Ethics Resources for Accounting Professionals

Case Study: Financial Controller is No Easy Job

Rex was employed as the Financial Controller of an expanding IT company which was planning to go public. In order to project a good financial performance, Andy, the Managing Director hinted that Rex should handle the financial estimates and anticipate sales growth meticulously.

Andy also made it clear to Rex that he did not care about what accounting method he would use.

In selecting the merchant bank to arrange for the listing, Rex's recommendation would be considered seriously by the board. Different bank managers approached Rex to promote their services.

Ben, who was the Marketing Director of ABC Bank, called Rex's office. After introducing the bank's offer, Ben further mentioned that he was currently handling acquisition plans of other listed companies.

He promised to release some "valuable information" to Rex if he helped him get the business. Rex did not take Ben's words seriously.

Based on the objective report Rex prepared, ABC Bank was engaged by the board to proceed with the listing of the company.

Finally, the company was successfully listed.

Rex divulged to Yuki, his wife that his company was undertaking some merger and acquisition plans which might boost the share price of the company. However, the Managing Director asked him to manipulate some management accounting data so as to facilitate the granting of credit facilities by some banks.

In a reunion of schoolmates, Yuki met Ben, one of her old best friends. Yuki sought advice from Ben regarding the difficulties her husband faced. Yuki did not know the relationship between Ben and her husband's company.

Ben called and invited Rex for dinner, saying that he would keep his promise of passing some "valuable information" to Rex.

Besides, he said he could offer golf club membership to Rex if he could provide some useful information about his company's merger and acquisition plans to him.

If you were Rex, what would you do?
Has Rex done anything wrong?

Financial Projection for Listing

Rex should always handle the financial estimates and anticipate sales growth meticulously. He should document his bases of assumptions and agree them with the Managing Director. All these should be reviewed by the reporting accountant as well as the bank which sponsored the listing, 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 was not concerned with what accounting method Rex used, Rex should ensure that the accounting method complied with the accounting standards prescribed by law and regulation and was relevant to the company's circumstance.

Request for Manipulation of Accounting Data

Rex should explain to the Managing Director that, first of all, a wilful act of manipulation of accounting data would be a criminal offence. Secondly, accounting information presented to banks would most likely be audited. Once the banks realised that there were significant discrepancies between the 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 scenario, banks could withdraw the financial support to the company.

Offering of "Valuable Information" and Advantage

The "valuable information" provided by Ben was likely insider information which, if used to deal in listed securities, could cause severe legal consequences. Rex should make it clear to Ben that his evaluation of the bank was conducted in an objective manner and there would be no need for Ben to reciprocate with any "gift" for him.

Although having dinner with Ben was a social activity, Rex should still be careful. If Ben disclosed any valuable information during their conversation, Rex should not deal, counsel nor persuade other persons to deal in the securities. Otherwise, he would breach the SFO.

Rex would have committed an offence under the POBO if he accepted the golf club membership from Ben and disclosed to him the useful information about his company's merger and acquisition plans as a trade. In fact, Rex should clearly reject the offer and report to the Independent Commission Against Corruption (ICAC) if being offered a bribe.

Handling of Confidential Information

One of the fundamental principles which professional accountants should comply with is confidentiality. They should respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of themselves or any third parties. Rex should be cautious not to disclose his company's merger and acquisition plans to anyone, including his wife and/or other relatives/friends, as such information was highly confidential and could affect the share price of the company.