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Solution of the case study Polly Peck International

Course Title: Corporate Governance and Financial Reporting
Course Code: AIS553
Submitted To:
Assistant Professor
Ashik-Uz-Zaman
Department of Accounting and information Systems
Bangabandhu Sheikh Mujibur Rahman Science and Technology University,
Gopalganj-8100

Submitted By:
Group 9

Name Student ID

Bisli Talukdar 17AIS008

MD. Bacchu Mia 17AIS015

Sabbir Sheikh (Leader) 17AIS017

Master of Businees Administration

Department of Accounting and information Systems

Bangabandhu Sheikh Mujibur Rahman Science and Technology University, Gopalganj-8100

Date of Submission: 20-03-2024

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 History of polly peck International

Polly Peck International (PPI) was a small British textile company which expanded rapidly in the
1980s and became a constituent of the FTSE 100 Index before collapsing in 1991 with debts of £1.3
billion, eventually leading to the flight of its CEO, Asil Nadir to Northern Cyprus in 1993. Polly Peck
was one of several corporate scandals that led to the reform of UK company law, resulting in the early
versions of the UK Corporate Governance Code.

On 26 August 2010 Nadir returned to the UK to try to clear his name. Prosecutors alleged that he stole
more than £150 million from Polly Peck and he faced trial on 13 specimen charges totalling £34
million. Nadir was found guilty on 10 counts of theft totaling £29 million. On 23 August 2012 at
the Old Bailey he was sentenced to 10 years in prison.

Company type Public

Industry Fashion industry
Founded 1940
Defunct 1991
Fate Bankrupt & broken up
Headquarters London, UK
Key people Asil Nadir (CEO)
Products Textile
Number of employees Circa 17,000

The case solution of Poly peck

Summary of the case:

The Polly Peck case study tells the story of the rise and fall of a multinational conglomerate founded
by British businessman Asil Nadir in the 1980s. The company experienced rapid growth, expanding
into various sectors such as electronics, textiles, and food. However, he soon realized the potential for
expansion and ventured into the electronics industry. He bought a controlling stake in a Hong Kong-
based electronics firm, Sansui Electric, which gave him access to cutting-edge technology. PPI's
electronic division quickly became its flagship business, contributing the bulk of the company's
profits. Nadir was known for his aggressive business tactics, and he was not afraid to take risks. He
frequently made large investments and acquisitions without conducting proper due diligence, which
ultimately proved to be his downfall. Nadir's aggressive business tactics, willingness to take risks and
failure to conduct proper due diligence on acquisitions ultimately led to the company's downfall. PPI's
accounting practices were opaque, and there were allegations of fraud and mismanagement. Strong
corporate governance and ethical practices could have prevented these issues from arising, and
potentially saved the company from collapse. Nadir was accused of stealing millions of pounds from
the company and fled the UK to escape prosecution. For instance, in 1989, PPI acquired a US-based
fruit company, Del Monte, for $875 million. However, Del Monte was experiencing financial
difficulties, and the acquisition was seen as a risky move by many analysts. In 1990, PPI's troubles
began to mount. The company's auditors raised concerns about its accounting practices, and there

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were allegations of fraud and mismanagement. The company's share price plummeted, and Nadir was
forced to step down as CEO. However, things went from bad to worse when the Serious Fraud Office
(SFO) launched an investigation into the company's finances. Nadir was accused of stealing millions
of pounds from the company and was arrested in 1990. Nadir fled the UK in 1993; just before his trial
was due to begin. He spent the next 17 years in northern Cyprus, where he was beyond the reach of
UK law enforcement. In 2010, he returned to the UK and was charged with 66 counts of theft and
fraud. In 2012, Nadir was found guilty of 10 counts of theft amounting to £29m and sentenced to 10
years in prison. This case highlights the importance of ethical business practices, due diligence, and
strong corporate governance in building a sustainable business.

Violation of Corporate Governance:

The collapse of Polly Peck International plc was characterized by numerous violations of corporate
governance principles, which played a significant role in facilitating the perpetration of fraud and
ultimately contributing to the company's downfall. Here are some key details outlining the violations
of corporate governance in Polly Peck:

1. Lack of Board Independence: Polly Peck's board of directors lacked sufficient

independence and oversight over the company's operations. Asil Nadir, the founder and CEO,
exerted significant influence over board decisions, limiting the effectiveness of independent
oversight mechanisms. This lack of board independence allowed for unchecked executive
power and diminished accountability.

