Question

LO 5-39 5.70 Role of a Board of Directors in Internal Control. Assume that the local newspaper just ran the following headline and article: "Audit Results: Airport executives from Kentucky racked up $500K in lavish expenses, concert tickets, and even gentlemen's club tabs" LEXINGTON, Ky. (AP)-A small commercial airport in Kentucky—and the taxpayers who support it-picked up top executives' tabs in recent years for Hannah Montana concert tickets, Nintendo Wii video game bundles and even a $4,400 gentlemen club check, according to a state auditor's report. The report released Wednesday outlines indulgences ranging from pricey electronics and exercise equipment to lavish meals and champagne. In three years, officials tallied more than $500,000 in questionable personal expenses. Page 217 [Author's note: General fund expenses were approximately $10,000,000 annually.) Kentucky Auditor Crit Luallen said the former executive director at Lexington's Blue Grass Airport created a culture of wasteful spending so vast, employees sometimes were paid twice for the same expense and used airport credit cards as if they were personal checkbooks. "I don't think we have ever seen an audit where so many different individuals involved in the management of a public agency abused the trust with such arrogance and lack of ethical standards," she said. Luallen says she has forwarded the case to the Kentucky attorney general, the U.S. attorney's office, and the FBI. Although the audit only covered the past three years, it does refer to one of the more glaring examples reported by the Herald-Leader: a $4,400 charge Michael Gobb and two other directors incurred at a Dallas strip club in 2004 The charge, which appeared on the credit card statement of the airport's director of planning, was listed as going to Millennium Restaurant. The word "marketing" was handwritten next to the amount. The Associated Press obtained that receipt and others through an open records request

Answer 1

a. The primary role of board is to govern, to control managerial opportunities and to ensure that CEO carry out their managerial functions and duties in the best interests of members. The board series of stakeholders, which the CEO must serve effectively. An important function of the board is to choose the CEO, and to assist the CEO in selecting the management team The board remains the CEO employer ,and the role of CEO is one primarily of management and administration. He CEO is responsible within established by the board for determining and overseeing the execution of the boards direction s and policies to ensure desirable outcomes. The CEO is accountable to board. The CEO should report to the board and keep it informed of the activities of the organization's CEO is likely to perform a balancing act in determining how much detail is given in reporting. In this case the Auditor said the former executive director at Lexington's blue grand airport created a culture of wasteful spending to vast and employees were sometime paid twice for the same expense and used airport credit cards as if there were personal check books. The CEO violated his duty to perform in an organization. b. 1. All expenditure should be incurred in accordance with approved policies. Policies should be approved by the board and be reasonable 2. The CEO expenses should be authorized by the chair of audit committee or by 2 members of the board. The chairpersons expenses should not be authorized by a subordinate 3. Business expenditure should be necessary and reasonable in the context of public sector expectations and the entity's business. Wasteful or excessive expenditure is not acceptable. All claims or payments should be supported by validated documentation. C. The auditor should assess and review CEO expenditure and use their judgement., auditors are expected to take in to account the specific requirements of Auditors general auditing standard. The auditor examines whether the expenditure was appropriate or not,reasonable, and incurred in accordance with entity's policies and procedures. d. While credit cards are a convenient means of paying for business expenses, they must be subject to appropriate controls and limits.we expect entities to have a policy governing the use of credit cards. All expenditure charged to credit card should be for a clear business purpose and be reconciled against receipts and the supplier invoice. Or other appropriate external supporting documentation.Authorisation of credit card expenditure should include the purchase receipt, as well as credit card record slips. Credit cards should not be used for personal expenditure or for obtaining cash advances. If the business purpose of the expenditure is not clear,a written reason for it should be attached to the credit card statement or attached receipts.