In addition to Mr Xu,several other directors were complicit in the activities although Shazia Lo,a senior qualifi ed accountant working for the fi nancial director,had been unhappy about the situation for some time.She had approached the fi nance director with her concerns but having failed to get the answers she felt she needed,had threatened to tell the press that future customer supply contract values had been intentionally and materially overstated(the change in fair value would have had a profi t impact).When her threat came to the attention of the board,she was intimidated in the hope that she would keep quiet.She fi nally accepted a large personal bonus in exchange for her silence in late 2008.
The investigation later found that Shazia Lo had been continually instructed,against her judgement,to report fi gures she knew to be grossly optimistic.When she was offered the large personal bonus in exchange for her silence, she accepted it because she needed the money to meet several expenses related to her mother who was suffering a long-term illness and for whom no state health care was available.The money was used to pay for a lifesaving operation for her mother and also to rehouse her in a more healthy environment. Shazia Lo made no personal fi nancial gain from the bonus at all(the money was all used to help her mother)but her behaviour was widely reported and criticised in the press after the collapse of the company.
The investigation found that the auditor,JJC partnership(one of the largest in the country)，had had its independence compromised by a large audit fee but also through receiving consultancy income from ZPT worth several times the audit fee. Because ZPT was such an important client for JJC， it had many resources and jobs entirely committed to the ZPT account. JJC had， it was found， knowingly signed off inaccurate accounts in order to protect the management of ZPT and their own senior partners engaged with the ZPT account. After the investigation,JJC‘s other clients gradually changed auditor,not wanting to be seen to have any connection with JJC. Accordingly,JJC’s audit business has since closed down.This caused signifi cant disturbance and upheaval in the audit industry.
Because ZPT was regarded for many years as a high performing company in a growing market,many institutional investors had increased the number of ZPT shares in their investment portfolios.When the share price lost its value,it meant that the overall value of their funds was reduced and some individual shareholders demanded to know why the institutional investors had not intervened sooner to either find out what was really going on in ZPT or divest ZPT shares.Some were especially angry that even after the fi rst restatement was announced,the institutional investors did not make any attempt to intervene.One small investor said he wanted to see more 'shareholder activism',especially among the large institutional investors.
Some time later,Mr Xu argued that one of the reasons for the development of the complex ZPT business model was that it was thought to be necessary to manage the many risks that ZPT faced in its complex and turbulent business environment. He said that a multiplicity of overseas offi ces was necessary to address exchange rate risks, a belief challenged by some observers who said it was just to enable the ZPT board to make their internal controls and risk management less transparent.
(a)Because of their large shareholdings,institutional investors are sometimes able to intervene directly in the companies they hold shares in.
Required:
(i)Explain the factors that might lead institutional investors to attempt to intervene directly in the management of a company; (6 marks)
(ii)Construct the case for institutional investors attempting to intervene in ZPT after the fi rst results restatement was announced. (6 marks)
(b)Distinguish between absolutist and relativist approaches to ethics and critically evaluate the behaviour of Shazia Lo(the accountant who accepted a bonus for her silence)using both of these ethical perspectives.(10 marks)
(c)The ZPT case came to the attention of Robert Nie,a senior national legislator in the country where ZPT had its head offi ce.The country did not have any statutory corporate governance legislation and Mr Nie was furious at the ZPT situation because many of his voters had been badly fi nancially affected by it.He believed that legislation was needed to ensure that a similar situation could not happen again.Mr Nie intends to make a brief speech in the national legislative assembly outlining the case for his proposed legislation and some of its proposed provisions.
