The information will be more aligned with shareholders and other stakeholder requirements, which may lead to enhanced trust and better engagement between Grunwald and all of its stakeholders, including its customers. Shareholders will be better informed and better able to assess the impact the CSR strategy is having on the business and their investment, in terms of risk and return.

Internal control systems relating to financial reporting

Although the board is ultimately responsible for setting appropriate policies on internal controls and obtaining the necessary assurances that the internal control system is functioning effectively, it can delegate this role to its newly established risk committee.

The risk committee at MegaMart would:
（i）Approve the company’s internal control strategy and policies. If such an approach had been previously followed at MegaMart, internal controls would have been established and it is unlikely that the overstatement of reported profit could have occurred.
（ii）Review reports on key internal control failures and monitor overall exposure on such failures. Again by highlighting those areas of activity which expose MegaMart to the highest level of internal control failures, management would have focused its attention on areas such as misreporting financial performance.
（iii）Assess the effectiveness of the company’s internal control system. This is an ongoing activity that is likely to be tasked to internal auditors who would systematically determine if internal control systems were fit for purpose and likely to identify significant accounting discrepancies. The internal controls breach that resulted in the profits warning will worsen the performance of the company and so make the achievement of its objectives even less likely.
（iv）Provide early warning to the board of any emerging weaknesses in internal control from its operating environment. Unfortunately, the board of MegaMart only appeared to become aware of the misreported financial performance after it arose – when it was too late to avoid it occurring.
（v）Comply with legislation and all regulations to which MegaMart is subject. The profits warning statement indicates that MegaMart is compliant with local stock market regulations, but the actual underlying misreporting infers a breach of legislation and a failure of internal controls.
（vi）Along with the audit committee, review the statement of internal control in compliance with corporate governance requirements before it is published in the annual report. If this had been undertaken correctly at MegaMart, it is very likely that the accounting discrepancy would have been avoided altogether, escaping the resultant financial distress to the company and its shareholders.
（vii）Ensure reliability of financial reporting, including the preparation of published financial statements. Clearly this failure of internal control is of great concern to the board of MegaMart, since the reported $250 million overstatement of profit has significantly damaged the company’s reputation and its share price performance in the financial markets.

The objectives of an internal control system are:
（i）The orderly and efficient conduct of business in conjunction with the risk management systems in place. Controls mean that business processes and transactions take place without disruption and with less risk, which in turn should add to shareholder value.
There is no indication from the scenario that the core retail operations of MegaMart are being conducted incorrectly. However, it is apparent that the finance department has some fundamental control problems which need to be addressed, and its actions have implications throughout the company. By strengthening the robustness of its financial controls, MegaMart is less likely to have a recurrence of recent events.
（ii）The safeguarding of business assets, which include both tangibles and intangibles. Controls are necessary to ensure these assets are optimally utilised and protected from misuse, fraud, misappropriation, or theft.
Although the ‘accelerated recognition of commercial income and the delayed accrual of costs’ did not in itself amount to misuse of corporate assets, the resultant misreporting of these has severely damaged the company’s reputation, a valuable intangible asset. The resultant fall in share price dramatically reduced shareholder value, which is only likely to recover when the market is confident in the internal control system at MegaMart.
The error detected by internal controls could indicate possible operational or financial irregularities. Such breaches could include the use of unauthorised or incorrect accounting policies, which was evident from the findings of the report on MegaMart which stated ‘internal financial reporting systems and associated internal controls were wholly inadequate, allowing significant errors to go unchecked.’
Robust internal controls and disciplinary sanctions designed to deter anyone at MegaMart acting inappropriately in the future would help to prevent such a situation recurring. Alongside this, management controls should be implemented, comprising regular checks which would identify possible significant errors.
（iii）The completeness and accuracy of accounting records. Ensuring that all accounting transactions are fully and accurately recorded, that assets and liabilities are correctly identified and valued, and that all costs and revenues can be fully accounted.
It is difficult to accept that an accounting discrepancy of $250 million could have arisen without senior management at MegaMart identifying it in its early stages, unless the accounting information presented was itself based on incomplete and inaccurate records. If all transactions are correctly recorded and appropriately accounted, then such a situation could not arise again in the future, so the accounting control systems need to be closely monitored and supervised going forward.
（iv)The timely preparation of financial information which applies to both statutory reporting and management accounts for the facilitation of effective management decision-making.
The publication of MegaMart’s interim results was delayed by a month because of the investigation into the misreporting, which would appear unavoidable under the circumstances. However, it is essential that financial information is presented to its users in a timely fashion and within strict deadlines as this will be a regulatory requirement. Therefore, the establishment of a reporting framework and cycle at MegaMart to meet statutory and management requirements is required. However, care should be taken to ensure that any resultant time pressure does not encourage inappropriate action or circumvention of controls, so adequate resources must be assigned to this task by the board.
In the aftermath of the recent accounting irregularity at MegaMart, it is necessary for the board to reflect on these objectives and adjust the internal control systems as suggested to prevent any further error.

The general principles which should be used by the board of MegaMart to govern the disclosure and communication of company information to its shareholders are:

Transparency

Transparency refers to open and fair disclosure of information to shareholders, and not concealing information when it may affect their business decisions. In effect this means that openness should be the default position adopted by the board of MegaMart in terms of information provision to its shareholders. The fact that the results of the investigation were leaked to the media, suggests that this may have been how MegaMart shareholders became aware of the situation. The resultant extraordinary general meeting, where several board members were asked to resign, could possibly have been avoided if the board had adopted transparent procedures more quickly in its dealings with the shareholders.

Completeness

Completeness Information communicated to shareholders should not only meet the minimum statutory obligations in terms of published financial statements, but also include appropriate narrative such as directors’ reports and operating and financial reviews. The board of MegaMart has a duty to provide shareholders with a complete picture of the company’s affairs so that they can make informed decisions about their investment.

Information asymmetry

The board and management of MegaMart need access to far more information than do its shareholders, to enable them to effectively run the company on behalf of the shareholders. However, to overcome this information asymmetry, the board should implement good internal controls to ensure that shareholders are regularly informed about company affairs.

Inspire confidence

The communication and disclosure of relevant and reliable information can sometimes help reassure shareholders and the market that the company is being governed well, and this may significantly influence the share price of the company. The scenario indicates that the board of MegaMart complied with those stock market listing rules concerned with announcing profit warnings, but was slow in releasing the results of the investigation. However, making the information available exposed weaknesses at MegaMart, which undermined shareholders’ confidence.

Confidentiality

There may be circumstances where the disclosure of sensitive and confidential information about the company’s affairs may not be in the best interests of shareholders, particularly when such information may provide an advantage to competition. In such a case, the board is fully justified in not communicating this information to shareholders. However, the board must be prepared to explain its reasoning behind the non-disclosure, particularly if it later transpires any hidden actions damaged the firm, as was recently the case at MegaMart.