Reference no: EM133306550

Case: HCI filed a statement in March with the Securities Commission, the regulator responsible for SEE-listed companies. This statement reported that the company's four-person audit committee met five times in 2020 to review the firm's financial statements. The statement also said:

"The members of the audit committee are not professionally engaged in the practice of auditing or accounting and are not experts in the fields of auditing or accounting. Members of the audit committee rely without independent verification on the information provided to them and on the representations made by management and the independent auditors...Furthermore, the audit committee's considerations and discussions referred to above do not assure that the audit of our financial statements has been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles or that our auditors are in fact ‘independent'."

Required:

Question 1. Would this statement indicate that the audit committee is fulfilling the role that would be expected of it under the rules that apply in the United Kingdom? Does this statement indicate that the expected role that is set out under the Sarbanes-Oxley rules is being fulfilled? Explain.

As per the relevant provisions related to UK Corporate Governance Code,
It is recommended there should be no fewer than three meetings during the year and
Roles and Responsibilities of Audit committee includes:
A) The audit committee should report to the board on how it has discharged its responsibilities like review ,report, comment on the financial statements of the company to the board.
B) The significant issues that require audit committee to be considered in relation to the financial statements and how these issues were addressed; for example , a change in accounting policy is correctly treated in books , a proper disclosure of the change and effects of the change has to be reported on.
C) The audit committee shall see the effectiveness of the external audit, check the independence of the external auditor, audit committee shall give its recommendation to board for the appointment, remuneration, terms of engagement of the external auditor to the board
D) And on any other matters for which board has seemed audit committee's opinion
E) The audit committee should review, and report to the board on, significant financial reporting issues and judgements made in connection with the preparation of the company's financial statements, interim reports, preliminary announcements and related formal statements.
F) The audit committee should review the clarity and completeness of disclosures in the financial statements and consider whether the disclosures made are set properly in context.
G) The audit committee is not satisfied with any aspect of the proposed financial reporting by the company, it shall report its views to the board.
H) The audit committee should review related information presented with the financial statements, including the strategic report, and corporate governance statements like vigil mechanism employed, whistle blower policy in the company relating to the audit and to risk management.
I) To assist the board to make that statement, any review would need to assess whether other information presented in the annual report is consistent with the financial statements.

In the instant case, the Audit committee has conducted 5 meetings, it is the responsibility of the management to prepare financial statements in accordance with the GAAP and as listed above the role of the audit committee is to review , report and check if there are proper disclosures in the financial statements made by the management,
The audit committee should assess the independence and objectivity of the external auditor annually, taking into consideration relevant UK law, regulation, the Ethical Standard and other professional requirements. The audit committee should consider the annual disclosure from the statutory auditor and discuss with the auditor the threats to their independence and the safeguards applied to mitigate those threats.
As per The Sarbanes-Oxley Act of 2002 ,audit committee needs to consider all of the relationships between the auditor and the company, the company's management and directors, not just those relationships related to reports filed with the Commission. The audit committee should consider whether a relationship with or service provided by an auditor:
(a) creates a mutual or conflicting interest with their audit client;
(b) places them in the position of auditing their own work;
(c) results in their acting as management or an employee of the audit client; or
(d) places them in a position of being an advocate for the audit client.

Question 2. On the 28th of January 2021, the company reported to the regulators at the Southern European Exchange that Mr. Villa had sold his HCI holding (3 million shares) in order to fund trusts set up for estate planning purposes. The actual sale occurred in small amounts that took place over a period of weeks, beginning in October and continuing until the end of January. In advance of the announcement of this sale, several large investment funds sold the HCI shares that they owned. The regulators noticed this activity and commenced an investigation. Why were the regulators interested in this activity? What might it indicate and why does this matter?

Estate planning is preparing a plan of action for transferring your assets to your beneficiaries or next of kin. This can allow you to pass over more of your estate by transferring assets in a tax-efficient manner.

Thereby it includes an act of transferring company's assets to the beneficiaries, and such sale occurred in small quantities also took place over a period of weeks. In advance of such announcement of such sale , large investment funds sold off their holding in HCI, this led to suspicion for the regulators then started investigation in order to find reasonable cause for the act and whether such act is legal and whether tax laws have been complied , since, HCI is a publicly listed company where public funds are used the regulators are of an opinion its better to get investigation done.

Mr. Villa being a director, chairman , and a chief executive officer of the company Hebron cable international has sold holdings worth 3million shares(which approximately equals to 10% of the holdings held by officer in charge of the companyl in order to fund trust for estate planning purpose. This act of estate planning done Mr.villaraised suspicion for the regulators thereby ,regulators started investigation proceedings into the company to determine whether such act is done in good faith Or it is done to defraud public funds of the company Hebron cable international.