1) Why do you think the YCP Company had been able to grow in just over five years?
Mr. Joe Kong and Jeff Watson were very well reputed in youth cell phones company case. At the time of incorporation of a company, they were able to join hands with a well-reputed media group and also the Telephone Apparatus Manufacturer. In the start of business, the company was able to attract the young generation as their customer and stole the share of other competitors. In the early years of operation, the company showed remarkable performance and all signs of growing company. It grew not only in the form of revenue generation, profitability, and balance sheeting footing, but, also it earned the trust of all stakeholders like shareholders, creditors, suppliers, and customers.
2) What impression have you formed of corporate governance in YCP Company?
The case study is an example of bad corporate governance or in fact no governance at all. There is no check and balance on activities and transactions made by the management. The regulatory authority and external auditors did not check whether the company is working in accordance with the rules and regulations or not. The financial controller, a key role player was also not performing his duties and was not providing a true and fair picture of financial accounts and other financial matters were also not monitored properly. Actually, Deputy CEO and CFO were working as agents of the CEO. The bankruptcy of corporate was on cards keeping in view the governance position of the company.
3) What is your opinion of the ownership structure in YCP, in light of the fact co-administrators Kong and Watson retain 60% of the voting equity? Can the group of small shareholders make a significant contribution to the governance of the company? What about large shareholders?
- The ownership structure was so called a publicly owned listed company but in fact, it was a sole proprietorship concern of Mr. Kong who along with his partner, holds 60% of shareholding and takes all decision solely. He was so ambitious that he did not bother to look into the ground realities. The other members of the Board, despite having the substantial share, did not take part in the management and were acting as a sleeping partner. There act encouraged Mr. Kong to do, whatever he wanted without consulting anyone else. The other small members collectively hold a substantial share in the business and could have their say in all decision of the company. It is true that they could not pass any resolution without the will of the main shareholders. But they could divert the attention of regulatory authorities and external auditors towards what happens in the organization.
4) What is your opinion of the structure of the board in YCP right after the company went public?
The company’s board constituted of seven directors which were elected for a period of three years. There was the representation of all categories of shareholders including major as well as minor shareholders. Mr. Joe Kong held the key position in the organization, which was given a mandate of strategic growth of an organization. Mr. Jeff Watson had the second most important role that is the administration of the company. While the other two major shareholders had only representation in the board without taking part in the affairs of the company. Since they did not take interest in governance of the company, therefore, it was easy for Mr. Kong and Mr. Chris, CFO to misrepresent them. The major shareholders were under influence of the CEO and Deputy CEO due to their reputation and market standing and raising funds to run the organization.
5) What information should the board have had before approving the construction of the private telephone network for YCP?
A proper feasibility report should have been circulated to the members of the board. The report should have discussed in detail the objective to be achieved, facts like the total cost of the project, a source of financing based on existing liquidity position. Further, facts like market conditions and market standing should have also addressed. The issues like cash flows generation and payment of debt burden along with payback time of project should have been discussed in detail. Along with the issue of target cost and prevailing price in presence of market leaders should also be required to be discussed. All the stakeholders should have discussed the fact in detail and then provide their independent opinion.
6) What role did the board members play in the case of YCP collapse? Refer to each member’s role separately.
Mr. Joe Kong took the decision was an overconfident person who did not listen to others and took the decision on his own. He did not take interest in the day to day affairs of the company; rather he was optimistic to get the company global. His over-optimism became the reason of collapse of the company. Mr. Jeff Watson was part of the deeds of Mr. Kong, although he was given a key position in the management and was well aware of the situation of the company but did not justify his position. Mr. Cat Chris, CFO has played a negative role, he was under influence of Mr. Kong and Watson he was not handling books of accounts and financial matters as per Generally Accepted Accounting Principles and misguided the Board as well as external auditors. Mr. Park and Mr. Johnson Both representatives of large shareholders, though the member of the board, but did not take part in the day to day activities. Although having a substantial stake in the business their companies did not have any key position in the affairs of the company. Mrs. Bell and Ms. March also behaved in the same way as large shareholders.
