Section B – TWO questions ONLY to be attempted 2 It was the final day of a two-week-long audit of Van Buren Company，a longstanding client of Fillmore Pierce Auditors. In the afternoon，Anne Hayes，a recently qualified accountant and member of the audit team，was following an audit trail on some cash payments when she discovered what she described to the audit partner， Zachary Lincoln，as an ‘irregularity’。A large and material cash payment had been recorded with no recipient named. The corresponding invoice was handwritten on a scrap of paper and the signature was illegible. Zachary， the audit partner，was under pressure to finish the audit that afternoon. He advised Anne to seek an explanation from Frank Monroe，the client‘s finance director. Zachary told her that Van Buren was a longstanding client of Fillmore Pierce and he would be surprised if there was anything unethical or illegal about the payment. He said that he had personally been involved in the Van Buren audit for the last eight years and that it had always been without incident. He also said that Frank Monroe was an old friend of his from university days and that he was certain that he wouldn‘t approve anything unethical or illegal. Zachary said that Fillmore Pierce had also done some consultancy for Van Buren so it was a very important client that he didn‘t want Anne to upset with unwelcome and uncomfortable questioning. When Anne sought an explanation from Mr Monroe，she was told that nobody could remember what the payment was for but that she had to recognise that ‘real’ audits were sometimes a bit messy and that not all audit trails would end as she might like them to. He also reminded her that it was the final day and both he and the audit firm were under time pressure to conclude business and get the audit signed off. When Anne told Zachary what Frank had said，Zachary agreed not to get the audit signed off without Anne‘s support，but warned her that she should be very certain that the irregularity was worth delaying the signoff for. It was therefore now Anne’s decision whether to extend the audit or have it signed off by the end of Friday afternoon. Required： (a) Explain why ‘auditor independence’ is necessary in auditor-client relationships and describe THREE threats to auditor independence in the case. (9 marks) (b) Anne is experiencing some tension due to the conflict between her duties and responsibilities as an employee of Fillmore Pierce and as a qualified professional accountant. Required： (i) Compare and contrast her duties and responsibilities in the two roles of employee and professional accountant. (6 marks) (ii) Explain the ethical tensions between these roles that Anne is now experiencing. (4 marks) (c) Explain how absolutist (dogmatic) and relativist (pragmatic) ethical assumptions would affect the outcome of Anne’s decision. (6 marks) (25 marks) 3 Mary Hobbes joined the board of Rosh and Company，a large retailer，as finance director earlier this year. Whilst she was glad to have finally been given the chance to become finance director after several years as a financial accountant，she also quickly realised that the new appointment would offer her a lot of challenges. In the first board meeting，she realised that not only was she the only woman but she was also the youngest by many years. Rosh was established almost 100 years ago. Members of the Rosh family have occupied senior board positions since the outset and even after the company’s flotation 20 years ago a member of the Rosh family has either been executive chairman or chief executive. The current longstanding chairman，Timothy Rosh，has already prepared his slightly younger brother，Geoffrey (also a longstanding member of the board)to succeed him in two years’time when he plans to retire. The Rosh family，who still own 40% of the shares，consider it their right to occupy the most senior positions in the company so have never been very active in external recruitment. They only appointed Mary because they felt they needed a qualified accountant on the board to deal with changes in international financial reporting standards. Several former executive members have been recruited as non-executives immediately after they retired from full-time service. A recent death，however，has reduced the number of non-executive directors to two. These sit alongside an executive board of seven that，apart from Mary，have all been in post for over ten years. Mary noted that board meetings very rarely contain any significant discussion of strategy and never involve any debate or disagreement. When she asked why this was，she was told that the directors had all known each other for so long that they knew how each other thought. All of the other directors came from similar backgrounds，she was told，and had worked for the company for so long that they all knew what was ‘best’ for the company in any given situation. Mary observed that notes on strategy were not presented at board meetings and she asked Timothy Rosh whether the existing board was fully equipped to formulate strategy in the changing world of retailing. She did not receive a reply. Required： (a) Explain ‘agency’ in the context of corporate governance and criticise the governance arrangements of Rosh and Company. (12 marks) (b) Explain the roles of a nominations committee and assess the potential usefulness of a nominations committee to the board of Rosh and Company. (8 marks) (c) Define ‘retirement by rotation’ and explain its importance in the context of Rosh and Company. (5 marks) (25 marks)