The Conflict between the Management and the Shareholders - Case Study Example

ETHICS-ETHICAL HEMP LTD Name Instructor’s Name Course Number Ethical issues identified Corporate agency issues When companies are formed, they are formed on the principle of going concern which states that companies are established and are deemed to exist or operate into the unforeseeable future. The owners of a business, the shareholders, always appoint the directors of management to oversee the affairs of the company. According to CHEN, LU and SOUGIANNIS (2011), the relationship that exists between the management and the shareholders is an agency relationship where the management is the agent and the shareholders are the principal. Many a times, there arises an agency issue or conflict between the management and the shareholders. The agency issue relates to the management acting not to the best interest of the owners (Shareholders) but rather to meet their own interests (Filatotchev and Wright, 2010). One way in which the management way fails to meet the interests of the shareholders, which amounts to agency problem is through mismanagement of resources (Gorganlidavaji and Mikaeeli, 2015). It has been indicated in the case that Max Acacia was one of the directors who was dormant in as far as the affairs of the organization is concerned. This means that the director didn’t have the interests of the company at hand. It has also been indicated that when the external auditors came in to audit the books of accounts, he found out that a lot of money had been lost to fraud and mismanagement of resources. Max is said to have heard rumours that a number of community improvement programs had stopped due mismanagement and wastage of money by Tasman Callistemon, community engagement officer. Tasman Callistemon is said to have been given $ 100,000 for purposes of undertaking community improvement programs. However, because of lack of proper controls set in the company, Tasma Callistemon found loopholes to mismanage money. According to (), the responsibility of formulating and establishing effective controls meant to cub fraud rests with the management. Tasma Callistemon mismanaged money courtesy of the fact the controls in the organization were not working, an indication that the management failed to perform its duties. All the above cases are unethical and boil down to the agency conflict because of the failure of the management to act to the best interest of the shareholders. Conflict of interest Conflict of interest refers to a case where management or board of directors who have been entitled with management of resources start engaging in other affairs which do not amount to core activities of the company. According to, Richard Conti (2009)), an organization exists inorder to meet set objectives and goals. However, for these objectives to be met, commitment on the part of the management and shareholders is required. Therefore, when management starts engaging in other activities which are not in line with the core objectives of the company, they lose focus and commitment and may lead the company to acute failure due to non-achievement of objectives. As Aguinis and Bradley (2015) asserts that the achievement of organizational objectives is a measure of success. Max who is one of the directors of the company is always away from the management affairs of the company as he is said to trust the other three directors. Additionally, he is said to miss most of the board meetings, meetings which are ideally meant to help steer the company to the right direction. Similarly, Ben, who is one of the company’s directors and Saffron’s husband, is a professional accountant who has assumed that role of a financial advisor to the company. This signifies conflict of interest on his part because he can fail to offer objective financial advices to the company because of personal benefits. The APESB 110 code of ethics for professional accountants section 220.1 clarifies the issue of conflict of interest. According to the code of ethics, a member who’s is in public practice should take reasonable measures and steps that help identify circumstances which can lead to conflict of interest. Conflict of interest can easily lead to creation of threats to fundamental principles (APES 110 Code of Ethics for Professional Accountants, 2010). For example, a threat of objectivity and confidentiality may be created when a member in public service serves clients whose interests are in conflict with those of the organization. Conflict of interest is one of the unethical issues affecting corporate governance. Failure to take due care and unprofessionalism (professional competence and due care) One of the responsibilities of the management is to act to the best interest of the shareholders, and with utmost true faith (Vazquez, 2016). Additionally, the management is also required to exercise professionalism and due care. The management team is required to be professional transparent and conduct the affairs of the company with integrity (Murphy, 2016). In has been indicated in the case that the company employed Andy Agapanthus as the internal accountant who was later to become the senior accountant, supposedly to be responsible with preparation of the company’s financial statements. However, Andy unprofessionally delegated most of his duties to Conrad Conifer and Helen Hibiscus who are junior accountants in the company. Moreover, Conrad, one of the junior accountants is unprofessionally fit to do an accounting job because he has a law degree. This was one of the mistakes that Andy Agapanthus did because it is said to have been the one who recommended them for employment to the management. Therefore, it was wrong for Andy Agapanthus to have delegated work to people not considered to be professionally fit. Infact, it has been indicated that in most instances, the junior accountants had to make sensitive and technical decisions which were supposed to have been made by the senior accountant. This signifies unprofessionalism and failure to act with utmost due care. Ideally, during board meetings, the senior accountant is supposed to present financial reports to the management. However, this is not the case with the Andy Agapanthus, who has always been out on other matters and therefore delegating the most crucial duty to junior accountants who barely understand what need to be presented. Infact, it has been indicated in the case study that there is an instance where during one of the board meetings , the juniors accountants did not present a statement of changes in equity. This therefore shows the extent of unprofessionalism and the breach of the principle of utmost due care on the part of Andy Agapanthus, the senior accountant B Fundamental principles Professional competence and due care This principle states that a member of the professional body needs to maintain professional knowledge and skills to an extent or level required to ensure that the client or customers receives competent professional services. Additionally, a professional accountant is expected to act diligently and in accordance with professional standards. In the case study, the senior accountant, Andy Agapanthus breached the principle of professional competence and due care. This is demonstrated in the manner in which he acts. Accounting