CAS E S T UDY T O P IC 4 .0: E THICAL C ONF L IC AND DI L EMMAS T O P IC 5 .0: C O RP O RAT E G O V ERNANCE AND C O RP O RAT S O CIAL RE S P ONS IBI L I TY PRE PARE D BY: KHAIR U N N I SA HU S N A B I N T I MUHAME D (1 8 D AT 2OF 201 2 ) N U R U L HU D A B I N T I AB D U L LAH (1 8 D AT 2OF 2004 ) AI N MAR DHIAH B I N T I AZMA N (1 8 D AT 2OF 2006 ) N U RSHAF IQA B I N T I SA N I DON (1 8 D AT 20F 201 6 ) L ECT U RER N AME : N U R AZRE E N AZRIA N A B I N T I AZHA N DPA50713: PROFESSIONAL ETHICS
NURUL HUDA BINTI ABDULLAH AIN MARDHIAH BINTI AZMAN KHAIRUNNISA HUSNA BINTI MUHAMED NURSHAFIQA BINTI SANIDON GROUP MEMBERS ”Yourreputationismore importantthanyourpaycheck,and yourintegrity isworththanyourcareer”_RyanFreitas QUOTES
LINEAR CORPORATION BHD'S SCANDAL Review the corporate governance issue The Linear Corporation Bhd's scandal in Malaysia in 1997 was one of the biggest corporate governance issues in the country. The scandal involves the manipulation of the company’s financial statements in order to boost the company’s profits, resulting in a false representation of the company's financial condition. The fraudulent activities were carried out by top management and company officials in collusion with outside parties. Alan Rajendram Jeya Rajendram, a former director of Linear Corporation Bh, paid out RM36 million in cash without obtaining board approval. This indicates a failure in the company's internal controls and decisionmaking processes. Best practices in corporate governance require appropriate levels of oversight and approval for significant financial transactions to ensure transparency, accountability, and the prevention of potential fraud or mismanagement. After the payment was made, it was discovered that there was no evidence of significant progress in executing the contract, and there was no documented evidence demonstrating the viability of the King Dome project. This raises concerns about the due diligence performed by the company and the management's ability to assess and manage risks effectively. Corporate governance principles emphasize the importance of thorough project evaluation and monitoring to ensure that investments are viable and deliver the intended benefits. Alan Rajendram was charged with authorizing the furnishing of a false statement to Bursa Malaysia. Providing false information to regulatory authorities violates corporate governance principles of transparency, integrity, and accountability. Accurate and timely reporting of financial and non-financial information is crucial for stakeholders' trust and confidence in the company. 2 LACK OF PROGRESS AND VIABILITY 1 LACK OF BOARD APPROVAL 3 FURNISHING FALSE STATEMENT THE CORPORATE GOVERNANCE ISSUE IN THIS SCANDAL IS
If you were Alan, what is the best practice that you should conduct? If I were Liner Corporation Bhd's former director, Alan Rajendram Jeya Rajendram, the best practice that I should conduct is to uphold my fiduciary duty to the company and its shareholders. This means acting in the best interest of the company, avoiding conflicts of interest, and ensuring transparency and accountability in all my dealings. Specifically,I should: As a director, Alan should have followed the company's internal controls and procedures, including obtaining proper board approval for significant financial transactions. This would ensure that decision-making processes are transparent, accountable, and in compliance with corporate governance standards. 1. ADHERENCE TO INTERNAL CONTROLS 2. DUE DILIGENCE AND RISK ASSESSMENT Before authorizing the payment of RM36 million, Alan should have conducted thorough due diligence on the King Dome project. This would involve assessing the project's viability, reviewing progress reports, and ensuring that there is sufficient evidence to support the project's execution. Robust risk assessment and mitigation strategies should be implemented to minimize potential risks and protect the company's interests. 3. ETHICAL CONDUCT AND INTEGRITY Alan should have maintained high ethical standards and integrity throughout his actions. Authorizing the furnishing of a false statement is a violation of corporate governance principles. Acting with honesty, transparency, and integrity is essential for preserving the trust of stakeholders and upholding the reputation of the company. 4. COMPLIANCE WITH REGULATORY REQUIREMENTS Alan should have complied with all relevant legal and regulatory requirements, including providing accurate and truthful information to regulatory authorities such as Bursa Malaysia. Providing false statements undermines the credibility of the company and can lead to legal consequences. 5. RESPONSIBLE LEADERSHIP As a director, Alan should have exercised responsible leadership by prioritizing the best interests of the company and its stakeholders. This includes acting in a diligent and conscientious manner, promoting good governance practices, and fostering a culture of compliance and ethical behavior within the organization.
