It emerged that the lack of correct information from Philos and elsewhere meant that Global-bank’s annual report statement of internal control effectiveness was not accurate and gave an unduly favourable impression of the company’s internal controls. In addition，the company’s audit committee had been recently criticised by the external auditors for a lack of thoroughness. Also，the audit committee had recently lost two non-executive members that had not been replaced.

　　The amount lost by Mr Mineta made it necessary to refinance the Global-bank business and when the board recommended a US$5 billion rights issue，some of the institutional investors demanded an extraordinary general meeting (EGM).Global-bank’s largest single shareholder，the Shalala Pension Fund，that held 12% of the shares，was furious about the losses and wanted an explanation from Mrs Keefer on why internal controls were so ineffective. When the Shalala trustees met after the losses had been reported，it was decided to write an urgent letter to Mrs Keefer expressing the trustees’ disappointment at her role in the internal control failures at Global-bank. The letter would be signed by Millau Haber， the chairman of the Shalala trustees.

　　At the EGM，Mrs Keefer made a statement on behalf of the Global-bank board. In it she said that Mineta had been a rogue trader who had wilfully disregarded the company’s internal controls and was，in breaking the company’s trading rules，criminally responsible for the theft of company assets. She denied that the main Global-bank board had any responsibility for the loss and said that it was a ‘genuinely unforeseeable’ situation.

　　(a) Kohlberg’s theory of the development of moral reasoning contains three levels， with each level containing two stages or ‘planes’。 It is a useful framework for understanding the ways in which people think about ethical issues.

　　Required：

　　(i) Explain the three levels of Kohlberg‘s theory. (6 marks)

　　(ii) Identify the level that Mr Mineta operated at and justify your choice using evidence from the case. (4 marks)

　　(iii) Identify， with reasons， the stage (or ‘plane’) of Kohlberg‘s moral development most appropriate for a professional bank employee such as Mr Mineta as he undertakes his trading duties. (2 marks)

　　(b) Explain FIVE typical causes of internal control failure and assess the internal control performance of Global-bank in the case scenario. (10 marks)

　　(c) Analyse the agency relationship that exists between the board of Global-bank and the trustees of the Shalala Pension Fund. (4 marks)

　　(d) Distinguish between narrow and wide stakeholders and identify three narrow stakeholders in Global-bank (based on Evan & Freeman’s definition) from information in the case. Assess the potential impact of the events described on each narrow stakeholder identified. (10 marks)

　　(e) You have been asked to draft a letter from Millau Haber，chairman of the Shalala trustees，to Mrs Keefer as a result of concerns over the events described in the case. The letter should explain the roles and responsibilities of the chief executive in internal control，and criticise Mrs Keefer’s performance in that role. (10 marks)

　　Professional marks are available in part (e) for the structure， content， style and layout of the letter. (4 marks)

　　2 In a major policy speech，Government finance minister Mrs Wei Yttria said that the audit and assurance industry’s work should always be judged by the effect it has on public confidence in business. She said that it was crucial that professional services such as audit and assurance should always be performed in the public interest and that there should be no material threats to the assurer’s independence. Enron and other corporate failures happened，she said，because some accountants didn’t understand what it was to act in the public interest. She stressed that it was important that firms should not provide more than one service to individual clients. If a firm audited a client then，she said，it shouldn’t provide any other services to that client.