Topic: Business Law
1. Explain how this scenario relates to an area of law taught in Introduction to Business Law. (2 marks)
Introduction to business law is a phenomenon that aids business mangers and everyone within the business environment to be aware of the legal environment that the business operates in. C & A engages an internal auditor to carry out auditing of their financial books of accounts and through intimidation, Julia who has been engaged as the internal auditor caries out the task negligently and later an external auditor is engaged to check on the correctness of the financial books. Fortunately or unfortunately discovers the mistake made by C& A and is therefore ready to take a law of action against the Company. This scenario relates to the introduction of law whereby, the directors are expected to ensure and keep proper accounting records that ought to disclose accurate and reasonable financial analysis of the company. Before approval of the accounts it is the responsibility of the directors to ensure that the information presented is true and comply with laws and regulations that is pursuant to the Company’s Acts (David and Frances, 1998, Pg.578-83).
2. What are the (legally) important facts in the scenario? (4 marks)
The essential legal facts in this scenario is whether the directors undertook their general responsibility of safeguarding the assets of the group and the company and this is by detecting any fraudulent action caused by the auditing firm besides other regularities. Another legal fact exhibited by this scenario is about the preparation of the directors reports by the directors before the financial accounts are published. The report in this case should act as an endorsement document towards the published accounts. In such a case, the report ought to portray true and fair view of the financial accounts. Furthermore, another essential fact is about the responsibility of the directors for the maintenance and the truthfulness of the corporate and financial information that is published. This is pursuant to the preparation and distribution of financial statements that ought to conform to the accounting standards. Another outstanding fact is about the roles and duties of an internal auditor towards the financial accounts and the extent at which he or she is binding to the law. He or She ought to work independently. Another factual statement exhibited by this scenario is the responsive action that an independent contractor ought to take in realizing the misconduct of the internal auditor (David and Frances, 1998, Pg.578-83).
3. If LMS sues C&A, what are the elements of the action that LMS must prove in order to win the case (as you have identified in question 1 above)? (4 marks)
Under the laws that governs a company, the directors/ managers/ C.E.O should not at any time approve the financial before ensuring that they ascertain true values of the financial accounts and are in accordance with the International Financial Reporting Standards (IFRS). In such a scenario, LMS should doubtlessly prove that the company did not observe this accounting standards and that was the reason why the figures had been overstated. It will also be the role of the LMS to present a proof that actually the directors did not at any moment go through the financial statements as per the requirements. This helps them in providing a true and fair state of affairs of the Company to the public and thus be able to determine the financial position of the company. LMS in this case representing the independent contractor should be able to prove that the financial analysis prepared by the C& A did not conform or is not in accordance with the IFRC as has been adopted by the EU. LMS could make allegations that financial fraud could be caused by the fact that an internal auditor was not allowed to work independently and most probably there was some intimidations or interferences in preparing of the financial books of accounts (Vermeesch & Lindgren, 2008, Pg 167-170). .
4. What arguments could C&A make in response to LMS"? Allegation? (3 marks)
On the other hand, C&A (the managers/directors) could prove that they actually involved an internal auditor who carried out the financial analysis. C&A could also respond to the allegations by the LMS by proving that actually the time taken to detect the fraud was so minimal and therefore they are also bound to making errors. The company may also claim they carried put their analysis in good faith and therefore are not aware of the allegations made by the auditing firm. All in the entire internal auditor and the management team will find themselves between a hard place and a rock if it’s proven that actually a fraud occurred which was deliberate (CCH Australia Limited, &Latimer, 2009, Pg. 237-39)
5. What should C&A do to avoid liability in similar situations? (2 marks)
The present management team could actually prove that before the occurrence of the financial fraud they had identified the material weakness within the financial controls and moreover disclosed to the auditors and the auditing firm about it. They can also prove not liable for the fraud by proving that such a misconduct whether material or not involved other members of the company who played a significant role within the company’s internal control system.
2. Letter instructing a solicitor (15 marks)
Chuan & Associates (C&A)
To the Solicitors,
On behalf of Chuan & Associates, I Julia Keith the accountant wishes to send my pleas to the solicitors to come for the rescue of our company on allegations of Financial Fraud. I carried out and performed the financial analyses procedures as per the international accounting standards but later after a close scrutiny by an independent auditor our company was considered negligent. In this regard, the independent contractor is claiming for compensation for the damages caused under the defamatory action. As per the enumerations attached to this document, the procedure, the internal audit that I carried out met the standards established by the Australian based business laws, provided by section 542.3 (f)(3) of the Minimum Internal Control Standards which had also been used by the Internal Auditors for the year that ended December 31, 2009. The sufficiency of the Financial Analysis was later ascertained by the director of our Company until later when allegations were alarmed on the negligence of the Company. The independent contractor has sort an action of law against our Company on the claim that the directors were not responsible enough to identify the material effects of the financial accounts prepared. Instead they went ahead and prepared a financial report as supporting evidence to the prepared and published financial analysis of the company (Vermeesch & Lindgren, 2008, Pg 165-68).
Basing our argument on negligence as a form Tort, we find it these allegations not actionable in the court of law. As defined, Negligence is a kind of a tort, whereby somebody might be executing his or her duties with as much caution as possible but in the long run may not fulfill the expected code of conduct stipulated by the international standards. Also others may use such opportunities in order to put others into problems on the fact sooner or later they may not be available for any accountabilities. This argument can be supported by Fletcher vs. Fletcher (1868) UKHL case, " persons who use properties or bring properties into the business premises which they are assured that it may cause or may come into conflict with other people or their properties deliberately have no obligation to face the law, and those alleged of others mistakes have by law a duty to direct upon them to use reasonable care and skill to avoid such a conflict." (CCH Australia Limited, &Latimer, 2009, Pg. 234-36)
Basing our argument on the Australian Case law (Chartered Accountants: influencing Australian business, 2009), I the Accountant asks for your assistance to relieve me off the allegation considering that, besides being the chief accountant I am the one who carried the internal auditing. In this case law, the roles and duties of a chartered accountant have been stipulated of which I conformed to them.
The independent contractors claim for compensation may be doomed wrong and not actionable by law considering that for any compensation to arise the, plaintiff must prove beyond doubts that he actually suffered damages. The materials in this scenario should be material enough. This argument is endorsed in Johnson v Commissioner of police, NSW Tribunal. This case law considers the kind of loss and damages that are compensable.
Ideally, our company is claiming compensation instead, since we started operations we have never had such alleges and thus we believe that, the independent contractor is spoiling the good reputation of our company. The auditing firm has therefore defamed our name and this was a law that was passed in the year 2006, such a claim is supported by Godfrey V Demon Internet Ltd 1999)
David Gardiner and Frances McGlone, 1998, Outline of Torts, 2nd Ed, Butterworth’s, at 33, citing McGuire v Union Steamship Co of New Zealand Ltd (1920) 27 CLR 570 at 578-83.
CCH Australia Limited, Latimer, P, 2009, Australian Business Law 2009 – 28th Ed., London: CCH Australia Limited
R. B. Vermeesch, Kevin E. Lindgren, 2008, Business law of Australia, 6th Ed. London: Butterworth’s, California: the University of California.