- 10 Marks
CR – Nov 2023 – L3 – Q3b – Regulatory framework and ethics
Evaluate ethical issues arising from a company's proposal to sell non-controlling interest in a loss-making subsidiary and manipulate financial reporting.
Question
b) The Directors of Okonko Ltd are considering acquiring shares in blue-chip companies domiciled in Asia, Europe and North America in the near future in order to diversify their operations and minimise systematic risk. Unfortunately, the entity is currently cash strapped and unable to exploit such opportunities. They would prefer to raise finance from shares on the Ghana Stock Exchange because it is currently highly geared and they do not wish to expose the company to further financial and liquidity risk. They are therefore keen to have a good amount as the balance on the retained earnings in order to remain attractive to prospective investors.
One proposal is that they sell non-controlling interest in one of its domestic subsidiaries (Afa-Alhaji Ltd) which has been recording persistent losses for the past five (5) years. The sale will improve the cash position but Okonko Ltd will continue to maintain control over Afa-Alhaji Ltd. In addition, the Directors are of the strong opinion that the shares can be sold profitably to boost its retained earnings. The Directors intend to transfer the relevant proportion of their share of the losses from the domestic subsidiary to the retained earnings, knowing that this is contrary to accounting standards.
Required:
Explain FIVE (5) ethical issues which may arise from the proposal of the directors of Okonko Ltd. (10 marks)
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