Corporate Governance and Fraud: A Detailed Analysis of TFS (Quintis)

This report provides a comprehensive analysis of the corporate governance and fraud issues surrounding TFS Corporation (later renamed Quintis), an Australian sandalwood company. The analysis begins by evaluating the strengths and weaknesses of TFS's corporate governance, highlighting inefficiencies in financial reporting, aggressive accounting policies, and a lack of transparency. The report then delves into the factors that contributed to the company's demise, including unethical accounting practices, misrepresentation of financial performance, and the failure of the board of directors to fulfill their responsibilities. Furthermore, the report examines the impact of Black Rock's investment in TFS, the company's subsequent bankruptcy, and the remuneration of the CEO and non-executive directors. This report provides a critical assessment of the remuneration packages of the CEO and executives, as well as the remuneration of the non-executive directors, offering a complete understanding of the factors leading to the collapse of the company. Overall, the report serves as a case study, illustrating the critical importance of strong corporate governance and ethical practices in maintaining investor confidence and ensuring the long-term sustainability of a company.

Governance and Fraud
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TABLE OF CONTENTS
Part 1..........................................................................................................................................3
(i)............................................................................................................................................3
(ii)...........................................................................................................................................4
(iii)..........................................................................................................................................6
Part 2..........................................................................................................................................6
(i)............................................................................................................................................6
(ii)...........................................................................................................................................8
References................................................................................................................................10
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PART 1
(i)
The strength and weakness of the corporate governance of TFS Company have been analyzed
below in detail manner:
Strengths:
Efficient and effective board structure and management: The management of the company
can be said well-efficient to recognize and manage risk relating to business. Even the board
follows the practice of accomplishing responsibilities and obligations relating to stakeholders
through its corporate governance practices (Quintis Limited, 2018).
Making appropriate attempt to comply with corporate governance principles: The
executive management make efficient attempt to perform their duties with honesty, integrity
care, and due diligence in order to act in the best interest of company which represent the highest
standard of corporate governance operations (Quintis Limited, 2017). With the specified
efficiency only, the company was able to make appropriate investments and provide profitable
results in its half financial year. This shows that the management had a good framework and
management within the semi-financial year. The results represent that company has good as
well as competent board structure. Adequate competence and skills are available with the
board of directors to implement the decision in an appropriate manner. The same has been
proven with the results attained during the semi-financial year 2016 as the profits attained
during specified semi financial period is due to the efficiency of board management.
The effort to regain the lost brand name or image of the company: The element of
continuous improvement can be assessed in management as the company is attempting to
rebrand through providing a new name, i.e., from TFS Corporation to Quintis in the year
2017. The management believes in providing necessary information to stakeholders within
time, and the same was done with the half-yearly result announced on 27th February 2017 so
that the investment opportunities could be available for profitable operations.
Weaknesses:
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Unable to provide true information to stakeholders and investors: Board of directors and
management are responsible for providing accurate information to stakeholders relating to the financial
performance of the company. The accounting practices followed by TFS Corporation were
questionable. As the revenue policy allows the company to recognize revenue before any cash is
received or the contract is executed. Thus, fictitious revenues were generated by the company in order to
gain access to financing through bond arrangements.
Giving acceptance to aggressive accounting policies: It could be assessed that aggressive accounting
policies along with discretionary revenue recognition policy which permitted to book revenue before
cash payment presented the untrue financial performance of the company. Even the company did not
make a sound decision relating to the huge investment made in sandalwood due to which investors
had to face huge losses.
Ignorance of risk of providing details relating to financial performance which is based
on unethical principles: The unethical practices followed by the management overlooked
the risk involved in providing wrong information (without strong evidence or analysis).
Stakeholders have right to attain information relating to business operations, but the company
denied the right to acquire correct information. Even the release of positive predictions for
future growth increased the share market value to great heights, but as the performance
presented in a financial statement was incorrect, the actual position could not be assessed by
stakeholders. Moreover, when the real picture came in front of stakeholders, it impacted the
image as well as the market value of the company negatively. Overall the window dressing
policy complied by the management was the main weakness of the corporate governance of
TFS Corporation.