standards require that fundamental financial statements that need to be prepared at the end of the financial statement include the Statement of financial position, the income statement and the statement of changes in equity. However, the senior account never prepared the statement of changes in equity which is one of the fundamental statements that need to be prepared. This contravenes the accounting standards and shows lack of professionalism. According to APESB 110 code of conduct for professional accountant section 130.1, there is obligation s imposed by the principle of competence and due care (APES 110 Code of Ethics for Professional Accountants, 2010). The first obligation imposed is that members should maintain professional knowledge and skills to the level that clients receive professional services. Additionally, another obligation imposed by the standards is that the member of the professional body should act diligently in accordance with set standards. Professional competence and due care entails exercising sound judgment in application of professional knowledge and skills in performance of accounting services. Objectivity The principle of objectivity states that a professional accountant is not supposed to allow bias, conflict of interest and undue influence of others to affect professional judgment. If the principle if contravened, it means that most of the decisions made will lack objectivity and may result to closure and termination of business activities. From the case study, the senior accountant, Andy Agapanthus was in involved in other matters like marketing, which amounts to conflict of interest. Andy Agapanthus is a professional accountant is supposedly required to deal with matters accounting but in the case study, he is presented as one who is engaged in other matters which are not related this professional duty. He is said to be involved in marketing matters which hinder him from objectively delivering his accounting duties, which he was ideally employed to do. Infact, the case study indicates that when the junior accountants, Conrad Conifer and Helen Hibiscus, were presenting accounting reports to the board of directors, the senior accountant, Andy Agapanthus, was not around. It has been indicated in the case that he was out of the country to attend to matters relating to the expansion of the business. This therefore amounts to lack of objectivity What I believe is the ethical course of action for the party. Delegation, according to Chou (2014)), entails allowing somebody else to act on your behalf. So ideally, according to Chou (2014), delegation is accepted and infact is a powerful management function that fosters the spirit of togetherness and belonging. Additionally, it is a training tool which can be used by a senior person to train his juniors. However, TOMARU, NAKAMURA and SAITO (2011)) asserts that a number of important factors need to be considered before delegation is done. One of such factors include considering the experience of the person to be delegated the job. It is important to consider experience because that ensures s that the right thing is done besides ensuring that the person is conversant with what is being done. Another important thing to be done during delegation is close supervision and monitoring. Close supervision and monitoring ensures that the right thing is done by those the job has been delegated to. In the case study, the senior accountant Andy Agapanthus has been presented to delegate most of his work to his junior subordinates, Conrad Conifer and Helen Hibiscus. The two junior accountants are inexperienced and therefore not fit to do some duties. Infact, the extent of Andy Agapanthus delegation is wanting because he delegates very important duties which are supposedly required to be done by him and him alone. The case study clearly indicates that there are instances where the junior accountants had to make crucial and key decisions which were supposedly required to have been made by the senior accountant alone. Another mistake that Andy Agapanthus did was to delegate work without close supervision and monitoring. Infact, the case study notes that during the board meeting, Andy Agapanthus was not there because he was out on other matters. I believe the ethical course of action was to delegate but after considering the level of skills and expertise. Additionally, Andy Agapanthus should not have delegated some crucial matters that require his personal presence. For instance the preparation of financial statements required his presence to ensure that all financial statements are prepared, accompanied with required notes to accounts. I also belief ethically , he was supposed to be there to also ensure that financial statements are prepared according to the required standards and that confidentiality is maintained. C. Proposed course of action The propose course of action stated above include ensuring that proper delegation is done. This is to ensure that the right thing is done and in the correct manner. This is in line with the principle of professional competence and due care which states that in the preparation of financial statements, care must be taken to ensure that financial statements are prepared according to required standards. Additionally, the principle states that financial statements must be prepared by competent individuals. Another recommendation was that Andy Agapanthus should have monitored his delegation process to ensure that the process is done by the right people inorder to maintain objectivity and confidentiality. This is in accordance with the principle of objectivity and confidentiality stipulated or set out in the APESB 110 Code of Ethics for Professional Accountants section 100.5. References Aguinis, H. and Bradley, K. (2015). The secret sauce for organizational success. Organizational Dynamics, 44(3), pp.161-168. APES 110 Code of Ethics for Professional Accountants. (2010). APES 110 Code of Ethics for Professional Accountants. [online] Available at: http://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 24 Mar. 2017]. CHEN, C., LU, H. and SOUGIANNIS, T. (2011). The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs*. Contemporary Accounting Research, 29(1), pp.252-282. Chou, C. (2014). Strategic Delegation and Vertical Integration. Managerial and Decision Economics, 35(8), pp.580-586. Filatotchev, I. and Wright, M. (2010). Agency Perspectives on Corporate Governance of Multinational Enterprises. Journal of Management Studies, p.no-no. Gorganlidavaji, J. and Mikaeeli, M. (2015). The Relationship between Corporate Governance Mechanisms and the Agency Costs in the Agency Theory Framework. Asian Journal of Research in Banking and Finance, 5(1), p.69. Murphy, B. (2016). Professional competence and continuing professional development in accounting: professional practice vs. non-practice. Accounting Education, pp.1-19. Richard Conti, C. (2009). Conflict of Interest. Clinical Cardiology, 32(12), pp.666-667. TOMARU, Y., NAKAMURA, Y. and SAITO, M. (2011). STRATEGIC MANAGERIAL DELEGATION IN A MIXED DUOPOLY WITH CAPACITY CHOICE: PARTIAL DELEGATION OR FULL DELEGATION*. The Manchester School, 79(4), pp.811-838. Vazquez, P. (2016). Family Business Ethics: At the Crossroads of Business Ethics and Family Business. Journal of Business Ethics. Read More