King IV Code Slides PDF

SLIDES How can KING IV be assessed? PRINCIPLE 1: Leadership (The Governing Body (GB) should lead ethically and effectively) Theory PRINCIPLE 1: Leadership: Class Example 1 Question from 2018 CAUB031 Supplementary Exam In terms of King IV, principle 1, the governing body should lead ethically...

SLIDES How can KING IV be assessed? PRINCIPLE 1: Leadership (The Governing Body (GB) should lead ethically and effectively) Theory PRINCIPLE 1: Leadership: Class Example 1 Question from 2018 CAUB031 Supplementary Exam In terms of King IV, principle 1, the governing body should lead ethically and effectively. List the characteristics that each member should have and display according to principle 1. (3) PRINCIPLE 1: Leadership: Class Quizz Question from 2022 CAUC032 Main Exam Background information You are a newly qualified Chartered Accountant, currently employed as a Junior Audit Manager at LNE & Associates Incorporated (hereafter referred to as “LNE & Associates”), a firm of registered auditors, where you completed your SAICA articles a year ago. LNE & Associates is a medium sized audit firm situated in Parktown, Johannesburg. Mr. Aiyer, an Audit Partner at LNE & Associates recently had a meeting with Mr. Naidoo, the Chief Executive Officer (CEO) of KPS (Pty) Ltd (hereafter referred to as “KPS”). During the meeting, Mr. Naidoo requested LNE & Associates to take over the audit of KPS for the financial year ended 31 August 2022. Zwane & Sons, the current auditors of KPS, has served the company for the past 4 years. He indicated that Zwane & Sons had a disagreement with the management a few weeks prior to year-end. There has been no communication between KPS and Zwane & Sons since the disagreement, this necessitated the need to search for a replacement auditor. The board also thinks that it may be time to bring in fresh and independent minds to perform the audit of their financial statements. LNE & Associates will be nominated by Mr. Naidoo as the replacement auditor of KPS for consideration in the upcoming board meeting, scheduled to take place on the 2nd of September. KPS needs the audited annual financial statements (AFS) to apply for a bank loan from ABB Bank which will be utilised to finance the planned online sales systems software development project to be undertaken in the second quarter of the 2023 financial year. LNE & Associates were requested to refrain from contacting the outgoing auditor as the matter is still to PRINCIPLE 1: Leadership: Class Quizz continued… Extract from minutes of Board Meeting Replacement of current auditors The board approved the removal of Zwane & Sons as the current external auditors of KPS and replaced them with LNE & Associates as the newly appointed external auditors of the company with immediate effect. Extract from a newspaper article: “Fuming customer over price manipulation at KPS” Customers were outraged on social media after numerous customers lodged a complaint against the company. It is alleged that the Marketing and Financial Director of KPS and two of its rival companies were engaged in price fixing for certain products offered at their respective stores. The price tags for these particular products were removed and amended since the beginning of May this year. Thereafter, the Sales Masterfile price list was amended to reflect the “new” prices on the system which was 20% lower than the competitive price. This was done to reduce competition in the area and to boost sales. On the 13th of September, KPS received a call from one of the inspectors from the Competition Commission of Inquiry Tribunal to visit the premises where these allegations were suspected and to start their investigation into the matter. PRINCIPLE 1: Leadership: Class Quizz continued… Question from 2022 CAUC032 Main Exam With reference to the scenario: i) Apply the six characteristics of ethical and effective leadership in terms of Principle 1 of the King IV Report on Corporate Governance and assess whether the board of KPS (Pty) Ltd individually and as a collective demonstrates ethical and effective leadership. (12)  PRINCIPLE 2: Organisational ethics (The GB govern the ethics of the organisation in a way that supports the establishment of an ethical culture) Theory Application (limited) PRINCIPLE 2: Class Example Question from 2021 CAUB032 Main Exam Extract from an Email To: partner1@C&M.co.za From: [email protected] Subject: Request to become the Auditors of Extreme Fuel Suppliers Limited Date: 14 May 2021; 2:29 PM To whom it may concern On behalf of the Board of Directors of Extreme I would like to request C & M to become the auditors of Extreme Fuel Suppliers Limited for the financial year ended 28 February 2021. Background: Extreme buys very large quantities of fuel at wholesale prices from BANTOL Limited. Extreme then resells this fuel that includes a profit margin to fuel depots and fuel stations (garages) that are situated in Limpopo, Mpumalanga and North West. Fuel sales include the sale of petrol, diesel and paraffin. Extreme makes use of Bulk Tankers (Pty) Ltd, a related company that owns fuel tankers to collect the fuel from a plant that is owned by Extreme which is situated in Ladanna, Polokwane. The fuel tankers are used to deliver the fuel load to the customer. Whistle-blowing mechanisms: Whistle-blowing mechanisms: None have been set up so far. REQUIRED With reference to the scenario: i) Discuss the concerns you might have in terms of Principle 2 of the King IV Report on Corporate Governance.  