Section B – TWO questions ONLY to be attemptedArthur Jellicoe has been the chief executive

Section B – TWO questions ONLY to be attempted

Arthur Jellicoe has been the chief executive officer (CEO) of Scapa Holdings, a listed company, for over 15 years, during which time the company has been very successful in capturing market share and achieving levels of profitability well in excess of it direct competition. Much of this success has been credited specifically to the way Arthur has managed the company. So when he advised the board at its last meeting that he plans to retire at the end of the year, there was real concern about appointing his successor. Scapa Holdings is particularly aware that any uncertainty which may arise during the CEO transitional period could result in a fall in share price, which they clearly wish to avoid.

The remuneration policy at Scapa Holdings includes a provision for awarding significant share options to executive directors when the company attains high levels of performance. For many years the targets set by the remuneration committee have been exceeded, so Arthur has accumulated a large number of share options which he can exercise any time over the next year. As part of his retirement planning, Arthur has consulted with an independent financial adviser who has recommended that he exercises his share options before he retires because they will deliver a tax efficient capital gain which he can then invest for his future. Clearly it will be in Arthur’s best interest to choose an exercise date when the share price is trading at its highest. So when a new contract opportunity was tabled by the sales director, which would clearly increase the company’s share price this year, Arthur was an enthusiastic supporter. Unfortunately, the finance director advised the board that its bank loan contained a restrictive covenant requiring the company to maintain interest cover of four times its pre-tax profit. Although Scapa Holdings has always been able meet this loan condition, the finance director is concerned that the further investment in the working capital needed for the proposed new contract presented a significant risk of breaching the loan covenant.

To address this issue the CEO suggested that inventory could be valued differently in order to report a higher profit figure, and thereby increase the level of interest cover. He further suggested that ‘this minor policy change would not be opposed by shareholders’ as it would undoubtedly increase the value of the share price. He also advised the board that he was sure that he could use his longstanding friendship with the engagement partner of Scapa Holdings’ auditors, who he had trained with as an accountant many years ago, to convince the audit team to agree with the higher inventory valuation during the forthcoming audit.

Required:

(a) An inherent risk in any listed company is that its directors have the power to pursue their own personal interests, which may not be aligned with their fiduciary duties towards shareholders.

Explain the term conflict of interest in this context, and using information from the scenario, discuss how Arthur Jellicoe’s behaviour presents a clear conflict of interest, stating what course of action he should take. (8 marks)

(b) Describe the agency relationships at Scapa Holdings, and explain how clear accountability could increase trust between principal and agent thereby reducing agency costs. (9 marks)

(c) Explain the meaning of ‘probity’ when maintaining professional business relationships as described in the scenario, and criticise the ethical behaviour of Arthur Jellicoe with respect to probity. (8 marks)

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  • 提问人:00****98
  • 发布时间:2018-02-28
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