As part of a review of its internal control systems, the board of FF Co, a large

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Question:

As part of a review of its internal control systems, the board of FF Co, a large textiles company, has sought your advice as a senior accountant in the company.

FF's stated objective has always been to adopt the highest standards of internal control because it believes that by doing so it will not only provide shareholders with confidence in its governance but also enhance its overall reputation with all stakeholders. In recent years, however, FF's reputation for internal control has been damaged somewhat by a qualified audit statement last year (over issues of compliance with financial reporting standards) and an unfortunate

internal incident the year prior to that. This incident concerned an employee, Miss Osula, expressing concern about the compliance of one of the company's products with an international standard on fire safety. She raised the issue with her immediate manager but he said, according to Miss Osula, that it wasn't his job to report her concerns to senior management. When she failed to obtain a response herself from senior management, she decided to report the lack

of compliance to the press. This significantly embarrassed the company and led to a substantial deterioration in FF's reputation.

The specifics of the above case concerned a fabric produced by FF Co, which, in order to comply with an international fire safety standard, was required to resist fire for ten minutes when in contact with a direct flame. According to Miss Osula, who was a member of the quality control staff, FF was allowing material rated at only five minutes fire resistance to be sold labelled as ten minute rated. In her statement to the press, Miss Osula said that there was a culture of

carelessness in FF and that this was only one example of the way the company approached issues such as international fire safety standards.

Required:

(a) Describe how the internal control systems at FF Co differ from a 'sound' system of internal control, such as that set out in the Turnbull guidance, for example.

(b) Define 'reputation risk' and evaluate the potential effects of FF's poor reputation on its financial situation.

(c) Explain, with reference to FF as appropriate, the ethical responsibilities of a professional accountant both as an employee and as a professional.