Reference no: EM132624110

Question - The executive chairman who was an internal audit committee with another two board members charged with ensuring the accuracy of the company's financial records, has said senior management did not inform directors of the problems. This situation will be closely examined as it is the legal responsibility of directors to ensure they fully inform themselves about the financial positions of companies they represent.

The Commission also will investigate statements by the directors that they relied on the accuracy of reports prepared by Company's auditors over the past seven years. Both the current and outgoing audit firms lodged formal declarations that the accounts had been subjected to full audits 'conducted in accordance with country Auditing Standards'. This included statements to the Commission which said 'our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates'.

Required - Read the above newspaper article:

(a) Identify the "dire" condition of the company.

(b) Explain how debt hypotheses under the Positive Accounting Theory can be employed, under the efficiency and opportunistic perspective, to explain and predict the action of the senior executive officer which created the "dire" condition of the company.

(c) The Company typically have a contractual arrangement with the bank with many covenants written to incorporate accounting numbers.

Explain why the Company agrees to enter into such agreement with the bank and do the bank gain from the existence of such agreements?