MAA 763 Governance and Fraud – T2 2015
Second assignment
Individual Assignment
Due date 28th September, Monday 11.59pm.
30% final mark (Total 3,000 words maximum)
Part 1 - 1,500 words maximum
Part 2 - 1,500 words maximum
This assignment requires students to work individually and apply discipline specific knowledge (GLO1), involving critical thinking (GLO4) and problem solving (GLO5) in a written form (GLO2).
Part 1 Answer the following questions based on the case study below:
Alex McAdams, the recently retired CEO of Athletic Shoes, was honoured to be asked to join the Board of Consolidated Mins (CMI) International Inc. Alex continues to sit on the Board of Athletic Shoes, as well as the Board of Pharma Advantage another publicly traded company on the New York Stock Exchange. However, CMI, as it is known, is a major step up for Alex.
CMI was formed as the United Mines Company in the 1870s, by an American railway magnate, and in 1985 it became Consolidated Mines International Inc. It operates mines in Central America and northern South America. In 2004, its revenue were approximately $4.5 billion and it employed about 25,000 people worldwide.
In deciding whether to accept the board seat, Alex conducted his own due diligence. As a result, there were two issues that he wanted to raise with Cameron Derry, the CEO of CMI. One concerned the allegations of questionable business practices. The other concerned the political instability in several of the Latin American countries in which the CMI mines are located. Today Alex was meeting with Cameron at the Long Bar Lounge.
During lunch Cameron candidly talked about the history of the company and the bad press that it often received. “In the 1920s we were accused of bribing government officials and using our political connections to have unions outlawed. In the 1950s we were accused of participating in the overthrow of a Latin American government. In the 1990s there were charges that we were exploiting our employees, polluting the environment, and facilitating the importation of cocaine into the U.S. But, none of these allegations has ever been proven in court of law,” said Cameron. “And we’ve even successfully sued one newspaper chain that published a series of these unproven stories about us”.
“As for the political environment, Alex, you’re right. There is no effective government in many of the countries in which we operate. In fact it is often the paramilitary that are in control of the countryside where we have our mines. These are very unsavoury organizations, Alex. They have their own death squads. They have been involved in the massacre, assassination, kidnapping, and torture of tens of thousands of Latin Americans, most of them peasants and workers, as well as trade unionists and left wing political figures.”
“Do they interfere with CMI’s operations?” asked Alex.
“No, and that’s because we’ve been paying them off. It’s now 2014 and we’ve been paying them since 1997. To date we’ve given them about $1.7million in total. Don’t look so shocked, Alex. Occasionally, we have to do business with some very unsavoury characters. And the United Peoples Liberation Front that controls much of the region around our mines is probably the worst of the lot. They are involved in disappearances, murder, rape and drug trafficking. The payments we make to them are for our protection. If we don’t make these payments it could result in harm to our personnel and property.”
“That’s extortion!”
“We don’t call it that. We list these payments as being for ‘security services, but we have no invoices to support the payments, and beginning in 2002 we began making direct cash payment to them. But, we now have an additional problem. The United State government has declared the United People Liberation Front to be a terrorist organization, and our outside legal counsel has advised us to stop making the payments. But if we stop I’m afraid of what might happen to our employees. I don’t want to support drug trafficking and terrorism, but I need our mines to stay open.”
“I’m telling you this Alex, because when you join the Board, the first item on next months’ agenda is these payments. I want the Board to approve that we continue to make these payments in order to ensure the safety of our Latin American employees and operations.”
(i) Discuss the ethical issues in the case above with reference to the principles of professional conduct. (5 marks)
(ii) What should Alex do? Analyse and discuss the case above using AAA ethical decision making model.
(8 marks)
Part 2
There have been numerous corporate fraud cases in the past decades, most of which caused the companies affected to subsequently experience financial difficulties and embarrassment. Select three examples of a fraud case, one from each location namely, Australia, Asia and European countries. Each case study must involve the following different types of fraud: one example of financial statement fraud, one example of asset misappropriation and one example of corruption. Address the following questions regarding each case study:
(i) Describe the type of fraud, how it was conducted, the extent to which the fraud occurred (duration, amount), how the fraud was uncovered and recommend ways in which the board, internal auditor and external auditor could have assisted in fraud prevention and detection. (8 marks)
(ii) Explain the causes of each fraud selected using the fraud triangle and discuss how in each case, the fraud affected the fraudster, the victim organisations and regulators. (6 marks)
When answering the questions, the answers must be specific and relevant to the facts of each of the case studies.
Three (3) marks will be awarded for overall grammar and expression.
(5 + 8 + 8 + 6 + 3 = 30 marks)
Submission:
• There is no need for a table of contents, an executive summary or an introductory section.
• Reference list is expected (using the ‘Deakin Harvard’ referencing style) but it is excluded from the word count.
• Ensure all answers are clearly labelled.
• Late submissions will be penalised at the discretion of the unit chair.
• Mark allocation is explained in the marking rubric.