company. The individual prepared a flawless audit report on behalf of Ramero company regardless of the fact that there were several cases of accounting misrepresentations within the company’s financial reports. However, the individual did outline certain weakness within the organization’s internal control system but there were endeavours from the company’s side to deal with these weaknesses. The Payroll application of Ramero company has certain loopholes. Firstly the system does not integrate the information of those employees whose background data is not stored within the master file. Several computers have started malfunctioning which is why the managers have frequently encountered issues related to data loss as the machines have failed to store backup information. The company’s warehouse/storeroom is stacked up with inventories but they are not incorporated appropriately within the financial reports. Ramero Company’s management has been reported to have resorted to belligerent accounting tactics in order to achieve greater returns. Even after such misconducts a flawless audit report was issued by the external auditor. Ramero Company managers have deviated from the interest of shareholders towards fulfilling their own personal interests by adopting aggressive accounting tactics to generate greater returns. The managers have rather emphasized on investing its wealth in an aggressive manner in order to generate higher yield at the end of a financial calendar. Ramero Company’s reputation was smudged to a certain extent in front of the public in general because of the management’s exhibition of aggressiveness in front of the customers. In addition, the company has also reportedly lost £50,000 worth of uninsured inventories when one of its warehouses accidentally caught fire. The company’s reputation was also tarnished as the management encountered frequent issues related to cash and cheque thefts. This issues, when came into the knowledge of the shareholders, deteriorate the management-shareholder relationship. Ramero Company has also been accused of being opaque to the shareholders by concealing crucial details related to the company’s financial performance for years. Following such occurrences of fraud and theft, the company was urged by the shareholders to create an action group that would be responsible for overseeing the company’s financial performance as well as monitor any fraudulent or illicit activities. However, even after such an important requirement no resolution was taken from the company’s side. Ramero Company has been accused of not having adequate security measures within the internal environment. There are no security guards to ensure the safety and security of the locker rooms. The store rooms are not even equipped with proper lock mechanisms. The store rooms are equipped with close circuit television cameras but they are hardly functional. The store room inventories often lie dispersed on the floor and therefore the room is not suitable for storing beverages and food products. This is one area where Ramero Company has failed to comply with the UK corporate governance code as it requires a leader to oversee security related problems in an organization. The company’s administrative building was not equipped adequate computers even though the number of administrative officers kept on increasing. The total number of computers in the administrative buildings was only three as opposed to ten officers. The compensations schemes offered to employees by the managers of Ramero Company were also not up the standard. Appendix 2: Question 2 Weakness The payroll software does not incorporate the information of those employees whose data is not recorded within the master file. In addition, the machines are not equipped with proper facilities that can store backup data. The store rooms do not have enough space to accommodate the consistently growing number of inventories. The chairman and CEO assume most of the responsibilities within the organization. He engages in frequent meetings with the board of directors and faces an upheaval task of generating higher returns consistently. The chairman often complains of being overloaded with responsibilities as he himself is responsible for overseeing HR as well as financial activities. The underlying reason behind that is the chairman’s reluctance of delegating authorities to subordinates. The motivation level of employees in Ramero company has decreased considerably over time as a result of the ill treatments that they have received from their chairperson. The payment and compensation schemes in the company are also not very lucrative. This has affected the performance of employees severely. The company has recently received negative publicity in the media due to its aggressive attitude towards customers. Moreover, its management has also been severely criticized due to a loss of £50,000 incurred by the company as a result of a fire that broke out in one of the company’s tore rooms. The store rooms lack adequate security measures and the lockers are not fitted with proper lock mechanisms. The company has encountered several issues of cash and cheque theft over the course of its operational lifecycle. Some of its employees were accused of stealing from company cash reserves. The underlying reason behind such illicit practices, as mentioned by the accused, is that they are severely underpaid. This highlights the weaknesses that lie within the company’s internal control system. After the discovery of several unethical and illicit practices, the shareholders urged the managers to set up an action group that would strictly supervise the performance of the organization as well as keep a check over the illicit and unethical practices. However, till date no such resolutions have been taken by the company. There are no internal auditors within the company. In addition there is no audit committee that would ensure the authenticity and validity of the accounting reports. Business is not conducted transparently within the company. Accounting information is not revealed to the shareholders completely. Summary of financial performance is not notified to the shareholders frequently or in time. This is one area where the company can improve drastically when it comes to providing services to shareholders. Information related to the company’s financial reports, corporate social responsibility endeavours, values, missions, visions, ethical codes of conduct are not properly mentioned in the corporate website of Ramero Company. Read More