Commercial Law

Assignment Two

It is not just a common practice to request a contract when seeking employment, but also a legal rule that requires an employment agreement to be accompanied with a contract document. The expected relationship between the employer and the employee is usually mentioned in the document, therefore making it a reference point for both parties. It is important to note, however, that there are certain elements that contract agreements should meet if they are to be actionable in a court of law (Fitzpatrick et al. 2013).

In the agreement, there must be intention (explicit or implied) by the parties to create a legal relationship and set up some term upon which they will be enforced.

One party must make an offer, whereby in our case at hand, the company must offer the employee a contract, and the employee must sign it to signify acceptance of the terms contained therein.

Parties to that agreement must be able to get into a contract, for instance, they should be of sound mind and legal age.

The parties must in a genuine way agree to the terms of the contract and lastly the contract must never be signed for an illegal purpose.

According to the stated conditions, it follows that Pia is entitled to her monthly pay of $65,000 per year and a sales based bonus. If Pia is able to prove that all conditions were met in her employment contract with TrenDesign Boutique Pty Ltd, she will present her case to a court of law for adjudication on breach of contract.

The laws are very clear on sacking or terminating employment contract, and the same refers to the employment contract that the company entered into with Pia. According to the terms of the contract, a three months’ notice is to be given by any party that intends to terminate the contract: Pia was laid off before the end of her contract and no notice was given. This therefore amounts to breach of part of the contract, because on appending a signature on the document, Pia was agreeing to everything contained therein as a whole.

In any negotiations, parties must be truthful and exercise good-faith bargaining, and therefore, both parties should trust each other. This is why TrenDesign felt that Miss. Pia had not conformed to god-faith bargaining regarding sales figures, so they ought to have presented their concerns to her or better even to fair work commission bargaining orders. However, if she continued ignoring the bargain requirement, they could have sought arbitration in courts and sack her was according to the case. On her part, Pia ought not to accept three months’ pay offered. First, she lost her job unfairly and secondly, this amounts to a counter offer, meaning that she foregoes her job in the remaining months of her contract for a value equivalent to three months’ pay offered. She would lose her salary as well as bonus if she agreed to the offer.

When a contract is signed, it remains actionable for the entire contract period unless it is terminated by a counter offer or frustration. Termination by frustration means that one party is deprived of the benefit of the other party’s performance (Fitzpatrick et al. 2013). The doctrine of frustration in this case is applicable because after the fire, Pia could not execute her part of the contract. According to common law, whenever frustrations are established, the contract is automatically terminated and gives no option to perform in the future. This is different for common law because the subsequent loss lies where it falls. There is an option that Pia can pursue to get damages as a substitute for her performance. The law ensures that a plaintiff is taken back to the position they would initially have if the contract had not stalled. It is correct for the company to offer Miss. Pia a three week pay, however, one of the elements of good-faith bargaining, disclosing relevant information in a timely manner, should be adhered to. If the company is offering this as a way to compensate her for termination of the contract, this should be disclosed, so that she can make an informed decision. It is important to Pia that the company had not included severance package in the employment contract. Legally speaking, an employer is not required to give severance pay to an employee unless the contract demands so. The offer the company is giving to Pia for one week is an equivalent of severance pay. It is a good thing but Pia is able to negotiate a better package than that.

Before the fire broke out, Miss. Pia had already been unfairly dismissed, and the mistake she was alleged to have committed was cleared by the company as an error on their part, therefore her contract ought to be on course. It is important to note that there are contracts that bar an employee from working for a competitor for a considerable period of time or within a certain geographical area. This clause is usually referred to as Non-compete Clause and is not mentioned in the contract, therefore, Miss. Pia can go ahead to look for employment. When the contract was frustrated, it ceased to exist and Pia was excused to perform her duties at the expense of her job. The situation remains so because the company has not retracted the repudiation; if the frustration was lifted, then Pia would have an obligation under the contract. The company does not make promises to Pia that operations will resume, which means that once operations resume, Pia would be required to continue working. It is important for her to know that her three-year contract cannot be pursued in court for the reasons stated above. She can look for a job because there is nothing that the company has done to make her believe they will require her services in the nearest future. Had the company given indication implicit or explicit that business will resume soon, then Pia would be held by her contract; and as such she ought not to enter into another employment contract. She therefore, can seek employment, even as she awaits court’s ruling because regardless of the outcome of the court process, she cannot work for TrenDesign any longer; the company is not in operation.

