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Loyalty to Employer vs Responsibilities to Other Stakeholders

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Patrick was a financial controller of an information technology company planning to go public.  In order to project a good financial performance, the Managing Director asked Patrick to handle the financial estimate and anticipate sales growth meticulously and said he would not bother which accounting method to use as Patrick was a professional accountant.


In the process of selecting a merchant bank to sponsor the listing, different bank managers approached Patrick to promote their services.  Benny, who was the Marketing Director of the OPQ Bank, met Patrick and introduced the bank’s offer. Benny mentioned that he was currently handling an acquisition plan and could release some reliable information to Patrick if Patrick could help him get the business.  Patrick didn't take Benny's words seriously.  Based on the objective report he prepared, OPQ Bank was engaged to proceed with the listing of the company. Finally, the company was successfully listed. 


The directors were enthusiastically considering some expansion plans which needed the support from banks.  Once again, the Managing Director asked Patrick to manipulate some management accounting data to facilitate the granting of credit facilities by banks.   


While Patrick was contemplating how to handle the Managing Director's request, the Assistant to General Manager asked Patrick to issue a cheque of $80,000 to a Mr. Wong, a bank manager in charge of the credit department.  The Assistant said that it was approved by the General Manager and all Patrick needed to do was to sign the cheque and book it as "entertainment" expenses.  


After the Assistant to General Manager left, the phone rang.  It was Benny of OPQ Bank.  He invited Patrick to dinner saying that he would keep his promise of passing some "valuable information" to Patrick.


If you were Patrick, how would you handle the requests of the Managing Director and that of the Assistant to General Manager, as well as the invitation of Benny to dinner?

Case Analysis

Financial Projection for Listing


Surely Patrick should handle the financial estimates and anticipated sales growth meticulously.  He should document his bases of assumptions and agree those with the Managing Director.  All these would be reviewed by the merchant bank which sponsored the listing as well as the reporting accountant, and the eventual delivery of the forecasts would be a matter of public and regulatory scrutiny once the company got listed.  Although the Managing Director did not bother which accounting method to use, Patrick should ensure that the accounting method followed all applicable Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and interpretations issued by the Hong Kong Institute of Certified Public Accountants.


Managing Director's Request for Manipulation of Management Accounting Data


Patrick should explain to the Managing Director that, first of all, a wilful act of manipulation of accounting data is a criminal offence.  Secondly, accounting information presented to banks would most likely be audited.  Once the banks realised that there were significant discrepancies between management accounting data previously presented and the audited accounting data, they would ask for explanations which would well call into question the credibility of the company.  In the worst case, banks could withdraw financial support to the company.


Request for a Cheque by the Assistant to General Manager


It would be a breach of the Section 9(3) of the Prevention of Bribery Ordinance (POBO) if the General Manger used false document e.g. false reimbursement records, to deceive his company. Furthermore, if the cheque payment was offered by the General Manager to the Mr Wong as an advantage in disguise to induce or reward for latter’s assistance in granting credit facilities to the company, both the General Manager and Mr Wong would breach Section 9 of the POBO.


Patrick should report the matter to the Managing Director and explain the legal consequences of being involved in such an act.  Patrick should take the opportunity to urge the Managing Director to issue a set of code of conduct to strengthen internal control of the company. He should report to the ICAC if corruption was suspected.


Offering of ‘Valuable Information'


The valuable information provided by Benny is likely to be insider information which, if used to deal in listed securities, could have severe legal consequences.  Patrick should make it clear to Benny that his evaluation of the banks was done in an objective manner and there would be no need for Benny to reciprocate with any 'gift' as a result of OPQ bank being appointed.  If Patrick's dinner with Benny is no more than a social entertainment, Patrick does not need to avoid it.  If by accident Patrick had heard of the valuable information from Benny but he did not deal, counsel nor procure other persons to deal in the securities, he would not breach the insider dealing provisions under the Securities and Futures Ordinance.

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