7) Do you believe that the role of the Financial controller had a decisive impact on the outcomes and how do you suggest he could have had avoided them?
Along with many other problems, the last nail in the coffin was the deficiency of liquidity which stimulated the failure of the company. The feasibility was prepared by the financial controller, which mislead the facts and did not provide the exact situation and realistic future projections. The financial controller had vast experience of his field and could actually manage the affairs in the much better way than what he did. As a financial control, it was his duty to determine the fair picture of companies solvency position and if there were any drawback and discrepancies that should have been highlighted. But the guy was engaged in making money through the selling of stocks and indirectly realizing in terms of money, the information he had about the company.
8) What is your opinion of the statement made in the case that:
“The accounting function is a joke. There are no rules, no directives no job descriptions and you can see segregation of duties everywhere. The concept of control seems to be forgotten as there is no accounting system”
The statement is given by a senior member of Mr. Clark’s investigating team. As a matter of fact, it is true to some extent, there is always room for improvement in rules and regulations. But when rules are not strictly followed, they create a chance of misrepresentation of the fact. The misappropriation techniques mentioned in this case like deferring payments, routing money through associated concerns, are not very complex in understanding. If a thorough analysis is conducted by some independent observer, it can be easily detected. However, the management and external auditors were manipulating the situation which is in fact wrong. The rules work best when followed and the authority which controls and monitors should ensure that proper procedures are being followed.
9) What is your opinion of the external auditors? Do you think the outcome in YCP Company suggest that they performed their duties according to the auditing standards? Do you think that auditing firms in their struggle to secure contracts or lose a client are entitled to act more as consultants and less as auditors? Please justify your views.
The external auditors have shown criminal negligence in this case. The license to operate as the external auditor is given only to those who have sufficient knowledge and experience. Ignorance of what happening in the organization cannot be an excuse of the situation. Had they done an audit with due diligence, they could have highlighted the situation much earlier when the company was solvent and could fulfill its commitments. The small suppliers of the company would have been saved from being bankrupt. The auditors should perform their duties without considering a clientele relation. To avoid such situation in future, the regulatory authority should take serious action against such auditors.
10) Do you believe there are issues (breaches) in the case leading to inappropriate management compensation; creative accounting; failure of directors and managers to exercise due diligence; lack of adequate regulation; and lack of independence in audit function? If yes how all these could have been avoided? Please justify your answers.
The problems referred above pertain to verification, checking and internal control system. There should be an adequate internal control system which regulates all the transactions and monitor that the organizational working is in compliance with the rule and regulations of a prevailing act. The guidelines given by the governing body should be strictly followed by the company. The system should be made is a way that each transaction is counter checked by someone else with responsibility. The regulatory body has to be proactive in this regard and should take disciplinary action against such auditors who do not perform their duties.
11) How a successful entrepreneurial character like Kong and Watson be controlled to protect shareholders?
A successful entrepreneur is the one who assesses and not just guesses or predicts. It is better to have all realistic view and proper projections for the future decision of business as the business is not merely fulfillment of the dream. The persons like Kong and Watson should not take decision independently rather they should find business associates of their own caliber. The persons who get such persons as their business partner should not merely invest in the business rather they should actively participate in the business affairs and put a close eye on what is happening around them and if they sense something wrong should come forward and take all necessary steps to stop it.
12) In your views, should the neighbor country’s governmental authorities have had arranged a bail-out program for YCP
The government of a neighbor country should have arranged a bailout program on their own or in collaboration with major stakeholders like Media partner and Telephone Apparatus Manufacturer. The government should have taken this step for the interest of masses at large. A default of one big company results in default of many small companies. The small units are normally unorganized, who do not have insurance cover for such unforeseen events. The act of government would have saved the jobs of 10,000 people and many small suppliers could have saved from being the defaulter. The government should have taken initiative and situation could be saved from being worse.
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