P1 Mock Exam  

 

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Mine Sweeper (MS) is a coal mine exploration company. Recently, one of mine reserve had a land slide, killing fifty mine workers and injuring ninety of them. Although the cause of the land slide is still being investigated by the authority, negative press reporting has created the perception that MS has generally ignored safety measures at the mine reserve, exposing the company’s thousands of workers in different coal mine across the country. An international human right group called BEWARE has publicly stated they will stage organized protests at each mine, starting in two weeks’ time and until MS agree to improve work site safety conditions. They also demanded MS to take up insurance cover for each worker to compensate them in terms of injury or fatality. A formal letter of demand has been served and a copy of the letter has been published in major news papers. An environmental protection group Preserve and Protect (PAP) also joined in and claimed that the company generally ignored sustainability. PAP claimed that MS has poor environmental practices such that the impact of the business on environment is not sustainable and the environmental footprint is getting larger. The chief executive is puzzled why there is a concern of sustainable development and the company is doing extremely well financially, with huge cash and coal reserves and strong order books.

An emergency board meeting is convened to discuss the issue. Beside directors, management including relevant heads of departments are invited for this particular meeting. The operations manager Bo Bian reported to the board that safety measures are implemented across all mine although they are of inconsistent quality. His justification is the amount of money spent on safety measures will depend on the potential coal reserve estimated at a particular mine. He believed this is the most objective criteria to decide on safety measures. The human resource manager Susie disagreed with this view. In her opinion, safety concerns human lives and should not be based on financial yard stick. Instead, it should be at least meet international best practices.

The result of internal investigation on the land slide was also discussed. Preliminary investigation showed that the land slide was possibly caused by a diversion of flow of an underground river. The diversion could have been caused by the drilling activities on land right above the river. The risk manager reported that the possible cause of the land slide identified in this internal report is not one of the risks identified and recorded in the risk management system. This is because the company has never in the past done any coal mine exploration or extract in areas with underground rivers. The internal audit manager highlighted a memo from a site engineer sent to the operations manager Bo Bian one month before the land slide happened. The memo expressed serious concerns on the presence of an underground river beneath the exploration site. Recommendations such as detailed

P1 Mock Exam  

 

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study of the situation, strengthening the soil condition or relocation of exploration site were suggested. The memo was sent one month before the land slide occurred. Bo Bian explained that he had in consultation with all other operations managers in other sites and all concurred that the suggested presence of an underground river and its implications were not proven. No action was taken because precious resource and time cannot be wasted on unfounded rumour. They believed, at that time, nothing serious could happen even if there is an underground river. The company was only performing exploration activities and not extraction of coal.

The chief accountant May informed the meeting that a provision of $5m has been included in the latest accounts (unaudited – the external audit will commence one month later) taking into account potential cleanup costs and compensation because of the land slide. Because of this, the results this year most likely will show a net of $4m instead of a profit of $1m.

The chairman of the board Alan Madog is particularly unhappy with accusation from PAP on the alleged poor environmental practice. He believed it is unjustified claim because MS has been spending money and resource dedicated to protect the environment. The company even has annual external audit on the environmental management system. The public relations manager Lucy suggested this could be due to PAP and the general public is not aware of MS’ efforts in environmental protection. Lucy suggested transparency and environmental reporting will help to manage such reputation risk. The chief accountant suggested the company uses full cost accounting to quantify the environmental costs MS incurred for this environmental reporting purpose. The environmental cost from the accounting system will not show the full extent of environmental cost. Everybody in the meeting is confused by May’s statement.

The following suggestions were tabled in the meeting:

• An environmental report to be prepared and published

• An audit of the company’s risk management to be conducted

• An independent review of the company’s safety measures by international experts of mine reserve safety to be conducted immediately – the report of the review will be available for the general public and, in particular, for BEWARE to address their concern on safety

• A letter to shareholders from the chairman to be prepared to inform shareholders of company’s action to address the concerns of BEWARE, PAP and shareholders’ concern on the financial impact of the land slide.

P1 Mock Exam  

 

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The meeting went on to debate whether the audit of risk management should be conducted by the internal audit department or outsourced to external expert. After the meeting, the chief executive suggested to the chief accountant that the provision of $5m is premature and should be removed from the accounts until the picture is a bit clearer. Otherwise, the financial performance will not permit the usual performance bonus for everybody in the company and there will be adverse impact on the share price. It is thus in the best interests of the company for the provision to be removed. May is now experiencing a conflict in her mind now but could not exactly say what the conflict is.

Required:

1. Explain the following terms:

a. Sustainability

b. Sustainable development

2. Explain the term “transparency” and its importance in the case of MS

3. Draft the chairman’s letter to be sent to the shareholders.

4. Explain the conflict that May is experiencing now in terms of professional accountant’s duty to employer and the professional accountant’s duty as a professional.

5. Using the American Accounting Association model, help the chief accountant to decide what to do on the suggestion by the chief executive to remove the provision.