In the 2009 results presentation to analysts, the chief executive of ZPT, a global internet communications company, announced an excellent set of results to the waiting audience. Chief executive Clive Xu announced that, compared to 2008, sales had increased by 50%, profi ts by 100% and total assets by 80%. The dividend was to be doubled from the previous year. He also announced that based on their outstanding performance, the executive directors would be paid large bonuses in line with their contracts. His own bonus as chief executive would be $20 million. When one of the analysts asked if the bonus was excessive, Mr Xu reminded the audience that the share price had risen 45% over the course of the year because of his efforts in skilfully guiding the company. He said that he expected the share price to rise further on the results announcement, which it duly did. Because the results exceeded market expectation, the share price rose another 25% to $52. Three months later, Clive Xu called a press conference to announce a restatement of the 2009 results. This was necessary, he said, because of some ‘regrettable accounting errors’. This followed a meeting between ZPT and the legal authorities who were investigating a possible fraud at ZPT. He disclosed that in fact the fi gures for 2009 were increases of 10% for sales, 20% for profi ts and 15% for total assets which were all signifi cantly below market expectations. The proposed dividend would now only be a modest 10% more than last year. He said that he expected a market reaction to the restatement but hoped that it would only be a short-term effect. The fi rst questioner from the audience asked why the auditors had not spotted and corrected the fundamental accounting errors and the second questioner asked whether such a disparity between initial and restated results was due to fraud rather than ‘accounting errors’. When a journalist asked Clive Xu if he intended to pay back the $20 million bonus that had been based on the previous results, Mr Xu said he did not. The share price fell dramatically upon the restatement announcement and, because ZPT was such a large company, it made headlines in the business pages in many countries. Later that month, the company announced that following an internal investigation, there would be further restatements, all dramatically downwards, for the years 2006 and 2007. This caused another mass selling of ZPT shares resulting in a fi nal share value the following day of $1. This represented a loss of shareholder value of $12 billion from the peak share price. Clive Xu resigned and the government regulator for business ordered an investigation into what had happened at ZPT. The shares were suspended by the stock exchange. A month later, having failed to gain protection from its creditors in the courts, ZPT was declared bankrupt. Nothing was paid out to shareholders whilst suppliers received a fraction of the amounts due to them. Some non-current assets were acquired by competitors but all of ZPT’s 54,000 employees lost their jobs, mostly with little or no termination payment. Because the ZPT employees’ pension fund was not protected from creditors, the value of that was also severely reduced to pay debts which meant that employees with many years of service would have a greatly reduced pension to rely on in old age. The government investigation found that ZPT had been maintaining false accounting records for several years. This was done by developing an overly-complicated company structure that contained a network of international branches and a business model that was diffi cult to understand. Whereas ZPT had begun as a simple telecommunications company, Clive Xu had increased the complexity of the company so that he could ‘hide’ losses and mis-report profi ts. In the company’s reporting, he also substantially overestimated the value of future customer supply contracts. The investigation also found a number of signifi cant internal control defi ciencies including no effective management oversight of the external reporting process and a disregard of the relevant accounting standards. In addition to Mr Xu, several other directors were complicit in the activities although Shazia Lo, a senior qualified accountant working for the fi nancial director, had been unhappy about the situation for some time. She had approached the fi nance director with her concerns but having failed to get the answers she felt she needed, had threatened to tell the press that future customer supply contract values had been intentionally and materially overstated (the change in fair value would have had a profit impact). When her threat came to the attention of the board, she was intimidated in the hope that she would keep quiet. She fi nally accepted a large personal bonus in exchange for her silence in late 2008. The investigation later found that Shazia Lo had been continually instructed, against her judgement, to report fi gures she knew to be grossly optimistic. When she was offered the large personal bonus in exchange for her silence, she accepted it because she needed the money to meet several expenses related to her mother who was suffering a long-term illness and for whom no state health care was available. The money was used to pay for a lifesaving operation for her mother and also to rehouse her in a more healthy environment. Shazia Lo made no personal fi nancial gain from the bonus at all (the money was all used to help her mother) but her behaviour was widely reported and criticised in the press after the collapse of the company. The investigation found that the auditor, JJC partnership (one of the largest in the country), had had its independence compromised by a large audit fee but also through receiving consultancy income from ZPT worth several times the audit fee. Because ZPT was such an important client for JJC, it had many resources and jobs entirely committed to the ZPT account. JJC had, it was found, knowingly signed off inaccurate accounts in order to protect the management of ZPT and their own senior partners engaged with the ZPT account. After the investigation, JJC’s other clients gradually changed auditor, not wanting to be seen to have any connection with JJC. Accordingly, JJC’s audit business has since closed down. This caused signifi cant disturbance and upheaval in the audit industry. Because ZPT was regarded for many years as a high performing company in a growing market, many institutional investors had increased the number of ZPT shares in their investment portfolios. When the share price lost its value, it meant that the overall value of their funds was reduced and some individual shareholders demanded to know why the institutional investors had not intervened sooner to either fi nd out what was really going on in ZPT or divest ZPT shares. Some were especially angry that even after the fi rst restatement was announced, the institutional investors did not make any attempt to intervene. One small investor said he wanted to see more ‘shareholder activism’, especially among the large institutional investors. Some time later, Mr Xu argued that one of the reasons for the development of the complex ZPT business model was that it was thought to be necessary to manage the many risks that ZPT faced in its complex and turbulent business environment. He said that a multiplicity of overseas offi ces was necessary to address exchange rate risks, a belief challenged by some observers who said it was just to enable the ZPT board to make their internal controls and risk management less transparent.
