Company description

CK investments (Pty) is a local hand sanitizing production company. The company was incorporated in 2010.

The company was started by Charles Mujende who is the 100% shareholder. CK is run by the owners brother in law, Lazareth Shilongo CA(NAM), the CEO of the company. Charles started the company using his pension fund of N$ 200 000.00.

The start-up funds were used to build the production centre in Tsumeb where the sanitisers are produced. The ingredients used to make the sanitiser include water from a nearby lake, alcohol and fragrance. CK investments is known to make sanitizers that leave your skin clean, smelling good and moisturized, they have patented their recipe and production processes. The sanitiser is packaged in plastic bottles. It is company policy that all spoilage from production be dumped in the lake to minimise waste management costs.

Page 12 of 16 You are a charted accountant and you went to university with Lazareth, the two of you have remained good friends since your time at university. Lazareth has asked you to assist the company with accounting, finance and internal audit functions of the company as they do not currently have a CFO or CAE. You accepted the job because he has promised you a handsome service fee that you will be paid in cash at the end of every month, off the books.

The company employs 500 men to produce, package and sell the sanitisers. All the salesmen are paid on a commission basis only. The company has a list of commercial suppliers whom they have a three-year sales agreement with. The CEO is output driven and is known to fire salespersons who do not sell more than N$10 000.00 worth of sanitiser per month. The CEO and all executives receive annual bonuses based on the profit before tax of the company.

In 2020, the demand for hand sanitisers increased exponentially due to the Corona virus. The government has put out a tender to local companies to produce hand sanitizers. The tendering process is highly competitive.

Fortunately, the audit committee chair, who is also the sales executive at CK, Sidney Haufiku is good friends with the government official who is overseeing the tender process. Sidney has invited the government official and his family to a nearby lodge for the weekend. All expenses for this trip were covered by CK investments and expensed in terms S11a of the income tax act. On the Saturday afternoon Sidney had a drink with the government official to discuss the tender. Sidney proposed that he could service the tender at a cost of N$3m, half the market value of sanitizers to save the government money if he could be guaranteed that the tender would be awarded to CK Investments. The government official agreed that given countries financial position, they would agree to the N$3m.

On 30 March the board had their first and last board meeting for the year. The audit committee has not had a meeting and no other committees have been established as yet. At that meeting Sidney briefed the board on his deal with the government official. Wilhelm Gariseb, is the production executive and a member of the board, his department has been experiencing a shortage of pharmaceutical alcohol in 2020. He proposed that to be able to produce at such low costs, they could use less alcohol and more water to make the sanitizers. The board consisting

Company description

CK investments (Pty) is a local hand sanitizing production company. The company was incorporated in 2010.

The company was started by Charles Mujende who is the 100% shareholder. CK is run by the owners brother in law, Lazareth Shilongo CA(NAM), the CEO of the company. Charles started the company using his pension fund of N$ 200 000.00.

The start-up funds were used to build the production centre in Tsumeb where the sanitisers are produced. The ingredients used to make the sanitiser include water from a nearby lake, alcohol and fragrance. CK investments is known to make sanitizers that leave your skin clean, smelling good and moisturized, they have patented their recipe and production processes. The sanitiser is packaged in plastic bottles. It is company policy that all spoilage from production be dumped in the lake to minimise waste management costs.

Page 12 of 16 You are a charted accountant and you went to university with Lazareth, the two of you have remained good friends since your time at university. Lazareth has asked you to assist the company with accounting, finance and internal audit functions of the company as they do not currently have a CFO or CAE. You accepted the job because he has promised you a handsome service fee that you will be paid in cash at the end of every month, off the books.

The company employs 500 men to produce, package and sell the sanitisers. All the salesmen are paid on a commission basis only. The company has a list of commercial suppliers whom they have a three-year sales agreement with. The CEO is output driven and is known to fire salespersons who do not sell more than N$10 000.00 worth of sanitiser per month. The CEO and all executives receive annual bonuses based on the profit before tax of the company.

In 2020, the demand for hand sanitisers increased exponentially due to the Corona virus. The government has put out a tender to local companies to produce hand sanitizers. The tendering process is highly competitive.

Fortunately, the audit committee chair, who is also the sales executive at CK, Sidney Haufiku is good friends with the government official who is overseeing the tender process. Sidney has invited the government official and his family to a nearby lodge for the weekend. All expenses for this trip were covered by CK investments and expensed in terms S11a of the income tax act. On the Saturday afternoon Sidney had a drink with the government official to discuss the tender. Sidney proposed that he could service the tender at a cost of N$3m, half the market value of sanitizers to save the government money if he could be guaranteed that the tender would be awarded to CK Investments. The government official agreed that given countries financial position, they would agree to the N$3m.

On 30 March the board had their first and last board meeting for the year. The audit committee has not had a meeting and no other committees have been established as yet. At that meeting Sidney briefed the board on his deal with the government official. Wilhelm Gariseb, is the production executive and a member of the board, his department has been experiencing a shortage of pharmaceutical alcohol in 2020. He proposed that to be able to produce at such low costs, they could use less alcohol and more water to make the sanitizers. The board consisting

Page 13 of 16 of Lazareth Shilongo (chair of the board), Sidney Haufiku (audit comm chair) and Wilhelm Gariseb (member of the board), resolved to apply for the tender at a low cost using less alcohol.

At the same meeting, the board learned that they were required to hire an external auditor. Lazareth suggested that you be appointed as the auditor as you are already familiar with the business. The board members agreed, and you were appointed as the auditor.

On 29 May 2020, a newspaper article published that a local company CK Investments had been selling the government ineffective sanitizer that was not strong enough to cleanse or sanitize skin. The government has distributed this sanitizer to schools and hospitals. As a result, the virus was able to easily spread as people would go about day to day activities under the assumption that they had effectively sanitized their hands.

After a legal inquiry the company was found guilty of several legal violations. As a result, the company was liquidated, and all 500 employees were left unemployed.

Page 14 of 16 Questions

Question 1 (6) Using the extract above, identify and give an example of all stores of value that the company uses in their value creation process.

Question 2 (2) Identify one type of ethical issue from the extract above; provide a brief explanation of the issue identified.

Question 3 (5) Can ethical qualities be attributed to corporations? Your response should include a discussion on moral responsibility. Use the extract above to help justify your response.

Question 4 (3) Based on the company description, has the company adopted a shareholder or stakeholder approach in their decision making. Please provide an explanation to support your answer.

Question 5 (2) The executive and government official agreed that the company would benefit from the contract as they would have more income and the government would save costs from the 3m dollar deal. Which method of ethical evaluation did they use and why?

Question 6 (2) What kind of economic system is CK investments operating in? Please provide a reason for your conclusion.

Question 7

(3)

Page 15 of 16 Assume that CK is the only seller of sanitizer in the country. What kind of competitive environment do they operate in? Please draw the demand curves for this type of competition.

Question 8

(5)

Would you agree or disagree that CK investments is operating sustainably? Please provide reasons for your answer.

Question 9

(10)

Identify any ethical concerns you may in terms of the CPC, based on the company description above.

Question 10

(12)

Please raise any corporate governance concerns you noted in the description above based on your knowledge of King 3/4. Please state the principle first and then apply it to the scenario above.