(ii)
Corporate Governance can be stated as a central and dynamic aspect of every business
(Sadique et al. 2019). The development of strong corporate governance is necessary to
protect stakeholders as well as to assure the maintenance of investors in the company
(Rasheed and Nisar, 2018). The fact cannot be denied that the challenges relating to the
effectiveness of corporate governance are significant irrespective of intent with which the covert
actions are conducted (Tarr, 2016). The three broad categories which motivate the
misgovernance are outright frauds, application of excessive power by retired founders of the
board and undue fortification (Hodgson, Seamer and Uylangco, 2018). The corporate
governance of TFS (Quintis) contributed to the demise of the company as it provided its
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acceptance to the unethical accounting practices which eventually developed an untrue financial
picture of the company for investors and stakeholders. In the annual report of the year 2013, a
segment noting has been presented that the payment of 610- then 580 ha lot has been not
received. Further, the notice relating to the same has been received on 30th June 2013. Even
attempt was made by the management to leverage high institutional revenue as a tool to attain
access to debt financing (Quintis Limited (ASX: QIN), 2017). All these practices represent the
negligence of management, which contributed to the demise of the company.
It can be accessed that the corporate governance responsibilities were not accomplished by the
board of directors. In accordance with ASX principles, it is necessary for the management to set
out the best governance practices so that an appropriate decision can be taken for investors. It is
necessary directors to act lawfully, responsibly and ethically on a mandatory basis (Tan, D.T.,
Chapple and Walsh, 2017). In case the management of the company would have applied due
diligence in order to ascertain whether the company has attained the profits presented in
financial statements of a period of six months, in reality, it would have known the real
profitability of company far earlier. Though, the management of TFS (Quintis) did not comply
with the same and provided financial results of the semi-financial year without assessing the
operations in an appropriate manner. Further internal audit function is not available in the
organization. Due to same, the operations were not accessed appropriately. The implied opinion
accepted by the management that sandalwood products will enhance in a concurrent manner
than the exploding legal manner was inappropriate. As it can be assessed that there is no logical
reason behind this projection and same affected the financial results in a significant manner
which eventually affected the market price of the company.
The board of director is responsible for managing the business operations in an effective manner
on behalf of shareholders (Salleh and Othman, 2016). Further, it is their duty to not to use
their position to gain advantage or to cause detriment to the company. In case of TFS
(Quintis); if management would have accomplished the responsibility in accordance with
principles of corporate governance than the financial results of six months period presented to
the stakeholders would have presented the actual financial position of the company. Though
the responsibility was not accomplished actually and unfair financial position was presented
in financial statements. These statements enforced media of present exponential growth in
Indian sandalwood sales. It increased the market value of over $600 million, and huge profits
were expected by the shareholders. Thus, due to non-compliance corporate governance
principles, the management contributed to the demise of the company in a significant manner. If
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the management would have accessed the financial statements in an appropriate manner and not
followed aggressive accounting policies than it is possible that company might have assessed the
actual progress of company and share price would not have collapsed, and the real picture of the
company would have been known by the investors and other stakeholders.
(iii)
In the present case, Black Rock injected cash to TFS (Quintis) and attained majority ownership
of the company. The investment made by Black Rock was made after the report provided by
Glaucus firm in which it was stated the company has not complied with the principles of
corporate governance (Fitzgerald, 2018). Further, for a similar reason, it was suspended from
trading on ASX. Even though the brand image of the company was ruined in a substantial
manner, Black Rock invested in the company and provided another opportunity to present its
efficiency. The decision made by the company of investing in TFS (Quintis) had affected their
brand image and overall performance as well. It would be correct to state that after a difficult
period of eighteen months, the company was able to enter a trading halt and initiate its
operations (Power, 2017). The investment made by the company provided TFS (Quintis) an
opportunity to save and rebuild its relationship and saved the demise of the company. The cash
injection provided by Black Rock was an investment opportunity to assist the company in
dealing with financial trouble and other financial crises. The cash injection is not less than strong
support, which was required by the company in an existing crucial period faced by it
(McCahery, Sautner and Starks, 2016). Thus, it can be concluded that the decision of Black
Rock provided a second chance to TFS (Quintis) to prove its efficiency and rebuild its lost
image. The decision played an important role in recovering the demise of Quintis as the
company would not have been able to recover its position in case cash support would not have
been provided by the Black Rock.