PRINCIPLE 3: Responsible corporate citizenship (The GB should ensure that the organisation is and is seen to be a responsible corporate citizen) Theory Application (limited) PRINCIPLE 3: Responsible corporate citizenship: Class Example Question from 2022 CAUC032 Main Exam With reference “PRINCIPLE 1: Leadership: Class Quizz” class example scenario: i) Discuss the concerns you might have in terms of Principle 3 of the King IV Report on Corporate Governance.  PRINCIPLE 4: Strategy and performance The GB govern should appreciate that the organisation’s core purpose, its risk and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process. Theory Application (limited) PRINCIPLE 4: Strategy and performance: Class Example 1 Question from 2022 CAUC032 Main Exam The following matters were discussed during the board meeting: Going concern The board took a decision not to perform a going concern assessment for the 2022 financial year as this assessment was done in the previous year and they believe that not much has changed since. It was therefore resolved that a going concern assessment will only be performed every three years, with next assessment planned for the 2024 financial year-end. REQUIRED With reference to the scenario: i) Discuss the concerns you might have in terms of Principle 4 of the King IV Report on Corporate Governance. PRINCIPLE 4: Class Quizz Question from 2022 CAUB031 Test 2 You are an Audit Manager at BuzzBee Auditors Inc. (hereafter “BuzzBee”), a firm of registered auditors. BuzzBee has been recently appointed to the statutory audit of Food4Africa Ltd (hereafter “Food4Africa” for the February 2022 financial year end. Company background Food4Africa is a manufacturer of mainly organic food products for resell to the upper and middle class income earners. Food4Africa’s head office is situated in Cape Town. The company has been listed on Johannesburg Securities Exchange (JSE) since 2007. Health and Safety allegations During the planning stage of the audit, as you were busy scrutinising the minutes of board of directors meeting, you noted that the company has been alleged to have contravened the Health and Safety Act. The allegations are so serious that the Consumer Protection Commission has opened an investigation into the misconduct. Further information revealed that the suspected perpetrators are Mr. Samuels and Mr. Tshamani. It is alleged that the two directors had conspired to reduce the operating costs for the company by reducing health and safety expenses in an attempt to improve the financial performance of the company following its decline. Nothing has been disclosed in the financial statement with regards to the contingent liability of the company in this regard. PRINCIPLE 4: Class Quizz continued… i) Identify and explain the six capitals in the value creation process in terms of Principle 4 of the King IV Code on Corporate Governance. (12) ii) With reference to the “Health and Safety allegations” heading, identify TWO of the six capitals in the value creation process in terms of the King IV Code on Corporate Governance, which have been violated by Food4Africa AND under each capital you have identified, evaluate whether Food4Africa has created value for its stakeholder(s). Fully support your answer with reference to the information provided under the stipulated heading. (6) PRINCIPLE 4: Class Quizz Suggested Solution Google the six capitals of value creation process, identify and explain the six capitals.  PRINCIPLE 5: Reporting The GB govern should ensure that reports issued by the organisation enable stakeholders to make informed assessments of the organisation’s performance, and its short, medium and long term prospects. Theory Application (limited) PRINCIPLE 5: Class Example 1 Question from 2022 CAUC032 Main Exam The following matters were discussed during the board meeting: Going concern The board took a decision not to perform a going concern assessment for the 2022 financial year as this assessment was done in the previous year and they believe that not much has changed since. It was therefore resolved that a going concern assessment will only be performed every three years, with next assessment planned for the 2024 financial year-end. REQUIRED With reference to the scenario: i) Discuss the concerns you might have in terms of Principle 5 of the King IV Report on Corporate Governance. PRINCIPLE 5: Class Quizz Question from 2021 CAUB032 Main Exam Extract from an Email To: partner1@C&M.co.za From: [email protected] Subject: Request to become the Auditors of Extreme Fuel Suppliers Limited Date: 14 May 2021; 2:29 PM To whom it may concern On behalf of the Board of Directors of Extreme I would like to request C & M to become the auditors of Extreme Fuel Suppliers Limited for the financial year ended 28 February 2021. Integrated report: The issue of an integrated report was considered by the Board but since we did not properly allocate time to this matter in 2021 it will only be done from 2022. REQUIRED With reference to the scenario: i) Discuss the concerns you might have in terms of Principle 5 of the King IV Report on Corporate Governance.  