The board of Worldwide Minerals (WM) was meeting for the last monthly meeting before the publication of the year-end results. There were two points of discussion on the agenda. First was the discussion of the year-end results;second was the crucial latest minerals reserves report.WM is a large listed multinational company that deals with natural minerals that are extracted from the ground,processed and sold to a wide range of industrial and construction companies. In order to maintain a consistent supplyof minerals into its principal markets, an essential part of WM’s business strategy is the seeking out of new sourcesand the measurement of known reserves. Investment analysts have often pointed out that WM’s value rests principallyupon the accuracy of its reserve reports as these are the best indicators of future cash flows and earnings. In order tosupport this key part of its strategy, WM has a large and well-funded geological survey department which, accordingto the company website, contains ‘some of the world’s best geologists and minerals scientists’. In its investor relationsliterature, the company claims that:‘our experts search the earth for mineral reserves and once located, they are carefully measured so that the companycan always report on known reserves. This knowledge underpins market confidence and keeps our customerssupplied with the inventory they need. You can trust our reserve reports – our reputation depends on it!’At the board meeting, the head of the geological survey department, Ranjana Tyler, reported that there was a problemwith the latest report because one of the major reserve figures had recently been found to be wrong. The mineral inquestion, mallerite, was WM’s largest mineral in volume terms and Ranjana explained that the mallerite reserves ina deep mine in a certain part of the world had been significantly overestimated. She explained that, based on theinterim minerals report, the stock market analysts were expecting WM to announce known mallerite reserves of4·8 billion tonnes. The actual figure was closer to 2·4 billion tonnes. It was agreed that this difference was sufficientto affect WM’s market value, despite the otherwise good results for the past year. Vanda Monroe, the finance director,said that the share price reflects market confidence in future earnings. She said that an announcement of an incorrectestimation like that for mallerite would cause a reduction in share value. More importantly for WM itself, however, itcould undermine confidence in the geological survey department. All agreed that as this was strategically importantfor the company, it was a top priority to deal with this problem.Ranjana explained how the situation had arisen. The major mallerite mine was in a country new to WM’s operations.The WM engineer at the mine said it was difficult to deal with some local people because, according to the engineer,‘they didn’t like to give us bad news’. The engineer explained that when the mine was found to be smaller thanoriginally thought, he was not told until it was too late to reduce the price paid for the mine. This was embarrassingand it was agreed that it would affect market confidence in WM if it was made public.The board discussed the options open to it. The chairman, who was also a qualified accountant, was Tim Blake. Hebegan by expressing serious concern about the overestimation and then invited the board to express views freely. GaryHowells, the operations director, said that because disclosing the error to the market would be so damaging, it mightbe best to keep it a secret and hope that new reserves can be found in the near future that will make up for theshortfall. He said that it was unlikely that this concealment would be found out as shareholders trusted WM and theyhad many years of good investor relations to draw on. Vanda Monroe, the finance director, reminded the board thatthe company was bound to certain standards of truthfulness and transparency by its stock market listing. She pointedout that they were constrained by codes of governance and ethics by the stock market and that colleagues should beaware that WM would be in technical breach of these if the incorrect estimation was concealed from investors. Finally,Martin Chan, the human resources director, said that the error should be disclosed to the investors because he wouldnot want to be deceived if he were an outside investor in the company. He argued that whatever the governance codessaid and whatever the cost in terms of reputation and market value, WM should admit its error and cope withwhatever consequences arose. The WM board contains three non-executive directors and their views were alsoinvited.At the preliminary results presentation some time later, one analyst, Christina Gonzales, who had become aware ofthe mallerite problem, asked about internal audit and control systems, and whether they were adequate in such areserve-sensitive industry. WM’s chairman, Tim Blake, said that he intended to write a letter to all investors andanalysts in the light of the mallerite problem which he hoped would address some of the issues that Miss Gonzaleshad raised.2Required:(((a) Define ‘transparency’ and evaluate its importance as an underlying principle in corporate governance and inrelevant and reliable financial reporting. Your answer should refer to the case as appropriate. (10 marks)b) Explain Kohlberg’s three levels of moral development and identify the levels of moral developmentdemonstrated by the contributions of Gary Howells, Vanda Monroe and Martin Chan. (12 marks)c) Critically discuss FOUR principal roles of non-executive directors and explain the potential tensions betweenthese roles that WM’s non-executive directors may experience in advising on the disclosure of theoverestimation of the mallerite reserve.(12 marks)(d) Draft a letter for Tim Blake to send to WM’s investors to include the following:(i) why you believe robust internal controls to be important; and(ii) proposals on how internal systems might be improved in the light of the overestimation of mallerite atWM.Note: four professional marks are available within the marks allocated to requirement (d) for the structure,content, style and layout of the letter.(16 marks)(50 marks)3[P.T.O.