Duty of Care, Skill and Diligence: Case Study Essay

Ong (CEO) Duty of care, skill and diligence: Ong failed to use reasonable diligence in discharging his duties. He did not inform the Audit Committee (“AC”) of the controversy surrounding the recognition of ISR revenue. For AIP, he made unwarranted assumption to consider ‘start of course’ as ‘start of course procedure’ without seeking professional advice. He had inappropriately recognized Franchise Revenue , contributed by flip pathfinders’ agreements, albeit knowing that these agreements were not in the ordinary course of business .

Applying the objective test, it was reasonable to expect Ong to present the issues to the attention of the relevant committee for further investigation. The subjective test was not in his favour, because being an Informatics’ co-founder, he should be familiar with the revenue recognition process and the non-existence of flip pathfinders’ agreements under Wong’s directorship. Hence, falling short of the standards, Ong breached the common law duty of care, skills, diligence and thus, statutory duty S157(1) .

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In addition, Ong breached S199(1) during the financial year, as the books and records of two of its subsidiaries were not properly kept. The premature recognition of the first twelve days of Q3FY04 revenue in Q2FY04 also demonstrated the lack of internal accounting controls, breaching S199(2A) . Furthermore, he failed to delegate and rely on others with care, skill and diligence. It was reasonable for Ong to rely on Informatics’ CFO to allow the changing of accounting policy .

However, he failed to act honestly as he was aware of the aggressive accounting associated with the new revenue recognition policy. Consequently, Ong violated S157C(1) due to S157C(2) .? Duty of loyalty and good faith Ong was dishonest when he made and released misleading unaudited financial statements, which he ought to know that the statements were misleading in a material way. He deprived members’ right to know the true financial status of the company by painting an untrue financial image.

Additionally, he issued a deceptive profit warning statement when in reality, he was aware of the whole process of overstating profits. Also, Ong engaged actively in changing the revenue recognition policy to one that is improper and inconsistent with Informatics’ internal and published policy. Hence, Ong breached his duty of loyalty, good faith, and S157(1). ? Wong (Chairman of the Board) Duty of care, skill and diligence During the relevant period, Wong was monitoring IGSPL’s business and was involved in the discussions over these policies.

Though he was aware of the dilemma in recognition of ISP and AIP, Wong chose not to exercise his absolute power of veto against Ong, hence, breaching his duty. Whilst Wong was a non-executive director, he was an active Chairman of the Board and Informatics’ full-time Chief Strategist. His time and effort in Informatics was comparable to Ong’s, thus similar standards should be applied to him. He did not meet the objective test standards as it was reasonable to expect Wong to take actions against Ong since he knew all the facts.

The standards were further raised by the subjective test. Being Informatics’ former CEO, the previous decisions he made provided a firm basis for determining Ong’s wrongdoings and thus, need to stop it promptly. Therefore, Wong breached the common law duty and S157(1). Duty of loyalty and good faith Although Wong was not actively involved in the early altering of revenue recognition policy, he learnt about the aggressive practices afterwards. After he gained knowledge of the issues, he instructed the relevant personnel to correct the problems.

Hence, Wong did not breach his duty of loyalty and good faith as he acted honestly. ? Other directors (Independent non-executive directors): Duty of care, skill and diligence The three independent non-executive directors formed the AC . They failed to meet the minimum expectations of a director , which are to be familiar with the operations and fundamentals of the company’s business. AC never noticed the potential problems of the recognition of AIP and ISR revenue.

Non-executive’s standard of duty would be lower than that of an executive. The objective test required a reasonable director to diligently scrutinize transactions and make proper inquiries about the company’s business. They would be expected to pick up the aggressive revenue recognized in AIP and ISR as one of AC’s duties is to review and ensure the integrity of internal audit statements, but they overlooked that. Hence, they failed to exercise reasonable diligence, breaching the common law duty and S157(1).


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