PRINCIPLE 6: Primary role and responsibilities of the GB (The GB should serve as the focal point and custodian of corporate governance in the organisation) Theory Application (Limited) PRINCIPLE 6: Class Example Question from 2021 CAUB032 Main Exam Extract from an Email To: partner1@C&M.co.za From: [email protected] Subject: Request to become the Auditors of Extreme Fuel Suppliers Limited Date: 14 May 2021; 2:29 PM To whom it may concern On behalf of the Board of Directors of Extreme I would like to request C & M to become the auditors of Extreme Fuel Suppliers Limited for the financial year ended 28 February 2021. Role of the board: The Board of Directors strive towards responsible ethical leadership by fulfilling the following two roles: Role 1: To steer the organisation and to set its strategic direction. Role 2: To approve policy and planning that give effect to the direction provided. REQUIRED With reference to the scenario: i) Discuss the concerns you might have in terms of Principle 6 of the King IV Report on  PRINCIPLE 7: Composition of the GB The GB should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibility objectively and effectively Theory Application!!  Considerations: Page 6-9 of KING IV Course notes 2020 COMPOSITION The GB should comprise a majority of non-executive members, most of whom should be independent Executive : Involved in the day to day operations of the company Non-executive : Not involved in the day to day operations of the company Independent non-executive : Independent from the entity and not involved in the day to day operations. EXAMPLE TOTAL governing body members 10 Executive: 4 members Non-executive : 6 members of which 5 are independent IS THIS IN ACCORDANCE WITH KING IV????  Chair of the GB Independent non-executive member Lead independent : Independent non-executive member SUB COMMITTEES May the CHAIR of the GB be a member? Member of audit committee NO Member of remuneration YES – but may NOT be the committee chair of that committee Nominations committee YES – and be the chair of that committee Risk committee YES – but may NOT be the chair of that committee PRINCIPLE 7: Class Quiz… CAUB031 May/June 2018 Exam QUESTION 1 [45 MARKS] You are a senior audit trainee working at Audit Experts (Pty) Ltd. You are currently engaged in the audit of Move-It Ltd (hereafter MI) for the financial year ended 28 February 2017. MI is listed on the JSE Securities Exchange, and its primary business is importing earth- moving equipment from China and India to sell in South Africa. MI’s head office is located at the Durban harbour. The headoffice take responsibility to clear the imported equipment through customs. The Harvard family controls MI by virtue of owning 52% of its issued shares. The patriarch of the Harvard family, John Harvard, has held the position of Chairperson of MI’s Board of Directors since he resigned as its Chief Executive Officer (CEO) at the end of the previous year. Hill Stanford replaced John Harvard in the latter position.  The Audit Committee members are elected by the Board of MI. No other committees were established by the Board. The following table regarding MI’s Board and its only subcommittee appeared in the most recent annual report. The composition of the Board has not changed since. Extract from the annual report of the composition of the Board of Directors and Audit Committee:  BOARD MEMBERS NOTE EXECUTIVE / NON- AUDIT COMMITEE (see EXECUTIVE MEMBER below ) Mr J Harvard Non-executive Not a member (Chairperson of the board/governing body) Ms C Harvard 1 Non-executive Not a member Mr H Stanford Executive : CEO Member Ms P Kekana 2 Non-executive Member Mr K Harvard 3 Non-executive Not a member Mr P Vuma 4 Non-executive Chairperson of the audit committee Mr T Zola 5 Non-executive Not a member Mr A Baloyi 6 Not a member /director Member serving on the board  The following additional information came to light (this was not included in the annual report): 1. Ms C Harvard is John Harvard’s wife. 2. Ms P Kekana was appointed by a BEE entity that holds 15% of the shares in the company. The value of this shareholding is material to the personal wealth of Ms P Kekana. The Harvard family was very involved in the selection of the BEE entity. 