Related-Party Contracts and a Departing Audit Chair

Board-level system failures (the more serious category)

1. Related-party transaction process. Abstention by the interested director is necessary but not sufficient. A material related-party contract should be referred to the audit committee or to the independent directors, supported by an independent valuation or benchmarking against the competing quotes, with the terms minuted. Treating it as 'an ordinary commercial matter' removed the only control that existed.
2. Disclosure. Naming the counterparty and the amount, without terms, rationale, benchmarking or the approval process, does not let a shareholder judge whether the terms are fair. The question is not whether the note is technically permitted; it is whether the market can assess the transaction.
3. Board composition. Two independent directors out of seven in a company where 8% of revenue flows to a family-connected entity is not a credible counterweight. Independence is a structural control, and it has been designed too thin for the risk profile.
4. Audit committee continuity. A resignation three days after a key audit matter is raised must be investigated, not accepted at face value; the stated reason should be tested and the real reason disclosed appropriately.
5. Internal audit independence. A CFO directing that a draft internal audit report be 'reframed' compromises the third line and is itself a governance event, independent of what the report says.

Individual accountability

• Chairman: conflict management and tone; abstention without escalation is a failure of chairing, not a defence.
• CEO: operating accountability for procurement and for the culture that produced the CFO's instruction.
• CFO: the instruction not to release the contract file and to reframe the audit report breaches integrity and objectivity. 'Not to leave the building' also risks destroying or withholding records that the auditor and committee are entitled to see. This is a conduct matter requiring immediate escalation, not a difference of view.
• Audit committee chair: accountable for the quality of the explanation given on resignation.
• The nephew and the carrier: a commercial counterparty, not a governance actor; accountability sits with the directors who approved the terms.

Board actions within 30 days

1. Escalate to the independent directors. The related-party contract goes to the independent directors or audit committee, with an independent fairness opinion and the competing quotes tabled. Payments under the contract should continue only to the extent legally required; new volumes should be suspended pending review.
2. Forensic review with a defined scope. Not just this contract: all related-party transactions above a threshold over the past three years, all procurement above a threshold, and the circumstances of the audit committee chair's resignation. Appoint external counsel or forensic accountants reporting to the independent directors, not to management.
3. Preserve records. Immediate litigation hold on the contract file, procurement correspondence and the internal audit draft. Instruct all staff in writing that no document is to be amended or removed.
4. Separate the CFO from the investigation. Administrative leave or reassignment of the relevant responsibilities, with the external auditor informed. The CFO cannot be the person determining what the auditor sees.
5. Engage the external auditor and take legal advice on the company's disclosure obligations, the related-party approval requirements and whether a shareholder vote is needed for a transaction of this size. Consider whether any matter is reportable to the regulator, and do so promptly if so.
6. Repair the structure: an interim independent director to restore committee composition, a written related-party transaction policy with thresholds, mandatory independent review and an annual shareholder mandate, and a whistleblowing channel reporting to the audit committee.

What the CFO and finance team should do

• The finance team should refuse the instruction to withhold or reframe documents, escalate in writing to the audit committee through the whistleblowing channel, and keep a contemporaneous record. Professional codes require integrity and objectivity, and prohibit association with misleading information. A junior accountant who complies is exposed personally; a junior accountant who refuses in writing is protected.
• The CFO's own duty is to disclose fully to the board and the auditor. If the CFO does not, the board must act on the information it already has - it is not dependent on the CFO's cooperation.

Principles

• One voice, one factual account, consistent across audiences; anything said to one audience must survive being read by the others.
• Communicate the process and the timeline, not a conclusion reached before the review is finished.
• Correct the earlier inadequate disclosure proactively; do not wait to be asked by an analyst or a journalist.

Shareholders and the market Immediate announcement that the board has referred the related-party contract and the audit committee resignation to the independent directors, that an independent review is under way, and when it will report. Confirm whether the earlier related-party note will be updated. Avoid selective briefing of large holders; the disclosure must be simultaneous. If the transaction required shareholder approval that was not sought, say so and state the remedy.

External auditor Full access, a single point of contact independent of the CFO, and notification of the document hold. Withholding documents from an auditor converts an accounting question into a legal one.

Employees A short factual note from the CEO: what is being reviewed, that cooperation is expected, that retaliation against anyone who raises a concern will not be tolerated, and how to raise one. Silence here is read as endorsement of the CFO's instruction.

The carrier Commercial and contractual language only - notice of review, confirmation of which volumes continue - with no commentary on the family relationship. Negotiate any change formally, in writing.

What makes it worse

• A statement that the contract was 'at arm's length' before any independent opinion exists; that is a claim the board cannot support and will have to retract.
• Letting the CFO draft the market announcement.
• Briefing the family's advisers or the carrier before the market.
• Framing the audit chair's exit as purely personal without testing it.
• Correcting the annual report note quietly in the next cycle rather than through a clear, dated announcement.