PART 2
(i)
The arrangements for remuneration packages of the CEO and executives has been approved
by the Board itself, as well as all the rewards as per the long-term incentive plans of the
Corporation, following recommendation from and some determinations by the committee of
remuneration(Annual Report of HARVEY NORMAN, 2018). In addition, the aggregate
NEDs remuneration has been set by the Board, also subjected to the approval of shareholder.
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A critical assessment of the short term and long term salary and performance benefits for the
CEO
Remuneration
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(Amount in $m)
Particular 2018 2017 2016
Total Remuneration of CEO 3.13 3.34 3.08
This salary is paid on the basis of following structure:
Figure 1: Salary structure of CEO
(Source: Annual report of Harvey Norman, 2017, 2018)
Year
Short Term Benefits Post-Employment Long Term Incentives
Total Remuneration
Salary & Fees Performance
Cash
Incentive
Other
Short
Term
Non-
Monetary
Benefits Superannuation
Performance
Cash
Incentive
Performance
Rights
2018 2,062,925 650,080 17,026 20,049 205339 173,027 3,128,446
2017 2,064,922 658,666 15,462 19,616 419,274 158,237 3,336,177
2016 2,074,63 510,950 6,059 19,308 441,885 30,051 3,082,886
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By considering the structure of Harvey Norman is appropriate, short term and long term
salary and performance benefits for the CEO is appropriate because it is supported by strong
norms and strict policy compliance. As per the annual report, annually, after considering
reports as well as performance in opposition to STI Target, the committee of remuneration
considers a last determination of STI amount that is payable to the CEO and all executive
directors. Further, the degree by which satisfaction of Financial Condition will be reported in
the Performance Report and Internal Audit Report, Remuneration Committee considers as per
the terms and condition of STI Plan 2018. Further, the Remuneration Committee might
anytime, in its fill discretion, reduce the PCI amount, which is, or might turn out to be paid to
an executive as per the 2018 STI Plan by delivering a written notice to the viable executive
any time prior to the date of payment.
Further, short term and long term incentives have also been provided in accordance with the
reward scheme. It could be accessed that appropriate structure has been provided by the
management so that fair chance could be provided to earn a specific reward by the CEO.
Even non-financial metrics are considered relating to sales of plantation in order to ascertain
Key Performance Indicators.
(ii)
A critical assessment of the remuneration paid to the 4 non-executive directors
Non- Executive Directors 2018 2017 2016
Christopher Herbert Brown
OAM
145,000 145,000 120,000
Michael John Harvey 60,000 60,000 60,000
Kenneth William Gunderson-
Briggs
173,873 189,475 150,000
Graham Charles Paton AM 145,000 145,000 120,000
(Source: Annual Report of HARVEY NORMAN, 2018, 2017)
According to the annual report of Harvey Norman, the NEDs remuneration is inclusive of the
fees of directors. However, NEDs are not permitted to retirement benefits, and they cannot
take part in any of the incentive related programs. Every NED obtains a fee for acting as a
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Corporate Director. Further, the overall framework of NED remuneration is separate and
different from the executive remuneration. Further, Fluctuations in payment to non-executive
directors could be assessed fluctuations in the profits of the company. It can be concluded
that remuneration paid to non-executive director is in accordance with the regulatory policies
followed by the principles and same is justifiable as it clearly reflects business profits and
contribution of their performance (Ferri and Göx, 2018).
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REFERENCES
Annual Report of HARVEY NORMAN, 2017. HARVEY NORMAN HOLDINGS
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August 2019].
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Rasheed, A. and Nisar, Z., 2018. A Review of Corporate Governance and Firm
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