2. Weak Internal Controls: Polly Peck had inadequate internal controls and risk management
processes to prevent and detect fraudulent activities. There were deficiencies in financial
reporting procedures, internal auditing, and compliance monitoring, which created
opportunities for manipulation of financial statements and misappropriation of company
funds.

3. Conflict of Interest: Asil Nadir and other top executives at Polly Peck were accused of
engaging in self-dealing and conflicts of interest, using company resources for personal gain.
Nadir's dual role as both CEO and majority shareholder allowed for the consolidation of
power and limited transparency in decision-making processes. This concentration of authority
facilitated the exploitation of the company for personal enrichment.

4. Opaque Financial Disclosures: Polly Peck's financial disclosures were opaque and lacked
transparency, making it difficult for investors and regulators to assess the true financial health
of the company. Allegations of accounting fraud and manipulation of financial statements
further obscured the company's financial position, misleading stakeholders about its
performance and prospects.

5. Inadequate Risk Management: Polly Peck failed to effectively manage risks associated with
its diversified business operations and exposure to volatile markets. The company's expansion
into politically unstable regions and reliance on speculative investments heightened its
vulnerability to external shocks and economic downturns. Inadequate risk assessment and
mitigation strategies exacerbated Polly Peck's exposure to operational and financial risks.

6. Non-Compliance with Regulatory Requirements: Polly Peck's compliance with regulatory

requirements was subpar, with allegations of regulatory violations and non-disclosure of
material information. The company's failure to adhere to accounting standards and disclosure

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 obligations undermined investor confidence and raised red flags about its corporate
governance practices.

Core problems of Polly Peck International:

The core problems associated with the collapse of Polly Peck International plc are deeply intertwined
with both accounting practices and corporate governance (CG) failures. Here are the key issues:

1. Accounting Irregularities: Polly Peck's collapse was primarily driven by accounting

irregularities and financial fraud. Asil Nadir and other top executives manipulated the
company's financial statements to inflate revenues, understate liabilities, and conceal losses.
These fraudulent accounting practices misled investors, regulators, and other stakeholders
about the true financial health of the company. The lack of transparency and accuracy in
financial reporting undermined investor confidence and contributed to the company's
downfall.

2. Weak Corporate Governance: Polly Peck suffered from weak corporate governance
structures and practices that failed to prevent, detect, or address the fraudulent activities
perpetrated by senior management. The board of directors lacked independence and diversity,
with Nadir exerting significant control over board composition and decision-making. This
lack of independent oversight allowed management to operate with impunity, contributing to
the perpetration of accounting fraud and other governance failures.

3. Lack of Internal Controls: Effective internal controls are essential for ensuring the
reliability of financial reporting and preventing fraud and misconduct within an organization.
However, Polly Peck's internal control environment was weak, allowing for the manipulation
of financial records and the misappropriation of company assets. Inadequate controls and
oversight mechanisms failed to detect or deter fraudulent activities, enabling senior
executives to engage in misconduct undetected.

4. Ethical Lapses: The collapse of Polly Peck also underscored ethical lapses within the
organization, including a culture that prioritized short-term financial performance over ethical
behavior and integrity. Senior executives, including Nadir, disregarded ethical considerations
in pursuit of personal gain and corporate success, leading to a breakdown in trust and
accountability. The lack of ethical leadership and a culture of impunity fostered an
environment where fraudulent activities could thrive without consequence.

5. Regulatory Compliance Failures: Polly Peck's collapse raised serious questions about
regulatory compliance and oversight within the financial markets. Regulators failed to detect
or address warning signs of fraud and misconduct within the company, highlighting
deficiencies in regulatory enforcement and oversight. The regulatory environment at the time
may have lacked the necessary resources, expertise, or tools to effectively monitor and
regulate complex financial transactions and reporting practices.

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Auditing Issues relate to the Collapse

The collapse of Polly Peck International plc revealed significant auditing issues involving both
internal and external auditors. Here's a breakdown of the key problems associated with auditing in the
Polly Peck case:

1. Internal Auditing Issues:

 Inadequate Independence: Polly Peck's internal audit function lacked independence

from management, compromising its ability to provide objective and unbiased
assessments of the company's financial controls and practices. Internal auditors may
have faced pressure or conflicts of interest that hindered their ability to effectively
identify and report fraudulent activities.

 Weak Internal Controls: Polly Peck's internal control environment was deficient,
allowing for the manipulation of financial records and the misappropriation of
company assets. Internal auditors failed to adequately assess and address weaknesses
in the company's internal controls, contributing to the perpetration of fraud by senior
management.

