Module Code :- ACC 1009
Level :- 4
Assessment title :- ES1 – Corporate Governance Review – 2400 words
Weighting :- 60%
Please read the whole assessment brief before starting work on the Assessment Task.
The Assessment Task
You are required to research and prepare a written review on E&O Hotles which is known to have been affected by a corporate scandal with regard to misreporting.
ACC1009 The Accountant In Business Assignment – UK
You are appointed as an Assistant Accountant, and the Financial Accountant has requested to conduct a written report to evaluate the E&O Hotels scandal covering the following elements:
i) Review the Macro-environment of the hospitality industry structure.
ii) Explain the nature of the scandal and the role the auditors played.
iii) How was the behaviour of the qualified senior qualified internal auditor Helen and Auditors GAC Partnership against a framework of professional accounting?
You are required to cite 4 examples.
iv) Cite 4 examples of bad corporate governance in E&O HOTELS and explain What
impact this corporate governance case could have had on the industry and other listed companies? You should focus on the main changes to the UK code of corporate governance which entered into effect in 2020.
Learning Outcomes
On successful completion of this assessment, you will be able to:
a) Describe the key environmental influences and constraints impacting organisations.
b) Apply professional and ethical frameworks to real world scenarios.
c) Explain the importance of good corporate governance and the evolution of good practice.
d) Explore the different roles within the accounting function in various organisations.
Your grade will depend on how well you meet these learning outcomes in the way relevant for this assessment. Please see the final page of this document for further details of the criteria against which you will be assessed.
Assessment Support :-
Specific support sessions for this assessment will be provided by the module team and notified through NILE.
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E&O Hotels Case Studyi
In the 2022 results presentation to analysts, the chief executive of E&O Hotels a global Hotel chain operating worldwide with its headquarters in Liechtenstein announced an excellent set of results to stakeholders. Chief executive Robin announced that compared to 2021 sales had increased by 50% profits 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 bonus as chief executive would be £15 million. When one of the analysts asked if the bonus was excessive Mr Robin reminded the audience that the share price had risen 30% over the year because of his efforts in skillfully guiding the company. He said he expected the share price to rise further on the results announcement, which it duly did. Because the results exceeded market expectations, the share price rose another 20% to £62.
Four months later Robin called a press conference to announce a restatement of the 2022 results. This was necessary he said because of some regrettable accounting errors. Followed a meeting between E&O Hotels and the legal authorities investigating possible fraud at E&O Hotels. He disclosed that the figures for 2022 were increases of 10% for sales, 20% for profits and 15% for total assets which were all significantly below market expectations. The proposed dividend would now only be a modest 10% more than last year. He said he expected a market reaction to the restatement but hoped it would only be a short-term effect.
The first 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 Robin if he intended to return some of the £15 million bonus based on the previous results (mainly cash bonus Mr Robin said he did not. The share price fell dramatically upon the restatement announcement and because E&O Hotels was such a large company it made headlines on the business pages in many countries.
ACC1009 The Accountant In Business Assignment – UK
Later that month, the company announced that following an internal investigation there would be further restatements all dramatically downwards for the years 2019 and 2020. This caused another mass selling of E&O Hotels shares resulting in a final share value the following day of £1. This represented a loss of shareholder value of £12 billion from the peak share price. Robin resigned, and the government regulator for business ordered an investigation into what had happened at E&O Hotels. The stock exchange suspended the shares. A month later, having failed to gain protection from its creditors in the courts, E&O Hotels was declared bankrupt. Nothing was paid out to shareholders whilst suppliers received a fraction of their amounts. Competitors acquired some non-current assets but all of E&O Hotels’ 35,000 employees lost their jobs mostly with little or no termination payment. Because the E&O Hotels 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 significantly reduced pension to rely on in old age.
The government investigation found that E&O Hotels had maintained false accounting records for several years. This was done by developing an overly complicated company structure that contained a network of international branches located a multiple tax haven territories and a business model that was difficult to under stand. Where as E&O Hotels had begun as a simple technology company Robin had increased the company’s complexity so that he could ‘hide’ losses and misreport profits. In the company’s reporting, he also substantially overestimated the value of future customer supply contracts. The investigation also found several significant internal control deficiencies including ineffective management oversight of the external reporting process and a disregard for the relevant accounting standards.
In addition to Mr Robin the CEO and the board chair, several other directors were complicit in the activities. Several board members had family/friend ties with Robin and hardily were independent. Although Helen a senior qualified CPA internal auditor was working for the audit committee had been unhappy about the situation for some time. She had approached the chairman of the audit committee and finance director with her concerns but having failed to get the answers, she felt she needed to report to the public in a press statement 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 intentions came to the board’s attention she was intimidated and threatened to keep quiet and was offered a large personal bonus in exchange for her silence in late 2021.
ACC1009 The Accountant In Business Assignment – UK
The investigation later found that Helen had been continually instructed against her judgement to consent that figures were free from errors, knowingly that these are grossly optimistic. When offered a large personal bonus in exchange for her silence she accepted it because she had no protection and was exposed and abused. Besides she needed the money to meet several expenses related to her husband who was suffering a long-term illness and for whom no state health care was available. The money was used to pay for her late husband’s cancer treatment. Helen made no personal financial gain from the bonus (the money was used to help her husband but her behaviour was widely reported and criticised in the press after the company’s collapse.
The investigation found that the External auditor, the GAC partnership (one of the largest in the country had its independence compromised by long tenure and personal relationships with board members. Besides a large audit fee and through receiving consultancy income from E&O Hotels worth several times the audit fee. Because E&O Hotels was such an important client for GAC, it had many resources and jobs entirely committed to the E&O Hotels account. GAC knowingly signed off in accurate accounts to protect the management of E&O Hotels and their own senior partners engaged with the E&O Hotels account. After the investigation GAC’s other clients gradually changed auditors not wanting to be seen to have any connection with GAC. Accordingly, GAC’s audit business has since closed down. This caused significant disturbance and upheaval in the audit industry.
ACC1009 The Accountant In Business Assignment – UK
Because E&O Hotels was regarded for many years as a high performing company in a growing market many institutional investors had increased the number of E & O Hotels shares in their investment portfolios. When the share price lost its value the over all value of their funds was reduced. Some individual shareholders demanded to know why the institutional investors had not intervened sooner to investigate what was happening in E&O Hotels and sell E&O Hotels shares. Some were especially angry that the institutional investors did not attempt to intervene even after the first restatement was announced. One small investor said he wanted to see more shareholder activism especially among the large institutional investors.
Sometime later Mr Robin argued that one of the reasons for developing the complex E&O Hotels business model was that it was thought to be necessary to manage the many risks that E&O Hotels faced in its complex and turbulent business environment and maximise profits through tax optimisation. He said that a multiplicity of overse as offices was necessary to address exchange rate risks a belief challenged by some observers who said it enabled the E&O Hotels board to make their internal controls and risk management less transparent.
The E&O Hotels case came to the attention of Robert Nie, a senior national legislator in the country where E&O Hotels had its head office. The country did not have any statutory corporate governance legislation, and Mr Nie was furious at the E&O Hotels situation because many of his voters had been badly financially 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. Mr Nie intends to refer to the latest UK corporate governance code (2021) to propose his changes.
