Margaret was involved in a conflict of interest situation for operating bogus companies to supply materials to XYZ Co. Ltd. Moreover, she might have breached Section 9 of the POBO for accepting secret commissions from other suppliers in awarding contracts for XYZ Co. Ltd. and Section 9(3) of the POBO if she intended to deceive her company by using false documents to claim private expenses or to deceive the company in the procurement process.

In view of the response from the Managing Director, Ernest should report to the Audit Committee or the Board of Directors of XYZ Co. Ltd., setting out the details of his findings of Margaret's malpractice.

If the committee or the board does not take appropriate action, then Ernest should consider reporting the matter to the appropriate authorities after seeking legal advice. While maintaining confidentiality of company matters is important, Ernest must also consider relevant laws or regulations and weigh the public interest in deciding whether to disclose such matters to the appropriate authorities.

In the worst case scenario, Ernest should be prepared to resign from XYZ Co. Ltd., given that he no longer had confidence in the integrity of those charged with governance of the company.

Audit Committee

According to the Listing Rules, every listed issuer must establish an Audit Committee comprising non-executive directors only and chaired by an independent non-executive director. The Audit Committee must have a majority of independent non-executive directors, a minimum of three members, and at least one of whom is an independent non-executive director with appropriate professional qualifications or accounting or related financial management expertise.

The Audit Committee's tasks include reviewing the company's governance and risk management systems. To achieve this, it should utilise the skills and expertise of the internal audit function, affirming the scope of its work, its priorities and resources. It should also ensure that internal audit is free to work independently and objectively, i.e. free from any influence of those being audited.

Whistle-blowing Policy

According to the Listing Rules Appendix 14 Corporate Governance Code and Corporate Governance Report issued by the Hong Kong Exchanges and Clearing Limited, it is a recommended best practice that the Audit Committee establishes a whistle-blowing policy and system for employees and those who deal with the issuer (e.g. customers, suppliers) to raise concerns, in confidence, with the Audit Committee about possible improprieties.

The whistle-blowing policy should include the following and be communicated to all staff:

• A statement to encourage reporting of actual or potential misconduct or malpractice by any staff of the company, irrespective of his/her rank, in relation to the company's business;
• Examples of misconduct to which the whistle-blowing policy applies, and illustrating the level of substantiation that may justify reporting;
• Encouragement of staff to seek guidance from appropriate, designated office(s) in case of doubt about particular situations or practices which may involve or give rise to misconduct or malpractice;
• A statement pledging confidentiality of the identity of the whistle-blower and the details of the report, and assurance of fair treatment and protection from retaliation;
• A policy against the consequence of knowingly/irresponsibly making false allegations or malicious allegations;
• The reporting/consultation channels and reporting mechanisms;
• The procedures/mechanism for handling reports; and
• A statement pledging timely handling of all reported issues.