(c) The ZPT case came to the attention of Robert Nie, a senior national legislator in the country where ZPT had its head offi ce. The country did not have any statutory corporate governance legislation and Mr Nie was furious at the ZPT situation because many of his voters had been badly fi nancially affected by it. He believed that legislation was needed to ensure that a similar situation could not happen again. Mr Nie intends to make a brief speech in the national legislative assembly outlining the case for his proposed legislation and some of its proposed provisions.Required:Draft sections of the speech to cover the following areas:(i) Explain the importance of sound corporate governance by assessing the consequences of the corporate governance failures at ZPT; (10 marks)(ii) Construct the case for the mandatory external reporting of internal fi nancial controls and risks; (8 marks)(iii) Explain the broad areas that the proposed external report on internal controls should include, drawing on the case content as appropriate. (6 marks)Professional marks will be awarded in part (c) for the structure, flow, persuasiveness and tone of the answer. (4 marks)
参考答案：
(i) Speech on importance of good corporate governance and consequences of failure Introduction Ladies and Gentlemen, I begin my remarks today by noting that we meet at an unfortunate time for business in this country. In the wake of the catastrophic collapse of ZPT, one of the largest telecommunications companies, we have also had to suffer the loss of one of our larger audit fi rms, JJC. This series of events has heightened in all of us an awareness of the vulnerability of business organisations to management incompetence and corruption. The consequences of corporate governance failures at ZPT. I would therefore like to remind you all why corporate governance is important and I will do this by referring to the failures in this unfortunate case. Corporate governance failures affect many groups and individuals and as legislators, we owe it to all of them to ensure that the highest standards of corporate governance are observed. Firstly and probably most obviously, effective corporate governance protects the value of shareholders’ investment in a company. We should not forget that the majority of shareholders are not ‘fat cats’ who may be able to afford large losses. Rather, they are individual pension fund members, small investors and members of mutual funds. The hard-working voters who save for the future have their efforts undermined by selfi sh and arrogant executives who deplete the value of those investments. This unfairness is allowed to happen because of a lack of regulation of corporate governance in this country. The second group of people to lose out after the collapse of ZPT were the employees. It is no fault of theirs that their directors were so misguided and yet it is they who bear a great deal of the cost. I should stress, of course, that jobs were lost at JJC as well as at ZPT. Unemployment, even when temporary and frictional, is a personal misery for the families affected and it can also increase costs to the taxpayer when state benefi ts are considered. Thirdly, because of the collapse of ZPT, creditors have gone unpaid and customers have remained unserviced. Again, we should not assume that suppliers can afford to lose their receivables in ZPT and for many smaller suppliers, their exposure to ZPT could well threaten their own survival. Where the value of net assets is inadequate to repay the full value of payables, let alone share capital, there has been a failure in company direction and in corporate governance so I hope you will agree with me that effective management and sound corporate governance are vital. The loss of two such important businesses, ZPT and JJC, has caused great disturbance in the telecommunications and audit industries. As JJC lost its legitimacy to provide audit services and its clients moved to other auditors, the structure of the industry changed. Other auditors will eventually be able to absorb the work previously undertaken by JJC but clearly this will cause short-to-medium term capacity issues for those fi rms as they redeploy resources to make good on those new contracts. This was, I should remind you, both unnecessary and entirely avoidable. Linked to this point, I would remind colleagues that it is important for business in general and auditing in particular to be respected in society. The loss of auditors’ reputation caused by these events is very unfortunate as auditing underpins our collective confi dence in business reporting. It would be wholly inappropriate for other auditors to be affected by the behaviour of JJC or for businesses in general to be less trusted because of the events at ZPT. I very much hope that such losses of reputation and in public confi dence will not occur. Finally, we have all been dismayed by the case of Shazia Lo that was reported in the press. A lack of sound corporate