The Critical Analysis of Ramero Company - Assignment Example

Introduction: The critical analysis of Ramero Company has been taken into consideration by comparing organizations’ practices to UK of corporategovernance. UK corporate governance code is an effort to provide company guideline to be successful for long time. This code allows employees to reduce risks and enhance security and reliability of the organization. QNo: 1. Circumstances where Ramero Company did not comply with the UK Code of Corporate Governance (i.e. evidence from the case is required) The number/title of the principle & provision violated in the code Evidence from the Code of Corporate Governance The impact of non-compliance on the company’s performance or success 1. Ramero Company is violating this rule, as Mr. James is not just the board of directors’ chairperson but CEO as well. Section “A” of leadership A.2 Division of responsibilities Code provision A.2.1 If the code provision of A.2.1 is considered then it has been mentioned that the role of chief executive and chainman cannot be exercised at a time. It has been encountered that CEO duality has negative impact over the performance of firm due to CEO’s compromise on control and monitoring. Therefore, the duality of CEO should be minimized at possible extent (Ugwoke, Onyeany and Obodoekewe 2014; Amba 2013). 2. However, at Ramero case Mr. Jams is holding enough powers and liable to perform several duties at a time such as liable to make transactional decisions, account and control, hiring and management. This is the violation of UK governance code Section “A” of leadership Code provision of A.2 (division of responsibilities) it has been mentioned clearly that distribution of responsibilities must be on fair basis and division of responsibilities should be appropriate and no one ought to be free to make decisions or have enough powers to make decisions. Meyer and wet (2013) examined the impact that financial performance receive from board structure and it has been found that there is negative relation between the corporate performance and ownership of board in term of earning per share. However, it has been encountered that size of board has significant impact over the performance of organization; intellectual capabilities and decision making skills have significant impact on corporate performance (Hendry and Kiel, 2004; Mryer and Wet, 2013) 3. However, Ramero does not have clear documentation for its decisions, goal to be achieved, description duties of board elaborates that meeting the expectations of shareholders, and generation of returns is the only concern of directors; company also not has independent non-executive to resolve the interaction issues that is the clear violation of UK governance code. Section “A” of leadership A1: The role of board Code provision A1.1 A4: non- Executive directors Code provision A4.1 and A4.2 If code provision of A.1.1 and A4.1 and A4.2 are considered respectively then it has been declared that company must have formal schedule for matters, company must provide an non-executive independent director in order to serve the directors as an intermediary and can help shareholders out in contacting issues. Board of directors have several responsibilities and participate in strategy building and decision-making. Moreover, it has been found that independence of non-executive directors do not have impact over firm performance (Mura, 2006). 4. Company is violating these codes or rule because company is exposed to several risks and does not have annual reporting on website that can serve shareholders with company’s strategy to cope-up with risky situation. Section “C”: (Accountability) C.1 business and financial reporting Code provision C.1.1 C.1.2, and C.1.3 In these codes, it has been explored that directors should demonstrate their responsibilities in preparing annual report and should deliver all necessary information to shareholders, they should declare their strategies of mitigating risk and should monitor the validity of financial statement. It has been realized that annual reporting plays important role in enhancing the business performance, enhance the moral of shareholders, and encourage them to invest in organization. Annual reporting has been considered as a strategy of increased corporate performance and medium of disclosure (Arshad and Othman 2012; Galbreath 2010). 5. However, at Ramero, aggressive accounting approaches are used to enhance profitability and annual reports are not published at company’s website. Even financial information is not available to shareholders. C.1 business and financial reporting Code provision C1.1 In the code provision C.1.1, it has been declared that board of directors are equally liable to provide necessary sound information to shareholders in term of annual reporting and liable to evaluate the position and performance of organization. Financial reporting enhances the confidence of shareholders and increases their trust that in result enhance the profitability thorough increased investments; financial reporting enhances the objectives and improve the accountability of the organization (Chukwugoziri 2012). 6. However, at Ramero procedural appointment is lacking because Mr. David is the external auditor since the company has been founded as it has been mentioned that company does not acquire any internal committee as well; that again represents the violation of UK governance code. Section C.3: audit committee and auditors Code provision C.3.1 In C.3.1, it has been clearly mentioned that the auditor team should be based on three and of based on two then must include one non-executive officer and there must be a clear procedure of appointing and discharging them with the consent of board and shareholders. External auditing has positive impact over the success of organization because external auditors ensure the effectiveness of organization’s operations, external auditor is able to provide independent opinion regarding the firm’s activities and plays significant role in fraud detection (Roush 2011). 