Duty of Care, Skill and Diligence: Case Study
Ong (CEO)
Duty of care, skill and diligence:
Ong failed to use reasonable diligence in discharging his duties. He did not inform the Audit Committee (“AC”) of the controversy surrounding the recognition of ISR revenue. For AIP, he made unwarranted assumption to consider ‘start of course’ as ‘start of course procedure’ without seeking professional advice. He had inappropriately recognized Franchise Revenue , contributed by flip pathfinders’ agreements, albeit knowing that these agreements were not in the ordinary course of business .
Applying the objective test, it was reasonable to expect Ong to present the issues to the attention of the relevant committee for further investigation. The subjective test was not in his favour, because being an Informatics’ co-founder, he should be familiar with the revenue recognition process and the non-existence of flip pathfinders’ agreements under Wong’s directorship. Hence, falling short of the standards, Ong breached the common law duty of care, skills, diligence and thus, statutory duty S157(1) .
In addition, Ong breached S199(1) during the financial year, as the books and records of two of its subsidiaries were not properly kept. The premature recognition of the first twelve days of Q3FY04 revenue in Q2FY04 also demonstrated the lack of internal accounting controls, breaching S199(2A) .
Furthermore, he failed to delegate and rely on others with care, skill and diligence. It was reasonable for Ong to rely on Informatics’ CFO to allow the changing of accounting policy . However, he failed to act honestly as he was aware of the aggressive accounting associated with the new revenue recognition policy. Consequently, Ong violated S157C(1) due to S157C(2) .
Duty of loyalty and good faith
Ong was dishonest when he made and released misleading unaudited financial statements, which he ought to know that the statements were misleading in a material way. He deprived members’ right to know the true financial
Duty of care, skill and diligence:
Ong failed to use reasonable diligence in discharging his duties. He did not inform the Audit Committee (“AC”) of the controversy surrounding the recognition of ISR revenue. For AIP, he made unwarranted assumption to consider ‘start of course’ as ‘start of course procedure’ without seeking professional advice. He had inappropriately recognized Franchise Revenue , contributed by flip pathfinders’ agreements, albeit knowing that these agreements were not in the ordinary course of business .
Applying the objective test, it was reasonable to expect Ong to present the issues to the attention of the relevant committee for further investigation. The subjective test was not in his favour, because being an Informatics’ co-founder, he should be familiar with the revenue recognition process and the non-existence of flip pathfinders’ agreements under Wong’s directorship. Hence, falling short of the standards, Ong breached the common law duty of care, skills, diligence and thus, statutory duty S157(1) .
In addition, Ong breached S199(1) during the financial year, as the books and records of two of its subsidiaries were not properly kept. The premature recognition of the first twelve days of Q3FY04 revenue in Q2FY04 also demonstrated the lack of internal accounting controls, breaching S199(2A) .
Furthermore, he failed to delegate and rely on others with care, skill and diligence. It was reasonable for Ong to rely on Informatics’ CFO to allow the changing of accounting policy . However, he failed to act honestly as he was aware of the aggressive accounting associated with the new revenue recognition policy. Consequently, Ong violated S157C(1) due to S157C(2) .
Duty of loyalty and good faith
Ong was dishonest when he made and released misleading unaudited financial statements, which he ought to know that the statements were misleading in a material way. He deprived members’ right to know the true financial