 Limited Scope and Resources: The internal audit function at Polly Peck may have
been constrained by limited resources, expertise, and authority, preventing it from
conducting thorough and effective audits of the company's operations. Insufficient
audit coverage and oversight may have allowed fraudulent activities to go undetected
for an extended period.

2. External Auditing Issues:

 Failure to Detect Fraud: Polly Peck's external auditors, who were responsible for
conducting independent audits of the company's financial statements, failed to detect
the fraudulent activities perpetrated by senior management. Despite their professional
obligations and responsibilities, external auditors may have overlooked warning signs
of accounting irregularities or failed to perform adequate audit procedures to uncover
the fraud.

 Lack of Professional Skepticism: External auditors may have lacked the necessary
skepticism and scrutiny to challenge management's representations and assertions
regarding the company's financial performance and position. A failure to exercise
professional skepticism and to conduct rigorous audit testing may have contributed to
the failure to detect fraudulent activities within Polly Peck.

 Conflicts of Interest: External auditors may have faced conflicts of interest stemming
from their financial relationships with Polly Peck or pressure to maintain lucrative
audit engagements. These conflicts may have compromised the independence and
objectivity of the audit process, leading to a failure to identify and report accounting
irregularities.

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Implication of Corporate Governance:

The collapse of Polly Peck International plc had significant implications for corporate governance
(CG), highlighting shortcomings in governance practices and underscoring the importance of effective
oversight and accountability. Here are some of the key implications of corporate governance in the
Polly Peck case:

 Loss of Investor Trust: Polly Peck's collapse eroded investor trust and confidence in the
company's leadership, management, and governance practices. The revelation of accounting
irregularities and financial fraud shattered the perception of Polly Peck as a well-managed and
financially sound company, leading to significant financial losses for investors and
shareholders. The breakdown in governance contributed to a loss of credibility for the
company and its leadership, highlighting the importance of transparency, integrity, and
accountability in maintaining investor trust.

 Regulatory Scrutiny and Reforms: The Polly Peck scandal prompted regulatory scrutiny
and calls for reforms aimed at strengthening corporate governance standards and oversight
mechanisms. Regulators and policymakers sought to enhance transparency, accountability,
and integrity in corporate decision-making through regulatory reforms and enforcement
actions. The scandal underscored the need for robust regulatory frameworks and effective
enforcement mechanisms to prevent and detect corporate misconduct, protect investors, and
safeguard the integrity of financial markets.

 Focus on Board Effectiveness: The governance failures at Polly Peck drew attention to the
importance of board effectiveness and independence in overseeing management and
safeguarding shareholder interests. Boards of directors were scrutinized for their oversight
responsibilities and their ability to challenge management, assess risks, and ensure
compliance with legal and ethical standards. The scandal underscored the need for diverse,
independent, and competent boards capable of providing effective governance oversight and
holding management accountable for their actions.

 Risk Management and Internal Controls: The Polly Peck scandal highlighted the
importance of robust risk management practices and internal controls in mitigating
operational, financial, and compliance risks. Weaknesses in Polly Peck's risk management
framework and internal controls allowed for the perpetration of financial fraud and
misconduct, underscoring the need for organizations to implement effective controls and
procedures to prevent, detect, and address risks. The scandal prompted companies to reassess
their risk management practices and strengthen internal controls to enhance governance
effectiveness and mitigate the likelihood of similar corporate failures.

 Ethical Leadership and Corporate Culture: The governance failures at Polly Peck
underscored the importance of ethical leadership and fostering a culture of integrity and
accountability within organizations. The scandal revealed a culture that prioritized short-term
financial performance over ethical conduct, leading to fraudulent activities and misconduct.
Companies were reminded of the importance of promoting ethical behavior, values-driven
leadership, and a strong ethical culture to prevent and deter corporate misconduct, foster trust
and confidence, and enhance governance effectiveness.

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Lesson learn from the polly peck scandals:

The Polly Peck scandal provides several important lessons for stakeholders in the realms of corporate
governance, risk management, ethical leadership, and regulatory oversight. Here are some key lessons
learned from the Polly Peck scandal:

 Importance of Transparency and Accountability: The Polly Peck scandal underscores the
critical importance of transparency and accountability in corporate governance. Companies
must maintain accurate and transparent financial reporting, disclose relevant information to
stakeholders, and hold management accountable for their actions. Transparency fosters trust
and confidence among investors, regulators, and other stakeholders, helping to mitigate the
risk of fraud and misconduct.