7. However, at Ramero transparency is a big issue because as a friend of CEO, Mr. David always issue clear report in order to declare the favorable position of the organization and avoid discrepancies Section C.3: audit committee and auditors Code provision C.3.2, C.3.4, and C.3.5 It has been mentioned clearly that role and responsibilities of audit committee should be written down, audit committee should help in decision making and should provide information regarding strategy, business model, company’s position, and performance to shareholders. Committee should make sure appropriateness of arrangements. It has been realized that information that transparency in audit empower the policy makers and management of the organization and has significant positive impact of corporate performance (McGee and Gaventa 2010) 8. However, at Ramero there is no audit committee and even company does not have internal audit department, which is the violation of UK governance code. In section C3: : audit committee and auditors Code provision of C.3.2 C3.6 These codes are elaborating the details regarding the internal auditors; it has been declared that internal audit committee should monitor the financing and auditing practices and it has been declared that audit committee should monitor the internal audit department. Internal audit department is the element that enables accounting system deployment possible and plays role in the evaluation of departments’ work. Internal audits keep the track of all organizations associated with the industry and considered as a core of business accounting. It is a critical part for corporate governance (Al-Matari, Al-Swidi and Fadzil 2014) and improves organizational efficiency through confirming the effectiveness of implementation of processes and operation standards (Saud and Marchand 2012). 9. However, at Ramero, no information regarding the general meetings’ frequency. Section E: relations with shareholders Code provision E 2.1 It has been declared that in general meeting separate resolution to each issue should be proposed and shareholders should have right to vote against the resolution, which means shareholders should have right to be involved in decision making process. It has been found that frequency of meetings has positive impact over firm’s performance and enhances firm’s value through increasing the confidence of shareholders (Ma and Tian 2009). 10. However, at Ramero communication, committee is not responding to the concerns of shareholders and even they were not provided with SFS. Section E : relations with shareholders E.1: dialogue with shareholders Code provision E.1.1 It has been mentioned that the concerns of shareholders should be addressed and communication should be done with shareholders, It has been realized that shareholders’ communication plays importance role in corporate governance and enhances the good relationship that in result increase the profitability of the organization (Millain 2013; Maher and Anderson 1999). Q no: 2. Weaknesses in Ramero’s internal control system (i.e. evidence from the case is required Justification for weaknesses The internal control component in COSO framework that was not complied with Justification for the choice of COSO internal control component 1. lacking to meet the UK governance code. The major weakness of internal control system is that it is lacking to meet the UK governance code. There is no equal distribution of responsibilities, nor is procedure for hiring, CEO playing dual role at a time. Framework of COSO The overall system is not compiled. There are no set standards and road map to apply, risk assessment does not exist in company and auditors does not present any evidence of discrepancies, there is no documentation has been done regarding the code of conduct, communication process with shareholders is not effective, and financial information is not presented to share holders. CEO is performing dual role that is against the UK governance code. Avoidance of risk management and lack of compliance can take company towards breakdown (Willson 2006) 2. Accountability of CEO As it has been mentioned in the code the one person should not be given free power to make decisions, but at Ramore Mr. James is overburden with responsibilities and pass all business related transaction, which shows lack of assessment. lack of assessment However, accountability is critical factors to organizational success and there is no clear standards regarding the monitoring and evaluation of CEO (Ferrell and Ferrell 2011). 3. Lack of resources Company has only one accountant and does not have any finance manager that can approve the financial records, which is the weakness of the organization Managing activities Financial managers are the one who evaluate the performance of the organization in term of financials and maintain the lower possible cost, insure the efficient utilization of funds, and provide quality information to organization that help in making informed decisions (Ciuhureanu, Balteş, & Brezai, 2009). 4. Poor reporting system 4. The reporting system of Ramero is not of high quality because company is not publishing annual reports, not providing financial data to shareholders, auditing practices are missing, and aggressive accounting practices are being utilized to higher the profitability, which means company is not efficient in its information and communication practices. Interaction and information Information and communication practices enhance the validity of data and help in enhancing the performance of the organization (Laudon, & Laudon, 1999). 5. Lack of security initiatives In case of Ramero, it has not been mentioned that Company has any policy against the fraud. Security activities In case of Ramero, it has not been mentioned that Company has any policy against the fraud. However, the data is exposed to fraud such as computers are shared by staff, CEO’s sharing of authority, and systems are the major factors. There is no particular system to encounter the fraud activities. 