Assignment 3

Auditors are important people safeguarding the shareholders’ investments. This is their statutory duty to give their opinion as to whether the accounts represent a true, free and fair review of the financial position of the corporation (Ramsay 2001). This can be a difficult task if the auditor does not work independently, because they will eventually not give an honest opinion of the state of affairs in the corporation. One of the objectives of audit is to improve the reliability of the financial reports that have been tabled by the management by checking their integrity and thus, increasing shareholders’ confidence in them (Fitzpatrick et al. 2013). In their report, auditors are supposed to be very objective and independent. This would guide them to give an assessment on whether the corporation complies with the generally accepted and recommended accounting principles and whether the financial statements are fairly presented as guided by Australian Statement of Auditors Practice AUP 32. Auditors have a responsibility of being impartial in their reporting. Obtaining this impartiality can be an uphill task for a firm or partner who disregards the professional requirement of independence. If the auditor is subjective, he/she may not give an independent opinion. Their misguided and untrue opinion would lead to wrong judgement and thus, a wrong opinion of the corporation’s state of affairs.

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To safeguard the shareholders from such incidences, several jurisdictions use professional requirements from accountants and auditors bodies as a safeguard. The government gets involved by ensuring that Corporation’s Act is in place and enforcing it to the letter (Fitzpatrick et al. 2013). The auditory committee of the client corporation is usually the recipient. This team is independent from the management and therefore forms another control body to ensure that any wrongdoing on the part of the management is reflected in the audit report and brought to the attention of shareholders. As stated earlier, audit enhances credibility of financial statements. However, this objective may not be met if for one reason or another, users of audit reports are of the view that the auditor is compromised.

When a retired auditor is elected to serve in a corporation board, they become part of the management. The management is usually charged with the responsibility of preparing financial statements at the end of the trading period among others. This means that an auditor will look into the financials prepared by the board, in which one of theirs sits. As a former employee of the firm and now a board member in client’s company, the retired auditor would be heavily involved in the auditory process. Whereas there is nothing definite mentioned in the law that states otherwise that retired auditors can be appointed to serve in the board of directors in Australia, the law leaves that to professional standards and bodies to regulate. The practice is that long as the retired auditor can prove that he has no financial reliance or operational influence over the previous employer, while the appointment remains uncontested (Ramsay 2001). Having served for some time in the audit firm, the former auditor may have some influence over the firm’s operational or financial affairs.

Auditors make their living from the fee they charge their clients. Thus, no auditor may be willing to do anything that can lay on the line this income stream. To safeguard their fee and independence, the firm can disregard any capital balance that accrues to retired partner. The firm can also abolish any financial arrangements that existed prior to the appointment of the board of the retired auditor. Finally the firm can generally ensure that the retired employee has got no financial or operational influence over the former employers and firm at large.

The auditor’s independence is categorised into two parts; when it is put in place prior to appointment and when the action is taken after the employment. If the retiring employee was involved in audit of joining the board, then firm can compel him/her to do the following. First, they require preparing a report that he has been appointed to join the board of directors. Upon this declaration, the employee should then be relieved of any engagements related to the client as a pre-engagement safeguard of independence (Ramsay 2001). The firm is also obliged to scrutinise the retiring member’s work to find out whether he/she always maintained professional scepticism or whether audit engagement required him or her to do it.

