Ethics in the Modern Business World: a Case Study on Leisure Net

Ethics in The Modern Business World INDEX: Page 1: front page Page 2: index Page 3: introduction Page 4: internal controls Page 5: internal control systems Page 6: conclusion Page 7: bibliography Leisure Net In October 2000 the company Leisure Net, lifestyle and health Fitness Company, was provisionally liquidated, having been listed only five years earlier on the JSE. Today Leisure Net has passed its infamous scandal and is being currently run by directors; Mike Hill and David Monkhous. Peter Gardener and Rodney Mitchell, at the time of 2000 acting executive directors of Leisure Net, were convicted in 2012 on charges of contravening s234(1) of the companies act61 of 1973, they served only 19 months of a 7 year sentence. They were convicted of this fraud through the use of company bank accounts and inflating of profits. The Leisure Net scandal has had far reaching effect on South African law and business. It is asked whether the collapse of Leisure Net was the result of Peter Gardener and Rodney Mitchel were they solely to blame, or the inability of the board of directors to identify and stop these two men. Many criticize the events surrounding whistle blower Wendy Addison, stating it was not her sole responsibility to expose the corruption of these two individuals. The South African business requires all businesses act and follow the highest of code of conducts and ethics to promote itself to future investors. Cases like Leisure Net damage South African business image, as their actions could have possible scared off potential investors. This study will expose the fraudulent activity and impractical internal controls of Leisure Net. The Problems It is usual for health clubs to collect money by means of debit orders. So it is easy to double the debit run which LeisureNet did in December; debiting once at the beginning of the month and once at the end of the month. This then showed increased revenue for the period. This increased revenue would be fraudulent. Furthermore leisureNets financial statements for 1999 also stated that they have been approved and that their accounts Deloitte and Touche had approved them. This was not true. The two men used offshore accounts to launder Dalmore money; a company acquired by Leisure Net and in which the executive directors Peter Gardener and Rodney Mitchell held 20% of the shares. Using business accounts they were able to avoid taxation and hide assets. However the real downfall of Leisure Net is owed to Peter Gardener and Rodney Mitchell ingenious method of inflating profit by taking advantage of the debit order system which all electronic left no statements making its easy to double the subscription run. Internal controls Internal controls are defined as having five components: 1. Control Environment-sets the tone for the organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control. 2. Risk Assessment-the identification and analysis of relevant risks to the achievement of objectives, forming a basis for how the risks should be managed 3. Information and Communication-systems or processes that support the identification, capture, and exchange of information in a form and time frame that enables people to carry out their responsibilities 4. Control Activities-the policies and procedures that help ensure management directives are carried out. 5. Monitoring-processes used to assess the quality of internal control performance over time. Internal controls are implemented in:

