Reference no: EM131640044

Case Study - Ethical Hemp Ltd

The Facts:

Ethical Hemp Ltd was incorporated in 2005 by Saffron Banksia and Esme Acacia. Over the next ten years the business expanded and in 2015 the clothing manufacturing and retail business had factories in both Bali and Sydney, shop fronts in Melbourne, Adelaide, Sydney and Perth and an on line retailing business selling 'ethically manufactured hemp based women's and girls' clothing across Australia and Asia. 

Saffron and Esme are both directors on the board as is Saffron's husband Ben who is a practicing accountant and who has assumed the role of financial advisor although he also runs his own successful accounting practice in Sydney. Esme's father Max, who has lent the company substantial sums over the years is also a board member although he rarely attends board meetings and trusts the other three directors to make all major strategic and operational decisions for the company. 

Ethical Hemp Ltd has no formal mission statement or charter but they do have an effective internet presence using an up to date web page and other on line marketing techniques to market their brand as being a leading Australian hemp clothing manufacturer and retailer.

In 2010 Ethical Hemp Ltd started an employee incentive scheme and established a number of community improvement programs assisting woman in both Bali and New South Wales. In 2011 the company employed a part time community engagement officer Tasma Callistemon. Tasma was provided with a hundred thousand dollar annual budget and full discretion to spend this money on community projects as she deemed appropriate. Tasma is a qualified accountant, but left practice after the birth of her child, preferring to work the three days a week that the community engagement role in Ethical Hemp Ltd requires. She has maintained her professional accounting membership. 

In February 2011 the company employed Andy Agapanthus as the company's internal accountant. Andy quickly established a solid reputation in the company and his role expanded rapidly. He became involved in the company's marketing, recruitment and other activities. As a result in January 2015 Andy secured the consent of the board to employ two junior accountants to take over the day to day accounting activities.  Given Andy's interests in other aspects of the company Andy is not able to provide them with much oversight or monitoring.  One of them, Conrad Conifer had no accounting experience when he was employed and the other Helen Hibiscus had worked for two years before joining Ethical Hemp Ltd. Her previous work involved the preparation of financial statements for a financial planning business. Conrad is paid $10 000 more per annum as he also holds a law degree. He does no more work than Helen does. 

Despite their inexperience Andy has been very comfortable leaving the accounting work for the company in the hands of Conrad and Helen. Both Conrad and Helen find it difficult over the next two years to contact Andy. They have learned not to bother Andy unless it is absolutely necessary. Subsequently, Helen and Conrad have often been faced with making crucial decisions that ordinarily should be left up to Andy and the board.

By 2016 the company had over 250 employees with approximately 30% of them working in their factory in Bali, 30% in their Sydney based factory and 40% in either administrative or selling roles. 

In the last few months a number of things have happened within the company that bring up ethical and potentially other concerns:

1. In June 2016 the firm employed the services of an external auditor Lawrence Helmsii to work with the accounting/finance team with a view to developing a prospectus for funds to expand the on line retailing component of the business into the competitive European market. As Andy has been away the external auditor has been working exclusively with Helen and Conrad. It has taken longer than anticipated for the auditor to determine the company's true financial position.  He has grave concerns around the financial situation of the company and is considering what he needs to do in relation to these concerns. 

2. At a board meeting in November 2016 Max reported to the board that he had heard rumours that a number of community improvement programs had stopped and that funds were being wasted. He is keen to have the board speak with and discipline Tasma in regard to this. 

3. At the January 2017 board meeting the draft financial statements were presented to the board by Conrad and Helen. Andy did not attend, having flown to Vienna in pursuit of ideas to expand the business. No bank statements and very minimal notes are included in these draft financial statements. No change in equity document has been prepared and a number of other reports that are normally prepared to enable the board to undertake their financial and risk overview were not presented. 

4. At the February 2017 board meeting Ben proposed that the company be placed into a voluntary administration. He is concerned that the company may no longer be viable. He confirmed that the company had spent a large amount of funds in relation to the proposed expansion into Europe and that this had caused a number of cash flow issues. Max is concerned as that level of expenditure was never authorised by the board.