A month later, you receive the following email:
From: Hesham El-Sayed. Independent Non-executive
To: Romuald Marek. Chief Finance Officer
Subject: Collapse of fuel supplier
I am writing to give you some advance notice of an internal audit investigation that has been commissioned by the Audit Committee
Just over a year ago. Planejoos, a newly formed company, approached the management team at Airfield's Capital City International (CCI) airport and offered to take over refueling operations at Starport Planejoos offered a higher percentage of revenue than the existing supplier was paying CCI's management team agreed and appointed Planejoos rather than renew the existing supplier's contract.
CCI was unable to conduct the usual background and credit checks on Planejoos for two reasons. Firstly, Planejoos was a new company and so did not have an extensive credit history that could be checked Secondly CCI was under time pressure to reach a decision on whether to renew the existing supplier's contract or allow it to expire
CCI's management team claimed that it had acted quickly in order to benefit from the additional revenue that could be earned from dealing with Planejoos The management team was acting on the basis that it had an ethical duty to maximise the wealth of Airfield's shareholders and that maximising revenues from fuel sales through this agreement with Planejoos was consistent with that ethical duty.
Unfortunately, as a new company. Planejoos struggled to obtain trade credit and the high demand for fuel put the company's cash flows under extreme pressure Receipts from sales lagged behind payments for inventory Planejoos has now collapsed, leaving a large trade receivable that CCI will have to write off as uncollectable CCI had permitted this receivable to accumulate rather
than pressing for payment and so putting Planejoos under further pressure.
Fortunately, the previous fuel supplier was prepared to return to CCI.
See the explanation below.
The acceptance of Planejoos at Capital City International airport with out credit rating check is a sign of poor internal audit practices. The CCI is the biggest airport the Arrfied owned and amongst the world big airports. The Planejoos is a newer and inexperienced company without sound credit and financial history, the collapse of aviation fuel provider at a major airport is credit and reputaional risk
The internal audit performance laking in Arrfied which is in the aviation business could put the business in danger and needs to be corrected. The poor performance of internal audit by not inusring compliance could make damage i.e. a terrorist could attack the aircraft and landside if properchecking are not done. The aviation business are vulnerable to hijacking, human trafficking and smuggling. A special attention must be invited to internal audit.
The overall performance of the internal audit and audit committee is questionable here. The audit committee is not formulated correctly. No non-executive director have sound financial expertise. Martin Harris is the only NED with financial expertise and taking him out of audit committee is not sign of good corporate governance. The new leadership at the audit committee with savvy of financial knowledge must be on the board.
Martin Harris should be taken on the board in replacement of Carmelita Tante. Revamp the internal audit department and startup a credit department which is also responsible to rating checking.
Arrfield must also think about to formulate a risk committee to check the risk and ensure that the risks are properly managed.
Requirement : 2
It is the duty of the management to maximize the shareholderâ€™s wealth, but a proper care must be taken while making any decision on behalf of the shareholders. It seems due care is not given to the decision and the decision was made in haste.
It is not only duty of the management to maximize wealth of the shareholder, they are supposed to protect the wealth of the shareholders. Any decision no taken within the risk appetite of the company may leads to breach of ethical principles.
The shareholders trust on the management that they will make the decisions in best interest of the company even if this is not is their own interest. Incase of the Planejoos the management has neglected the credit rating check any made the decision solely on the basis of prices that Planejoos quoted. It seems that this decision does not fit in the risk appetite and risk tolerance of the Arrfield.
Memorandum of Understanding between Fouce Oil and Slide
It is proposed that Fouce Oil and Slide will temporarily combine their exploration activities, with Slide taking overall control in recognition of the greater expertise of its professional exploration staff.
This collaboration will work as follows:
1.Slide will take responsibility for the management and operation of all future exploration activities for the two companies, with effect from 1 October 2015.
2.Fouce Oil will second all of its professional oil exploration staff to Slide. Fouce will continue to employ these staff and will pay their salaries.
3.Slide will brief Fouce Oilâ€™s professional oil exploration staff on all operational matters relating to exploration activities for the duration of this arrangement.
4.The provisions of paragraph 3 will apply to any projects in which Slide participates with third parties on a farm-in or other joint venture basis.
5.In recognition of Slideâ€™s greater expertise, Fouce Oil will offer its entire portfolio of existing exploration rights to this venture, without any charge to Slide. Fouce Oil will also pay for 55% of any and all exploration costs, leaving Slide responsible for the remaining 45%.
6.The revenues from all successful discoveries will be shared equally by Slide and Fouce Oil. In the event that either party wishes to sell an oil well, the other will have the option of purchasing the otherâ€™s rights for 50% of the wellâ€™s agreed valuation.
7.This arrangement will be subject to review at the end of five years and annually thereafter. In the event that either party wishes to discontinue the arrangement, all ongoing exploration projects will be drawn to an orderly conclusion.
Thomas Yip, Chief Executive Officer, Fouce Oil
Andrew Jones, Chief Executive Officer, Slide
14 May 2015
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The following email has been forwarded to you by William Seaton, Director of Finance:
From: William Seaton, Director of Finance
To: Finance Manager
Subject: Email from CFO of Fouce Oil
This email arrived last night. I need you to help me to think through the various implications of doing what it suggests before I present it to the Board. I need you to focus on the following issues:
ï‚·Would this proposal make sense from a strategic point of view?
ï‚·If we did decide to go ahead, what would be the issues that we would have to consider with respect to informing the stock market?
Could you please email me your thoughts within the next hour? I have to brief the Board later today.
The email referred to can be found by clicking on the Reference Materials button.
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