6. Inappropriate actions Company is overcharging its customers that in result reducing the competitive position of the organization Managing activities Company is gaining negative publicity, due to such factors company even had to lose 50000 Euros. 7. Monitoring and assessment The security system of the organization is not good because despite the fact that cash and cheques were stolen from the safe of the company; Monitoring activities Company did not take anything into account and theft continued until the reporting of an employee. Such threats are disastrous for company’s image. 8. Lack of ethical practices Employees were not treated ethically Ethical activities Employees were not treated ethically because when an employee reported the theft and complained to not receiving its fair share they were dismissed but not paid for their theft, which exposed the ethical misconduct of the Ramero (Gupta, Gollakota and Srinivasan 2007). 9. Poor relationship management Poor relations with shareholders Information communication and control environment Poor relations with shareholders are another weakness of the organization; good relationships with shareholders are important for organization because bad relations result in decreased financial productivity and firm’s value. There was not a process through with shareholders can interact with board and company was not had any interest in communication with them. 10. Negative corporate image Negative corporate image is enough to decrease the profitability of the organization and company was not able to improve this situation. Marketing activities Company was facing many scandals and all this happened due to lack of communication, risk assessment, monitoring and evaluation, and transparency. Negative image brings several risk for organizations (Eccles, Newquist and Schatz 2007) Q No: 3 Circumstances that might increase the risk of internal fraud at Ramero company (i.e. evidence from the case is required Justification The type of internal fraud that might be committed Justification 1. Shared systems and lack of security of data It has been examined by (Khanna and Arora 2009) that lack of security encourages and helps employees to do fraud activities. At Ramero, there was no security system to prevent company from theft; and some CCTV cameras that had been placed in this regard were not working properly and were not enough to protect stock room. Company’s data is highly exposed to fraud and some risk include: Mismanagement of billing, theft, hypothetical purchasing and selling practices, sharing of systems and misuse of inventory. It has been encountered that lack of security is allowing staff members to freely enter and exist in stock room. Some systems are shared by several employees that would result in increasing the risk of misappropriation. 2. Company does not acquire any code of conduct regarding ethics, controlling and motoring. Company’s must acquire ethical code of conduct in order to deal with issues and fraud activities; without ethical code of conduct company can not fulfill the all requirements that result in corporate performance. Defined rules enable organizations to undertake the security measures and take actions against the unethical practices. Company is lacking in ethical consideration, monitoring and evaluation due to unspecified practices. Employees involved in fraud activities can justify their practices because they do not have any specifies code of conduct that can guide them. Due to lack of defined practices several fraud activities take place and management can nit blame employees if they have not told employees clearly that what to do and what not. 3. Company’s initiatives regarding past fraud activities are not appropriate There must be clear description of fraud level and company must mention the course of action that will be followed against the employees who will be finding guilty. Company must mention the practices that will be implemented in case of fraud and should formulate policies in order to control such activities. Cheques and cash was stolen from company-safe and such act is a type of fraud that comes under the asset misappropriation (Ziegenfuss, 1996) Company should have taken the fraud activities of cheque and cash theft as alarming conduct and should have taking appropriate actions against the employees involved in such practices and should have increased the security of stock room. Companies initiatives could help in guiding the employees and can help in shaping their behaviors. However, company’s inappropriate actions are not alarming for employees and they may conduct the same action again. This leverage just not enhance the threat of fraud but also damage the financial position of the organization 4. Company did not acquire ant practices regarding the fraud tracing and did not acquired any whistle blower practice Whistle blowing is a practice of evaluating risk of the organization (Gaol et al., 2014). This technique allows organizations to take the fraud activities into account through having feedbacks from detective employees. Company does not acquire any audit department that can help organization in detecting the fraud activities and CEO of the organization cannot pay attention towards all issues at a time while he is overburden with different duties. Inappropriate practices and corruption. Company is lacking in monitoring and control practices that give the employees leverage to do several fraud activities and such intention of employees will result in the damage of financial position of the company, negative image and bad shareholders relation. 