governance practice places employees such as Ms Lo in impossible positions. Were she to act as whistleblower she would, by all accounts, have been victimised by her employers. Her acceptance of what was effectively a bribe to remain silent brings shame both on Ms Lo and on those who offered the money. An effective audit committee at ZPT would have offered a potential outlet for Ms Lo’s concerns and also provided a means of reviewing external audit and other professional services at ZPT. This whole situation could, and would have been, avoided had the directors of ZPT managed the company under an effective framework of corporate governance. (ii) The case for the mandatory external reporting of internal controls and risks I now turn to the issue of the mandatory external reporting of internal controls and risks. My reason for raising this as an issue is because this was one of the key causes of ZPT’s failure. My fi rst point in this regard is that disclosure allows for accountability. Had investors been aware of the internal control failures and business probity risks earlier, it may have been possible to replace the existing board before events deteriorated to the extent that they sadly did. In addition, however, the need to generate a report on internal controls annually will bring very welcome increased scrutiny from shareholders and others. It is only when things are made more transparent that effective scrutiny is possible. Secondly, I am fi rmly of the belief that more information on internal controls would enhance shareholder confi dence and satisfaction. It is vital that investors have confi dence in the internal controls of companies they invest in and increased knowledge will encourage this. It was, I would remind you, a lack of confi dence in ZPT’s internal controls and the strong suspicion of fraud that caused the share price to collapse and the company to ultimately fail. Furthermore, compulsory external reporting on internal controls will encourage good practice inside the company. The knowledge that their work will be externally reported upon and scrutinised by investors will encourage greater rigour in the IC function and in the audit committee. This will further increase investor confi dence. To those who might suggest that we should opt for a comply-or-explain approach to this issue, I would argue that this is simply too important an issue to allow companies to decide for themselves or to interpret non-mandatory guidelines. It must be legislated for because otherwise those with poor internal controls will be able to avoid reporting on them. By specifying what should be disclosed on an annual basis, companies will need to make the audit of internal controls an integral and ongoing part of their operations. It is to the contents of an internal control report that I now turn. (iii) Content of external report on internal controls I am unable, in a speech such as this, to go into the detail of what I would like to see in an external report on internal controls, but in common with corporate governance codes elsewhere, there are four broad themes that such a report should contain. Firstly, the report should contain a statement of acknowledgement by the board that it is responsible for the company’s system of internal control and for reviewing its effectiveness. This might seem obvious but it has been shown to be an important starting point in recognising responsibility. It is only when the board accepts and acknowledges this responsibility that the impetus for the collection of data and the authority for changing internal systems is provided. The ‘tone from the top’ is very important in the development of my proposed reporting changes and so this is a very necessary component of the report. Secondly, the report should summarise the processes the board (or where applicable, through its committees) has applied in reviewing the effectiveness of the system of internal control. These may or may not satisfy shareholders, of course, and weak systems and processes would be a matter of discussion at AGMs for non-executives to strengthen. Thirdly, the report should provide meaningful, high level information that does not give a misleading impression. Clearly, internal auditing would greatly increase the reliability of this information but a robust and effective audit committee would also be very helpful. Finally, the report should contain information about any weaknesses in internal control that have resulted in error or material losses. This would have been a highly material disclosure in the case of ZPT and the costs of non-disclosure of this was a major cause of the eventual collapse of the company. I very much hope that these brief remarks have been helpful in persuading colleagues to consider the need for increased corporate governance legislation. Thank you for listening. [Tutorial note: full speech not required to gain full professional marks as the question asks for ‘sections’ of the speech.]