• Delegated authority
• Bank
• Cash
• Fixed assets
• Vehicles
• Stocks
• Payroll

We see here a failure in three major areas of internal control; delegated authority, bank and cash. Delegated Authority: The Board of Trustees delegates authority through the Chief Executive for the day-to-day running of the organisation. In a large and busy organisation it is not practical to expect one person to make all the decisions and authorise all transactions. The Chief Executive will, therefore, further delegate authority to members of the staff team to relieve the load and to ensure smooth operation during absences of key staff. Peter Gardener and Rodney Mitchell benefited from an internal system that was not correctly employed, the committees did not delegate responsibilities properly leaving Peter Gardener and Rodney Mitchell in charge of items that regularly over-sighted by more than one director. The actions of the committee of directors should have been to delegate sensitive positions to more members to lessen chances of fraud. Another failure that occurred due to poor delegation of duties was the hiring of the internal auditor who at no point found fraud during Peter Gardener and Rodney Mitchell management. Committees should delegate with profession ensuring no member has the ability to commit fraud, as well as creation of an audit committee. Bank: The company had many accounts leaving a great possibility for use of these dormant accounts, leading to Peter Gardener and Rodney Mitchell illegal use to avoid taxation and aid in laundering of money. Business, especially large corporations need to pay careful attention to accounts and ensure that no account is being used outside of business us. Simple controls such as closing unused accounts would of greatly help Leisure Net. Cash: The companies debit orders provide an easy area for fraud as almost no internal controls where in place, it must therefore fall upon the company to update its payment options to unsure less fraud can take place. The bellow image provides a clear understanding of good corporate governance and its structure. Companies rely on solid structure to function; this structure is made from internal controls that have been put in place to help management and to promote a ethical professional business image This is an extract from Nomura Holdings https://www.nomuraholdings.com/investor/cg/intcon.html Nomura holds high standards with regards to internal controls they focus heavily on the committee system. Internal Controls System “As a Company which utilizes the Committee System, the central role in business oversight is taken by the Board of Directors and the Audit Committee (the majority of the members of the Audit Committee are Outside Directors). The Chair of the Board of Directors is held by a non-executive director, allowing the Board to better oversee the business conducted by the executive officers. The Audit Committee is chaired by an outside director, making its independence from management even clearer. Further, in order to ensure effective and adequate internal controls, the Group Internal Audit Department, which is independent from the business execution functions, and other similar audit sections placed in major affiliated subsidiaries conduct internal audits of the Company and its subsidiaries. The implementation status of the internal audit is reported to the Internal Controls Committee, which includes a member of the Audit Committee, and the matters discussed at the Internal Controls Committee are also reported to the Board of Directors. Results of individual internal audits are also reported periodically (monthly as a general rule) to the Audit Committee by the Group Internal Audit Department. In addition, to strengthen the independence of the internal audit sections from the business execution functions, implementation plans and formulation of the budget of the Internal Audit Division, as well as the election and dismissal of the Head of the Internal Audit Division, require the consent of the Audit Committee, or a member of the Audit Committee designated by the Audit Committee. Audit Committee members may recommend to Executive Officers changes to the implementation plan, additional audit procedures or improvement plan preparations.” Conclusion Leisure net has only to follow its international community’s actions. The world of business has changed. Ethics are now held high with the image of a company. Was the collapse of Leisure Net the entire doing of Gardener and Mitchell? Yes and no, yes their actions lead to liquidation, the fixed books led investors stray, but the larger picture is that of a failure of the entire board of directors, auditors and shareholders for being unable to identify the fraudulent behaviour of the two directors. I have listed and provided working examples of internal controls that once in place would ensure no fraud can occur without going unnoticed, these like everything in life is not a fool proof unbeatable system, but they require large amounts of effort and work to cheat, Gardener and Mitchell found a loop hold in the inner workings of Leisure Net, their transgressions have led to the collapse of a south African company and have weakened the image of our business and economy sectors. The actions of these two men have ensured that in order to commit fraud again in South Africa, the entire company would have to be corrupt to get away with it. https://www.nomuraholdings.com/investor/cg/intcon.html https://www.mango.org.uk/guide/icexamples https://www.iol.co.za/news/crime-courts/leisurenet-whistleblower-speaks-out-1.1460904 https://www.leisure-net.org https://www.aabschools.com/case_studies/424.html ETHICAL CHALLENGES IN SOUTH AFRICAN BUSINESSES The real problem with the topic of business ethics is not just the cost of being caught or punished but the impact on the perception of the company. Awareness is increasing. But research suggests that many businesses have a compliance approach to managing ethics - it’s about ticking boxes – it does not translate into actual desired behaviour.” The ethical problems I am going to speak about are Nepotism, Corruption, Sexual Harrasment and Illegal Strikes. Nepotism Nepotism generally means providing workplace opportunities to employees based on personal relationships rather thanon their qualifications for the position. This will reduce the overall productivity of the company. This lack of fairness can also cause a business to lose its best employees as their resentment will cause then to try to move to more ethical businesses. In addition, it becomes a problem for managers who are not able to give fair treatment to their subordinates because they are connected to someone of authority in the company. It also gives these employees a sense of entitlement and that the consequences do not apply to them. Corruption Corruption is the abuse of entrusted power for private gain. It hurts everyone who depends on the integrity of people in a position of authority. Corrupt activity affects development, it contributes to less local and foreign direct investment. Sexual Harrasment Sexual harassment is identified as unwanted conduct of a sexual nature. Sexual harassment in the workplace is inexcusable. It is the employer's responsibility to ensure that policies and procedures are followed in order to stop sexual harassment in the workplace. Employees need to be able to identify acts of sexual harassment so that the necessary action may be taken to eliminate this. Employers should develop and implement policies and procedures that will lead to the creation of workplaces that are free of these practices Illegal Strikes Management must walk the talk if there is to be a change in business ethics 1 | Page

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