Ethical Issue Analysis You are given the following scenario regarding an ethical

Question

Ethical Issue Analysis

You are given the following scenario regarding an ethical issue on financial reporting. You are required to analyze the ethical issue and establish an approach to resolve the issue.

Scenario

A Backroom Deal

Happy Burger is a famous fast food chain primarily selling burgers, french fries and chicken products. By September 1990 when Happy Burger made its initial public offering, it had expanded to 30 locations and operated its own facility for processing food in an effort to lower costs and maintain consistency. Today, Happy Burger is the top five largest fast food chain in Hong Kong and serves over 100,000 customers each day. In response to the market changes, the company is now planning to open a new subsidiary brand ‘Kiss Kids Cafe’ which will offer play areas and kid-friendly meals to attract middle-class families with young children.

A year ago, Happy Burger started collaborating with a new vendor ‘Wheemeat’ that supplies raw chicken and beef. Wheemeat is owned by the nephew of Ricky Ko, the Chief Executive Director of Happy Burger. In fact, Ricky Ko and his nephew are not only relatives, but also close partners in other businesses. Comparing with the previous meat vendor, Wheemeat’s products are unreasonably high-priced. Thomas Lui, the newly joined Chief Operating Officer of Happy Burger, noted that the Procurement Service Department of Happy Burger granted the supply contract to Wheemeat last year without going through the official tendering procedures. There is no record of supplier evaluation from the Tender Board as if the Department did not call for any tenders. Besides, only limited information was provided by Wheemeat for validating its operational and financial stabilities.

Thomas is recently handling a complaint from the Head of the Processing Plant, Keith Chan, regarding the poor quality of meat supplied by Wheemeat. Keith finds that the meat is not vacuum packed and has a stale smell. The storage and transport hygiene is also suboptimal. The meat is likely spoiled or expired. During the investigation, Ricky and the Head of Procurement are suspected of receiving commission from the Wheemeat’s contract. Thomas worries that the reputation of Happy burger will be seriously impaired if the poor meat quality and senior management’s misconduct are uncovered to the public.

Assume you are Thomas Lui, please answer the following questions.

1. Identify and describe the ethical issue(s) in this case. (maximum 300 words)

2. List three possible options for resolving the above issue(s) and evaluate each of the options. (maximum 400 words)

3. With reference to the applicable standards (e.g. HKICPA code of ethics, Hong Kong Stock Exchange listing rules, etc.), suggest and explain an action plan that you should carry out based on your evaluation of the options under (2). (maximum 300 words)

(Hint: You may refer to Section 100 – 150 of the Code of Ethics for Professional Accountants issued by HKICPA. The Code is available online at http://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeI/COErevised.pdf. You may also refer to other applicable standards such as the listing rules of Hong Kong Stock Exchange.)

Explanation / Answer

Answer 1. The ethical issue in this cae is the conflict of interest and nepotism in flnalizing the endor deal. As per the case, vendor was not seleted based on the tendering procedures. It has been observed that there was no procedure or evalutation was followed to selecting before finaziling the vendor. Also, very limited information was provided about the vendor for validating its operational and financial stabilities.

There was was a personal interest of the Ricky, the Chief Executive Director of Happy Burger in finalizing the vendor as 'Wheatmeat' was owned by his nephew, who was also his business partner in other businesses. The head Procurement Service Department of Happy Burger and Ricky was receiving commision from 'Wheatmeat' in order of which 'Wheatmeat' was supplying poor quality of meat.

Answer 2. The solution to above problem could be:

A.) When the company was thinking for vendor selection, it should have been gone through the supplier tendering procedure which has to be assessed by all the directors of Happy Burger and also it should manage the team in such a way that any unauthorized work should be immediately reported. Also, the tendor process should have an comparison from the supplier product and ongoing market product quality and demand and its meeting standards.

B.) Proper compliant team should be assigned in the begining as the company is handling its businees over a large scale. Proper quality of product received should be taken care of in the every supply received.

C.) At this point, tender procedure should be passed for the hiring of new vendor with the proper evalution of the the vendor. Also, 'Wheateat' along with the other two should be penalized for their doing.

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