The Codes of Ethics varies between companies but is usually
coded based on the Principles of Ethics, which includes professional competence
and due care, integrity, professional behaviour, confidentiality, and
objectivity. Be it the Management or the Board of Directors, their actions and
decisions should comply with the Principle of Ethics since breaching the
principles could have a significant impact on the company and its stakeholders.
In this scandal, CAO breached three principles, namely professional competence
and due care, professional behaviour, and integrity (Ethics Board, 2005).

Competence and Due Care

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Under the Principles of Ethics, professional competence and
due care require all parties within the company to maintain a certain level of
relevant professional knowledge and skill (Ethics Board, 2005).

In this scandal, CAO went into speculative options trading
with the Management and Board having no knowledge of options. Instead of
designing a risk management system for speculative options derivative trading,
CAO used its existing system designed for swaps and futures trading. It should
have assigned a group of employees to look into the risk management strategies
for this specific type of trading. If there are no suitable employees to take
on the responsibilities, CAO can outsource it to other Financial Advisory
Companies (Farhan, 2014).

CAO also valued options at intrinsic value and ignored the
time value of money. Due to the lack of relevant knowledge, this led to the
failure of compliance with IAS 39 Financial
Instruments: Recognition and Measurement and FAS 133 Financial Accounting
Standards No. 133, which recognise derivatives at their fair market
value. Such valuation errors were done throughout 2004 and resulted in
accounting errors in the financial statements presented to the public (Farhan, 2014).

improper risk management strategies and its failure to comply with the
accounting regulations further increased the risk present in CAO and breached
the professional competence and due care under the principles of ethics.

Professional Behaviour

Under the Principles of Ethics, professional behaviour
emphasizes on complying with the relevant laws and regulations and avoiding any
action that discredits the profession (Ethics Board, 2005).

After making huge losses,
both CAO’s Management and Chen did not disclose a US$550 million trading loss
and deceived DB (China Daily, 2006). They should have notified the public that it was
suffering heavy speculative losses. as required by the Monetary Authority of
Singapore (The Institute of Singapore
Chartered Accountants, 2017). Thus, there was a breach of insider trading laws for not
disclosing the trading losses at the time of sale.

As with the earlier
principle, CAO breached the IAS 39 and FAS 133, which recognise derivatives at
their fair market value (Farhan, 2014).

Since both Chen and CAO went
against the law which is codified, they have breached the professional
behaviour under the Principle of Ethics.


Under the Principles of Ethics, integrity emphasizes that
all parties be straightforward and honest in all professional and business
relationships (Ethics Board, 2005).

As above, prior to selling the shares to DB for US$120
million, CAO, CAOHC, and Chen failed to disclose the trading losses CAO had
incurred. Before engaging in the transaction, neither of the three parties had
disclosed, to the public or any external parties, the fact that they were
engaging in speculative trading, as well as the losses CAO had incurred as a
result of such activities. When alerted to this issue, DB immediately resold
the shares for only US$108 million but incurred approximately US$12 million in
losses (Arnold & Bradsher, 2004). The scandal also
led to a 23 percent decrease in CAO’s share price (Burton, 2004).

Instead of hiding the loss information, CAO should have
disclosed it to the public for better decision making. Chen’s action led to
huge losses for DB and breached the integrity principle.

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