Dato' Kamil mentioned that the external audit practice is run by the Chief Executive Officer's son, implying a potential conflict of interest. Independence and objectivity are crucial for external auditors to provide unbiased opinions on the company's financial statements. The close relationship between the CEO and the external auditors raises concerns about the auditors' independence and the objectivity of their work. In this case, Dato' Kamil believes that all members of the audit committee should be professional IT engineers to understand the industry and its technical challenges fully. While industry knowledge is valuable, best practices recommend having a diverse range of skills and expertise within the audit committee, including financial, accounting, and internal control expertise. It may not be necessary for all members to be IT engineers, but having at least one member with strong IT knowledge would be beneficial for an ICT company like Excellent Berhad. LIMITED IT EXPERTISE 2 The Audit Committee members only met with the external auditors once in the previous year. Effective oversight of financial reporting requires regular and meaningful interactions with external auditors. Best practices suggest that audit committees should maintain a robust and continuous relationship with external auditors, including regular meetings, discussions of audit findings, and evaluation of their independence and performance. Besides that, insufficient communication with management and auditors. A well-functioning audit committee should communicate regularly with both internal and external auditors, as well as with company management, to ensure they have sufficient information to identify and address risks to the company. INADEQUATED ENGAGEMENT WITH EXTERNAL AUDITOR: 3 If the audit committee members have close ties or relationships with company management, there may be a risk of bias or conflicts of interest that could compromise the committee's ability to provide impartial oversight. In this case, All four members of the Audit Committee are non-independent nonexecutive directors and recently retired members of Excellent Berhad's management board. This lack of independence raises concerns about their ability to provide unbiased oversight and challenge management effectively. Best practices suggest that audit committee members should be independent and free from any conflicts of interest. LACK OF INDEPENDENCE 1 POTENTIAL CONFLICT OF INTEREST WITH EXTERNAL AUDITORS: 4 Judge the way in which Excellent Berhad audit committee has failed to meet the best practice. Based on the case, there are several ways in which Excellent Berhad's audit committee has failed to meet best practices: EXCELLENT BERHAD
Why audit committee responsible for overseeing the internal audit function Independent and objective oversight Monitoring complianc e Assessing risk and control Accountability The audit committee is responsible for overseeing the internal audit function because it plays a critical role in helping the committee fulfill its responsibilities. The internal audit function is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It provides an organization with a systematic and disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. The reasons for audit comitte responsible for overseeing the internal control is : The internal audit function provides an independent and objective assessment of the organization's operations. It is essential that the audit committee oversees the internal audit function to ensure that it remains independent and objective in its work. This independence is crucial for maintaining the integrity of the company's internal audit processes. The internal audit function assesses the effectiveness of the organization's risk management and control processes. The audit committee assists the board of directors in identifying and managing risks by monitoring the effectiveness of internal controls and risk management processes. They help to ensure that the internal audit function adequately addresses the company's risk profile and helps in mitigating potential risks. The internal audit function monitors the organization's compliance with laws, regulations, and policies. The audit committee needs to oversee this function to ensure that the organization is complying with all applicable laws and regulations. Their role is vital in promoting good governance and ethical conduct within the organization. The audit committee holds the internal auditors accountable for their work by reviewing their performance, ensuring they have the necessary resources and expertise, and evaluating the effectiveness of internal controls and risk management systems. They play a key role in ensuring that internal auditors are fulfilling their responsibilities effectively.
The concept of independence requires that members of the audit committee be free from any influence or conflicts of interest that could impair their ability to carry out their responsibilities objectively. Review whether Excellent Berhad comply with the concept of independence Lack of Independent Directors All members of the Audit Committee are nonindependent non-executive directors and recently retired members of Excellent Berhad's management board. Independence is a fundamental principle of good corporate governance, and having a majority of independent directors on the audit committee is recommended. Independent directors are expected to bring objectivity, critical thinking, and an external perspective to the committee's oversight responsibilities. In this case, Excellent Berhad does not comply with the concept of independence in several ways: Potential Conflict of Interest: The fact that the external audit practice is run by the Chief Executive Officer's son raises concerns about the independence and objectivity of the external auditors. It is essential for external auditors to be free from any conflicts of interest and perceived as independent to maintain the credibility of their work. The close relationship between the CEO and the external auditors may compromise their independence and raise In corporate governance, independence is important in a number of contexts. It is vital that external auditors are independent of their clients, that internal auditors are independent of the colleagues they are auditing, and that non-executive directors have a degree of independence from their executive colleagues on a board. Independence is a quality that can be possessed by individuals and is an essential component of professionalism and professional behaviour. It refers to the avoidance of being unduly influenced by a vested interest and to being free from any constraints that would prevent a correct course of action being taken. It is an ability to ‘stand apart’ from inappropriate influences and to be free of managerial capture, to be able to make the correct and uncontaminated decision on a given issue