The independence test after appointment that is postemployment safeguards can be employed by determining whether there is any need to change or alter audit plan. The main reason for these safeguards is to have some control and cover the risk of influence by the employee on the conduct of audit. Being a board member, it means that the retired auditor will be spending a substantial amount of time with the audit team. It is therefore imperative for the firm to send people who can competently handle the retired employee without being compromised (Harris & Whisenant 2012). If more time was taken by the retiree with the audit team, then a new partner should be appointed. Equally, the auditor manages to get promoted to serve in the client’s audit committee within one year, then assign a new employee who will take over the next year’s audit.

According to Harris and Whisenant (2012), the firm is supposed to notify the audit committee of the appointment of one of their own to the board and a discussion should be instituted. At this stage, the audit committee should look into any relationship between the retiree and the appointee that would harm independence including appearing to be independent as required by the law.

After the collapse of big listed corporations in most European countries, the majority of countries indicated that blame auditors for non-rotation. These counties made a deliberate move to legislate and put in place laws for auditor’s rotation; this threatening tactic ensures that partners remain vigilant (McKenna 2013). The government through its legislative arm and professional bodies have settled on mandatory rotation of auditors as a way out. The said rotation can happen at the firm level or the audit partner level. Many countries in the world have adopted this rotation and just like Australia, there have been a lot of challenges in implementing it. Most countries have managed to embrace it at a partner level as it is a requirement of most professional bodies that they do so.

With auditors interacting with their clients every so often, they may become very familiar with one another, lack professional scepticism and their work may not be of high quality. To counter this problem, the proponents of this move argued that after serving for some specified tenure, corporations would be supposed to rotate auditors (Australian Securities and Investments Commission 2015). Other than professional requirement that was strict about partner rotation, the firms must as well be rotated, and this is the responsibility of the client companies to implement. What should have been the concern of the proponents of this move is the quality of the audit prior and post rotations. They ought to check whether there was anything that the outgoing firm did not detect but was detected by the incoming auditors. If that happened, then the rotation could be said to be achieving its goal.

Whereas this move is to ensure the independence of the auditor, it would be good to check other threats to auditor’s independence and whether this rotation is sufficiently addressing them. First, there is the provision of non-audit services by the firm to the client (Fitzpatrick et al. 2013). While a firm may rotate its accountant in charge, he/she did not work alone, thus his/her assistant accountants should follow suite. If the partner is changed and the subordinates are not rotated, it might not make any sense. These firms may not have the capacity in terms of human resource to rotate everyone so that those who participated in non-audit service keep off during audit. Whereas professional bodies may have it in their code of ethics, what happens on the ground is different.

Most firms in modern times are merging to form a group due to several reasons, among which is efficiency as well as political reasons where foreign corporations cannot operate in some jurisdictions. These reasons prompted firms like KPMG, Price Waterhouse Coopers, and others to come into being. When clients are looking for an audit firm, they look for well-established and renowned firms (McKenna 2013). Given that the number of such firms remains small, the firm rotation in these companies remains within a small circle of audit firms. When the tenure is set at five years, it means that corporation X uses KPMG and PWC among others every end of their tenure after which it goes back to KPMG and the cycle continues.

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There is a problem with the mandatory rotation of auditors because ultimately developing a working client could be okay so long as it does not go overboard. In fact, to conduct an audit, a firm must understand the industry well. Rotation of auditors in specialised industry is imperative. However, the process could expose the company to audit risk failure more so in first years after rotation when new firm understands the industry. It is during the time taken by the new firm to familiarise itself with the new client that the company is exposed to financial frauds. More often, majority of financial frauds are orchestrated by very versed people in corporation’s financial management or board of directors. Therefore, knowing that there is an incoming firm, the management may take an opportunity to defraud the company and it may go undetected (Rose 2013). Whereas mandatory rotation would replace a set of partners with others, outgoing partners would lose their relationship, but the incoming partners would step in their shoes and same potential conflicts will continue. It will take more than just pressure from the government’s side, because corporations themselves have to support the initiative, otherwise the legislation and enormous government push will be in futility.

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