 Need for Independent Oversight: Effective corporate governance requires independent

oversight from boards of directors, auditors, regulators, and other stakeholders. The Polly
Peck scandal highlights the importance of independent boards capable of challenging
management, assessing risks, and ensuring compliance with legal and ethical standards.
Independent oversight helps to safeguard shareholder interests, mitigate conflicts of interest,
and promote integrity and accountability within organizations.

 Enhanced Risk Management Practices: The Polly Peck scandal underscores the importance
of robust risk management practices in identifying, assessing, and mitigating risks that could
threaten a company's financial stability and reputation. Companies must implement effective
risk management frameworks, internal controls, and compliance programs to prevent, detect,
and address fraud and misconduct. Proactive risk management helps organizations anticipate
and respond to emerging threats, reducing the likelihood of costly governance failures.

 Promotion of Ethical Leadership: Ethical leadership is essential for fostering a culture of

integrity, accountability, and ethical conduct within organizations. The Polly Peck scandal
highlights the dangers of prioritizing short-term financial performance over ethical behavior
and values-driven leadership. Companies must promote ethical leadership, instill a strong
ethical culture, and provide training and support to employees to promote ethical decision-
making and behavior at all levels of the organization.

 Strengthening Regulatory Oversight: The Polly Peck scandal underscores the need for
robust regulatory oversight and enforcement mechanisms to protect investors, maintain
market integrity, and prevent corporate misconduct. Regulators must have the resources,
authority, and expertise to effectively monitor and regulate corporate behavior, investigate
allegations of fraud and misconduct, and hold wrongdoers accountable. Strengthening
regulatory oversight helps to deter corporate malfeasance, promote transparency and
accountability, and safeguard the interests of investors and other stakeholders.

In summary, the Polly Peck scandal offers valuable lessons for companies, boards, regulators, and
other stakeholders on the importance of transparency, accountability, risk management, ethical
leadership, and regulatory oversight in maintaining effective corporate governance and preventing
governance failures. By learning from the mistakes of the past and implementing best practices,
organizations can enhance governance effectiveness, restore investor trust, and promote long-term
sustainable growth.

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Some fruitful suggestions derived from the Polly Peck case:

1. Enhance Board Independence and Diversity: Companies should prioritize the

independence and diversity of their boards of directors to ensure robust oversight and
accountability. Boards should include a diverse mix of backgrounds, expertise, and
perspectives, with independent directors capable of challenging management and promoting
transparency and integrity.

2. Strengthen Internal Controls and Risk Management: Organizations should implement

robust internal controls and risk management practices to identify, assess, and mitigate risks
that could threaten their financial stability and reputation. This includes enhancing processes
for financial reporting, compliance, and internal audit to prevent and detect fraud and
misconduct.

3. Promote Ethical Leadership and Culture: Companies should foster a culture of ethical
leadership, integrity, and accountability throughout the organization. This involves promoting
ethical behavior, values-driven leadership, and a strong ethical culture at all levels of the
organization, supported by training, communication, and incentives that reinforce ethical
conduct.

4. Improve Transparency and Disclosure Practices: Organizations should prioritize

transparency and disclosure in their financial reporting and communications with
stakeholders. This includes providing clear, accurate, and timely information to investors,
regulators, and other stakeholders, and ensuring transparency in corporate governance
practices and decision-making processes.

5. Enhance Regulatory Oversight and Enforcement: Regulators should strengthen oversight

and enforcement mechanisms to monitor corporate behavior, investigate allegations of fraud
and misconduct, and hold wrongdoers accountable. This includes providing regulators with
the resources, authority, and expertise to effectively regulate corporate conduct and promote
market integrity.

6. Implement Whistleblower Protection Mechanisms: Companies should establish

mechanisms to encourage and protect whistleblowers who report concerns about fraud,
misconduct, or unethical behavior. This includes implementing confidential reporting
channels, providing protections for whistleblowers against retaliation, and conducting
thorough investigations of reported allegations.

7. Conduct Regular Governance Reviews and Assessments: Companies should regularly

review and assess their corporate governance practices to identify areas for improvement and
ensure compliance with regulatory requirements and best practices. This includes conducting
periodic governance audits, assessments, and benchmarking exercises to evaluate governance
effectiveness and identify opportunities for enhancement.

By implementing these suggestions, companies can strengthen their corporate governance practices,
enhance transparency and accountability, and mitigate the risks of governance failures and corporate
misconduct, ultimately promoting long-term sustainable growth and value creation for stakeholders.

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