Corporate Governance

TUNKU ABDUL RAHMAN UNIVERSITY COLLEGE

Faculty of Accountancy, Finance and Business

Corporate Governance and Ethics Exercise

VSYS plc manufactures a range of computer products including silicon chips, hard drives and advanced graphic cards from its single factory located in a medium-sized town in central UK. About 20% of the working population are employed by the company, and it has a reputation for being a good employer with specific focus on maintaining and enhancing benefits for its employees. A local university runs courses specifically for potential employees of the company.

Although the company is profitable, the recent management accounts show falling margins with the possibility of loss being made next year, the first in the 25 year history of the company. The main reasons for the falling profits has been identified as increasing competition from manufacturers in the Far East., and ongoing quality control issues with several lay manufacturers. A recent feasibility study shows that moving production to a Far Eastern country would enable the company to take advantage of lower labour costs and proximity to suppliers of high quality components. The administration and marketing functions would remain at their current location. While a final decision has yet to be made, the board is aware of the negative impact this would have on the image of the company and are therefore reluctant to make a firm commitment.      

Movement of production systems to the Far East is seen as a particular problem to the company. Specific areas of concern include:

i).    Obtaining and maintaining supplies from new suppliers

ii).   Setting up production lines with new workforce and new machinery

iii). Maintaining sufficient inventory of materials to meet demand when the delivery times are uncertain

iv). Implementing any necessary revisions to the management accounting systems

However, the board is confident that the move will be successful and looks forward to a positive response from workers and shareholders.

a) Explain how a sound system of internal control and internal audit can enhance corporate governance.

b) Assess the problems with the internal control systems that have been highlighted by the decisions to outsource to the Far East and briefly recommend ways in which those problems can be minimized.

c) Demonstrate why the company’s plan to outsource to the Far East represent a change in its social responsibility stance and assess the consequences of a change in stance.  

Lim may2016  

Answer Guide

(a) Internal control system

The responsibility of putting in place an internal control system lies with the board for that forms of their duty in managing the company. Internal control system will ensure the company has proper records of their assets and transactions. UK Turnbull Report provides a guideline:

Turnbull Report states:

Internal control system should –

1. facilitate an effective and efficient operation of the company. It enables the company to respond to specific risk to prevent it from achieving its objectives. The risks may be operational, financial or compliance.

2. provide for quality internal and external reporting.  This means the company must have transparent, understandable and up-to-date internal control structure and processes together with equally transparent, understandable and up-to-date external reporting for the benefit of   shareholders or investors 

3. ensure compliance with laws and regulations. This means the company must comply with all the laws and regulations in the conduct of its business.

However, Turnbull Report emphasized that the internal control system must be sound. It recognized that the system might not give complete assurance but having a sound system enables the company to minimize any occurrence of loss or fraud due to poor management