It was late January 2020 and as the board of UK listed specialist polymer and plastics producer Ringer plc sat down Chairman John Dawes sensed that it would be a difficult meeting given some contentious items on the agenda and two new independent non-executive directors in place and ready after a period of induction to enter debate and to offer constructive challenge.

The main items on the agenda were:

• Questions raised by the audit committee chairman regarding a lack of transparency in the draft financial statements for the year to 31st December 2019 
• A recent media report regarding the failure of the company to sign up to The Real Living Wage 
• Feedback from a meeting with key investors undertaken by John Dawes 
• A recent internal audit report concluding that whilst risk management and internal control systems supported the achievement of strategic and operational objectives they were weak as regards the objectivity of reporting with senior finance management able to override controls The board consists of the following directors: 
• Chairman John Dawes – Independent upon appointment and with extensive 
industry experience, John joined the board last year. 
• CEO Sarminder Kaur – Promoted to the board as operations director after 
twenty years in the production function at Ringer plc four years ago. 
• CFO Ravi Sethi – Joined the company as a financial accountant and was 
promoted to the board two years ago. Ravi is a Chartered Accountant. 
• Operations Director Sally Fish – Joined the company graduate scheme in 
production and research and development and was promoted to the board three years ago. 
• HR Director Hugh Main – Joined the board last year from a major HR consultancy firm.
• Marketing Director Jane Jackson – Jayne joined the company four years ago after a career in marketing consultancy and joined the board two years later. 
• Independent non-executive director Jim Bean – Mr Bean has served at board level for two listed companies and has extensive experience as a NED and joined the board this year. 
• Independent non-executive director Mary Coyne – A Chartered Accountant, with many years of big firm experience in audit, and as an audit partner for five years before retiring and joining the board this year. Her firm had no connections to Ringer plc. 
• Non-independent non-executive director Norman Duke - a Chartered Accountant and former finance director. 
• Prior to this there were only two non-executive directors, Norman Duke and Robyn English a retired lawyer who was independent upon appointment ten years before. 
• Sarminder had operated as an executive chairman for two years.
• The audit committee consists of Jim Bean as chairman, Norman Duke and Mary Coyne and meets four times a year focusing it’s attention upon: 
• Review of the audit plan and later the outcomes of external audit and the objectivity of the auditors in order to assess the effectiveness and independence of the auditor 
• Review of internal audit reports taking a judgment on responses and reviewing actions taken and subsequent indicators of performance 
• Approval of the financial statements, annual report and interim report following a presentation by the finance director and his team 
• Approval of the annual report contents relating to risk management, internal control effectiveness, viability and going concern following a presentation by the finance director and his team 
• At a recent meeting Jim Bean questioned the limited disclosures relating to both trade receivables and trade payables where there were large balances for ‘other’ receivables and payables with no supporting explanations and no ageing. He also questioned the large balances for accruals and provisions that he saw as potentially discretionary and available for profit smoothing. Ravi closed down discussions since these were fully compliant and signed off by the auditors.

• A recent series of newspaper articles berated the company for its failure to support the Real Living Wage quoting Sarminder as saying that they paid wages and salaries at competitive levels and that such matters were commercial decisions for a company that had to protect jobs by maintaining a healthy margin. Media reports were also highlighting that dividends were increasing whilst the unfunded pension deficit was rising.
• A recent television programme focused on the company’s involvement in the production of plastic micro-particles that were found increasingly in pollution surveys with no plan to change. Sally Fish had told the programme that whilst demand was high and there was no cost effective alternative that selling such products within regulations was acceptable.
• At a meeting with key shareholders concerns were expressed that the company was pursuing growth without adequate regard for debt levels leading to price cutting to gain market share leaving operating margins lower and interest and dividend cover lower that they would seek. Two key shareholders found the annual report difficult to follow with limited discussion of operations and the financial position and performance. They both found the reconciliation of cash flows from operating activities and working capital changes difficult to reconcile to account balances in the statement of financial position suggesting that there was some obfuscation.
• The board heard how recommendations to reduce the ability of the senior finance managers in a recent internal audit report had merely been noted and then dismissed by the finance director.

In relation to the matters the board voted not to make changes to financial reporting processes, internal controls, wage policy and production of micro- particles.

Required:

• Assess the structure of the board before and after the recent changes and also the audit committee based on the information given in the scenario and your understanding of the UK Corporate Governance Code 2018.

Answer rating: 100% (QA)

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