Janelle Davis is one of the audit seniors at MYH and came to see you about an is

Question

Janelle Davis is one of the audit seniors at MYH and came to see you about an issue that she finds worrisome. Janelle is part of the audit team that audits Great Gold Limited (GGL), a company that extracts and refines gold at a local mine. She is also on the audit of Big Machine Limited (BML), a company that leases and services large mining machinery to a number of the gold mines in the region. During the course of the audits she discovered that Mr. Brent Allen, a director of Great Gold Limited, was also a director of Big Machine Limited. GGL is leasing a significant percentage of their machinery from BML. There are a couple of other machinery suppliers in the region who only supply GGL with a small proportion of their machinery needs. The question that worries Janelle is whether GGL are leasing from BML because Brent Allen has directed them to in order to increase BML’s profits. She thinks that this may be unethical. Required: Using the American Accounting Association (AAA) ethical decision model and relevant ethics standards to recommend a course of action for Janelle.

Explanation / Answer

Facts of the case: GGL has been leasing a significant amount of machinery from BML. Brent Allen is the director of both GGL and BML. Ethical Issue Involved: Does Brent Allen, being the director of both GGL and BML, the chief reason behind GGL doing major business using BML machinery? Norms, principles and values related to the case: The allocation of third party for rendering services to a company must be either value based or bid based. The director is required to disclose information about all the directorships held by him, in front of the company board If company board has objection of an individual, being director of two interlinked businesses, he has to step down from either of the directorships. Alternative course of actions: Disclose in front of the Board that Brent Allen has directorship of BML as well Try to find out the main reason behind GGL doing business with BML. Based on the reason, future course of action can be decided Let the situation be as it is as the company’s business is not getting hampered Best course of action: Option 2 i.e. Try to find out the main reason behind GGL doing business with BML. Based on the reason, future course of action can be decided. This way, the facts can come to light and accordingly; the situation can be dealt with. Consequences of each alternative: Option a: This might create a controversy in the Board. The validity of facts may become difficult to establish Option b: This seems the most logical way to handle this situation. If BML has been validly chosen, business must be continued as is. If there is any partiality based on choosing BML, appropriate actions must be taken to stop this business immediately. Option c: This is like showing a blind eye to the fact, which can become a blunder for the business in near future. Decision: Janelle must go with Option (b)

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