3. Mr K (Kevin) Harvard, John Harvard’s son, has been working for an auditing firm in Mauritius for the past two years. He is expected to stay there for at least another three years. Kevin’s sister, Thrish, is an alternate director and has been standing in for him. 4. Mr P Vuma has no connection to the company other than the directorship he holds. 5. Mr T Zola has no connection to the company other than for the directorship that he holds. He was appointed to the Board in 2011 because of his connections in the Department of Public Works, where he held a senior position until 2010, when he took early retirement following allegations of corruption made against him, a matter which is still under investigation. Mr John Harvard insisted that the Board gives Mr T Zola a chance to serve as director after some of the Board members expressed concerns about the allegations against Mr T Zola. 6. Mr A Baloyi, MI’s chief buyer, is not a director of the company, but is a member of its Audit Committee. Mr A Baloyi worked in China for a number of years, and speaks Mandarin language fluently. MI sent him to China and India on a number of occasions in order to deal with the suppliers. MI does not pay him additional amounts over and above his normal director’s fee for doing this, but the Harvards family have paid him in excess of R50 000 in each of the last three years to thank him for his good work. 1.1 Evaluate Move-It Ltd’s governance practices in terms of the Companies Act of 71 of 2008 and the KING IV report. Use the information from with the following headings ONLY to answer the question: The extract from the annual report of the composition of the Board of Directors and Audit Committee and the additional information that came to light (this was not included in the annual report): Structure your answer under the following headings: (8) 1.Board Composition (PRINCIPLE 7) (5) 2.Sub-Committees (PRINCIPLE 8) (4) 3.Audit Committee (2) 4.Any other issues (2) Communication skills, structure and layout and clarity of PRINCIPLE 7: Class Example Suggested Solution Refer to - Principle 7 Class Example Suggested Memo uploaded on BB under “Class Discussion Questions and Suggested Solutions >>> Module 2.  PRINCIPLE 8: Committees of the GB (The GB should ensure that its arrangements for delegation within its own structures promote independent judgement, and assist with balance of power and the effective discharge of its duties. Theory Application!!! EXAMPLE – refer to Move-It Ltd Class Example PRINCIPLE 8: Class Example Suggested Solution Refer to - Principle 8 Class Example Suggested Memo uploaded on BB under “Class Discussion Questions and Suggested Solutions >>> Module 2.  PRINCIPLE 11 : RISK GOVERNANCE (The GB should govern risk in a way that supports the organisation in setting and achieving its strategic objectives.) Theory Application (limited)  PRINCIPLE 12 : Technology and information governance The GB should govern technology and information in a way that supports the organisation setting and achieving its strategic objectives. Theory Application (limited) PRINCIPLE 12: Class Example Question from 2021 CAUB032 Main Exam Extract from an Email To: partner1@C&M.co.za From: [email protected] Subject: Request to become the Auditors of Extreme Fuel Suppliers Limited Date: 14 May 2021; 2:29 PM To whom it may concern On behalf of the Board of Directors of Extreme I would like to request C & M to become the auditors of Extreme Fuel Suppliers Limited for the financial year ended 28 February 2021. Technology and information governance: Our Board is very much involved in setting the approach and approving the policy for technology and information governance. We also believe that our department managers are highly skilled and we delegated the tasks of implementation and oversight to manage technology and information solely to them. We trust them 100% and we do not insist on any feedback from them or from an independent third party. REQUIRED With reference to the scenario: i) Discuss the concerns you might have in terms of Principle 12 of the King IV Report on Corporate Governance. PRINCIPLE 13: COMPLIANCE GOVERNANCE (The GB should govern compliance with applicable laws and adopted on-binding rules, codes and standards in a way that supports the company being ethical and a good corporate citizen) Theory Application (Limited) EXAMPLE – refer to “PRINCIPLE 1: Leadership” class example scenario. EXAMPLE – refer to Move-It Ltd Class Example  PRINCIPLE 16: STAKEHOLDERS In the execution of its governance role and responsibilities, the GB should adopt a stakeholder-inclusive approach that balance the needs, interests and expectations to material stakeholders in the best interests of the organisation over time Theory Application (Limited)  PRINCIPLE 17: Responsibilities of institutional investors The GB of an institutional investors organisation should ensure that responsible investment is practiced by the organisation to promote the good governance and the creation of value by the companies in which it invests. Theory Application (Limited)