5. Company’s CEO is involved in duality practices, company does not have finance manager, IT department has single personnel, relation of external auditors with CEO, no good relation with shareholders, no issuance if annual report, CEO is liable to promote ant demote employees on the basis on personal judgments. It has been encountered that accountability of CEO enable him to take responsible action, but at Ramero this is not the case, CEO is not accountable to anyone. Moreover, he is plays several actions at a time that may not allow him to complete each task efficiently. The result of lack of accountability is that CEO is promoting employees not based on their performance but because of personal judgments. CEO is involved in duality practice that result in inappropriate management of company’s function Company has single IT employee who is managing several factions that reduce the efficiency of the company and enhances the chances of corruption. It has been encountered that in order to detect the fraud activities companies must have internal auditor that can encounter the potential risks (Bhasin 2007). Ti has been encountered that CEO with separate role can better manage the financial position if the organization (Fosberg 2004). QNo: 4 recommendations to Ramero company on in order to reduce control risks 1. Code of conduct is a guide for employees and consists of standards and rules; company clearly communicates the duties and communicate punishments if found ethically disrupt (Ferrell 2008).1 It has been found that Ramero does not have clear code of conduct that is evident from the comment of James that “there is no need for an ethical code of conduct because he has decided by himself that who will be penalized for what”. Company should introduce a clear code of conduct that will help in building the culture of the organization and reduce the potential activities of fraud; when employees will be aware of consequences of unethical behavior, they will make sure not to commit such acts. 2. Transparency in external audit allows companies to correct the mistakes and makes companies’ operation effective through strengthening internal control; but at Ramero Mr. David due to his personal relations with CEO always issue clean report that does not allow company to realize the internal control system’s weaknesses. Company should enhance the transparency of external audit that will allow company to encounter the current position of the company and allow taking actions accordingly. 3. The UK governance code has been established by considering all complexities; compliance with the law improves the justifications of company’s actions and makes the corporate governance easy to enforce (Kipling 2008).2 Company should follow the UK governance code that will in result enhance the internal control of the organization, prevent organization from risk, and become the source of competitive advantage for the company. 4. If the organizational structure is not defined and employees are not aware, to whom they have to report and accountability standards are not defined then it will create problem for organization. Employees will not be able to work efficiently; as it has been encountered that the CEO of the company Mr. James is Overburdned and IT manager is also dealing with several issues at a time, which reduces the effectiveness and create security issues. Therefore, company should develop a formal structure and should define the control requirements in order to encourage the control environment, and improves efficiency. 5. Internal audit allows organizations to reduce operational cost, improves productivity, security, customer satisfaction and moral of employee, but at Ramero there is no internal audit department and committee; even company has no finance manager that can approve financial records. Company must hire an internal auditor that will report the fraud activities and help in avoiding the practices that can increase the risk of theft. QNo:5 recommendations to reduce fraud risk at Ramero company 1. Compliance with UK code of governance will enhance the accountability and due to the description of duties, no one will be able to blame others for unethical conducts. As it has encountered that at Ramero role of board and other department is not defined. Company, in order to reduce the fraud activities must follow the UK governance code that will guide the organization in coping up with such activities. 2. As it has been encountered that company is utilizing less inventory and single system has been used by multiple employees that enhances the security issues. Company must bring enough inventories into office and should not allow employees to share their systems that in result will help in reducing the fraud activities. 3. It has been encountered that for the security of stock room, there were no guards, proper locks and not even the all CCTV cameras are in well condition. Company should make sure the deployment of sound technological system through which security of stock room and data can be increased. 4. Ramero does not acquire any ethical code of conduct; that in result creating the security issues and fraudulent activities have been take place multiple times. Company must acquire a standardized well-defined code of conduct that will prevent company from such activities. 5. As it has been encountered that Mr. David has not been hired according to the procedure of UK governance code and due to his personal relation get bias and issue clean audit report to CEO that does not allow company to realize internal weaknesses of organization. Rather to clean the audit report in order to present the better image of the organization; company must hire external auditor according to the UK governance code that will result in increasing the security of the organization through reporting the independent facts. Conclusion: Critical analysis of the company exposed the fact that company is not complying with the UK code of governance. Major weaknesses, risk assessment practices, and flaws of the framework has been defined, some recommendations have been presented in order to prevent organization from risk and fraud threats. References Al-Matari, E. 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