Section A – This ONE question is compulsory and M
Section B – TWO questions ONLY to be attempted
1 Rowlands & Medeleev (R&M), a major listed European civil engineering company, was successful in its bid to become
principal (lead) contractor to build the Giant Dam Project in an East Asian country. The board of R&M prided itself in
observing the highest standards of corporate governance. R&M’s client, the government of the East Asian country, had
taken into account several factors in appointing the principal contractor including each bidder’s track record in large
civil engineering projects, the value of the bid and a statement, required from each bidder, on how it would deal with
the ‘sensitive issues’ and publicity that might arise as a result of the project.
The Giant Dam Project was seen as vital to the East Asian country’s economic development as it would provide a
large amount of hydroelectric power. This was seen as a ‘clean energy’ driver of future economic growth. The
government was keen to point out that because hydroelectric power did not involve the burning of fossil fuels, the
power would be environmentally clean and would contribute to the East Asian country’s ability to meet its
internationally agreed carbon emission targets. This, in turn, would contribute to the reduction of greenhouse gases
in the environment. Critics, such as the environmental pressure group ‘Stop-the-dam’, however, argued that the
project was far too large and the cost to the local environment would be unacceptable. Stop-the-dam was highly
organised and, according to press reports in Europe, was capable of disrupting progress on the dam by measures such
as creating ‘human barriers’ to the site and hiding people in tunnels who would have to be physically removed before
proceeding. A spokesman for Stop-the-dam said it would definitely be attempting to resist the Giant Dam Project when
The project was intended to dam one of the region’s largest rivers, thus creating a massive lake behind it. The lake
would, the critics claimed, not only displace an estimated 100,000 people from their homes, but would also flood
productive farmland and destroy several rare plant and animal habitats. A number of important archaeological sites
would also be lost. The largest community to be relocated was the indigenous First Nation people who had lived on
and farmed the land for an estimated thousand years. A spokesman for the First Nation community said that the ‘true
price’ of hydroelectric power was ‘misery and cruelty’. A press report said that whilst the First Nation would be unlikely
to disrupt the building of the dam, it was highly likely that they would protest and also attempt to mobilise opinion in
other parts of the world against the Giant Dam Project.
The board of R&M was fully aware of the controversy when it submitted its tender to build the dam. The finance
director, Sally Grignard, had insisted on putting an amount into the tender for the management of ‘local risks’. Sally
was also responsible for the financing of the project for R&M. Although the client was expected to release money in
several ‘interim payments’ as the various parts of the project were completed to strict time deadlines, she anticipated
a number of working capital challenges for R&M, especially near the beginning where a number of early stage costs
would need to be incurred. There would, she explained, also be financing issues in managing the cash flows to R&M’s
many subcontractors. Although the major banks financed the client through a lending syndicate, R&M’s usual bank
said it was wary of lending directly to R&M for the Giant Dam Project because of the potential negative publicity that
might result. Another bank said it would provide R&M with its early stage working capital needs on the understanding
that its involvement in financing R&M to undertake the Giant Dam Project was not disclosed. A press statement from
Stop-the-dam said that it would do all it could to discover R&M’s financial lenders and publicly expose them. Sally
told the R&M board that some debt financing would be essential until the first interim payments from the client
When it was announced that R&M had won the contract to build the Giant Dam Project, some of its institutional
shareholders contacted Richard Markovnikoff, the chairman. They wanted reassurance that the company had fully
taken the environmental issues and other risks into account. One fund manager asked if Mr Markovnikoff could
explain the sustainability implications of the project to assess whether R&M shares were still suitable for his
environmentally sensitive clients. Mr Markovnikoff said, through the company’s investor relations department, that he
intended to give a statement at the next annual general meeting (AGM) that he hoped would address these
environmental concerns. He would also, he said, make a statement on the importance of confidentiality in the
financing of the early stage working capital needs.
(a) Any large project such as the Giant Dam Project has a number of stakeholders.
(i) Define the terms ‘stakeholder’ and ‘stakeholder claim’, and identify from the case FOUR of R&M’s
external stakeholders as it carries out the Giant Dam Project; (6 marks)
(ii) Describe the claim of each of the four identified stakeholders. (4 marks)
(b) Describe a framework to assess the risks to the progress of the Giant Dam Project. Your answer should
include a diagram to represent the framework. (6 marks)
(c) Using information from the case, assess THREE risks to the Giant Dam Project. (9 marks)
(d) Prepare the statement for Mr Markovnikoff to read out at the AGM. The statement you construct should
contain the following.
(i) A definition and brief explanation of ‘sustainable development’; (3 marks)
(ii) An evaluation of the environmental and sustainability implications of the Giant Dam Project; (8 marks)
(iii) A statement on the importance of confidentiality in the financing of the early stage working capital needs
and an explanation of how this conflicts with the duty of transparency in matters of corporate
governance. (6 marks)
Professional marks for layout, logical flow and persuasiveness of the statement. (4 marks)
(e) Internal controls are very important in a complex civil engineering project such as the Giant Dam Project.
Describe the difficulties of maintaining sound internal controls in the Giant Dam Project created by working
through sub-contractors. (4 marks)
2 It was the final day of a two-week-long audit of Van Buren Company, a longstanding client of Fillmore Pierce Auditors.
In the afternoon, Anne Hayes, a recently qualified accountant and member of the audit team, was following an audit
trail on some cash payments when she discovered what she described to the audit partner, Zachary Lincoln, as an
‘irregularity’. A large and material cash payment had been recorded with no recipient named. The corresponding
invoice was handwritten on a scrap of paper and the signature was illegible.
Zachary, the audit partner, was under pressure to finish the audit that afternoon. He advised Anne to seek an
explanation from Frank Monroe, the client’s finance director. Zachary told her that Van Buren was a longstanding client
of Fillmore Pierce and he would be surprised if there was anything unethical or illegal about the payment. He said
that he had personally been involved in the Van Buren audit for the last eight years and that it had always been
without incident. He also said that Frank Monroe was an old friend of his from university days and that he was certain
that he wouldn’t approve anything unethical or illegal. Zachary said that Fillmore Pierce had also done some
consultancy for Van Buren so it was a very important client that he didn’t want Anne to upset with unwelcome and
When Anne sought an explanation from Mr Monroe, she was told that nobody could remember what the payment
was for but that she had to recognise that ‘real’ audits were sometimes a bit messy and that not all audit trails would
end as she might like them to. He also reminded her that it was the final day and both he and the audit firm were
under time pressure to conclude business and get the audit signed off.
When Anne told Zachary what Frank had said, Zachary agreed not to get the audit signed off without Anne’s support,
but warned her that she should be very certain that the irregularity was worth delaying the signoff for. It was therefore
now Anne’s decision whether to extend the audit or have it signed off by the end of Friday afternoon.
(a) Explain why ‘auditor independence’ is necessary in auditor-client relationships and describe THREE threats
to auditor independence in the case. (9 marks)
(b) Anne is experiencing some tension due to the conflict between her duties and responsibilities as an employee of
Fillmore Pierce and as a qualified professional accountant.
(i) Compare and contrast her duties and responsibilities in the two roles of employee and professional
accountant. (6 marks)