Q 01. Comfort HotelsComfort Hotels Limited (CHL) is a medium size, private company which currently operates a chain of eighteen medium sized hotels throughout Sri Lanka. CHL is headed by Isuru Prasad who created the hotel chain in 2008 and acts as CHL's CEO and Chairman. Given the success of the hotel chain in Sri Lanka, Mr Isuru Prasad is now considering listing on the Sri Lanka Stock Exchange to raise capital from new equity investors to fund expansion with new hotels initially in Sri Lanka, with further long term expansion planned in India and South East Asia.
CHL has a small Board of Directors as follows:
|Name ||Description |
|Isuru Prasad (male, age 59) ||The Chairman and Chief Executive Officer (CEO) of CHL |
|Kasun Jayawardena (male, age 56) ||CHL's Finance Director |
|Amila Gamage (male, age 51) ||CHL's Sales, Marketing and Operations Director |
|Sahan Alwis (male, age 50) ||Non-Executive Director (NED), who is the owner of Sri Lanka Fresh Laundry Limited, an important supplier to CHL |
|Mahesh Bandara (male, age 52) ||Non-Executive Director (NED) who is CHL's previous Finance Director |
The CEO and Chairman, Isuru Prasad, believes that only those who have worked for the company or who are associated with the company have the relevant knowledge and experience to successfully run the business. The Board of Directors has never undergone annual performance evaluation of its effectiveness and none of the directors received any training when they were first appointed, or subsequently. Mr Prasad believes in learning on the job and doesn't believe there are any issues with how the Board currently operates and its performance and effectiveness.
At the last Directors meeting, Mr Prasad commented that he does not fully understand the purpose of corporate governance and why CHL will need to comply with all its requirements after the company has listed. Mr Prasad would also like to understand the key requirements for the formation of a new audit committee under the code. The Finance Director, Kasun Jayawardena, has explained to Mr Prasad that full compliance with the Sri Lanka Code of Corporate Governance will be required by the market should CHL proceed with the proposed listing.
(a) Discuss the changes which are required to the composition and performance of CHL's Board of Directors in order to comply with the 2017 Sri Lanka Code of Corporate Governance. For each change:
Note - For this requirement, focus on the main board of directors only
(i) Correctly identify the relevant principle or provision and explain why CHL is currently not compliant with the 2017 Sri Lanka Code of Corporate Governance (5 Marks)
(ii) Recommend what action CHL must take to become compliant with the 2017 Sri Lanka Code of Corporate Governance (5 Marks)
(iii) Explain how each recommendation will benefit CHL and its shareholders (5 Marks)
(b) Explain the role of the audit committee to the CEO (5 Marks)
Q2Due to the COVID-19 pandemic, the business of Green PLC was significantly affected and the CFO of the company, who is a chartered accountant of CA Sri Lanka, noticed that the net profit in the financial statements for the year ending 31 December 2020 will be significantly less when compared to the previous year. So far, Green PLC’s revenue for the year 2020 is significantly lower and advances received from some customers in 2020 will not form part of the revenue for 2020 due to Green PLC being unable to produce goods as expected, in 2020.
The CFO of Green PLC informed the CEO of the above situation. However the CEO wants to maintain at least 75% of the profitability that was there in 2019, in the financial statements for the year ending 2020 as the company is required to meet some conditions in certain agreements with private investors. Therefore he instructed the CFO to recognise revenue from contracts with customers who have paid advances even though the control of goods will not be transferred in the year ending 31 December 2020. The CEO also reminded the CFO that if this cannot be done, his year-end bonus will be impacted.
Comment on the ethical responsibility of the CFO in respect of the instructions given to him by the CEO. (5 Marks)