Far Eastern University

Institute of Law

Research Paper on Corporate Governance

Submitted to:
Atty. Gerard L. Chan, LL.M.

Submitted by:
2011412222
2012510761

A. Basic details of the case

The Queensville Subdivision Homeowners Association is an association of all
homeowners, lot buyers or long-term lessees and occupants of lots or houses at
Queensville Subdivision, Bagumbong, Caloocan City. It was incorporated on February 3,
2009. Its primary concern is to facilitate the delivery of adequate social services and
economic advantages for the association to improve the quality of life and well-being of
its members.

The board of directors or trustees of this association is composed of seven (7) elected
members. The officers of the association are the President, Vice President, Secretary,
Treasurer, Auditor and such other officers as may from time to time be determined by the
board.

Prior to the formulation of the said association, there was already a problem on water due
to system loss and water leakage. The Queensville Subdivisions water-distribution
system is under the mother meter transaction therefore the payment of bills is made
through the association and not directly to Maynilad.

On February 5, 2013, the total unpaid water bills amounted to an aggregate of

P1,053,084.09. The members of the association became alarmed on the said issue and
wanted an immediate action to solve the problem.

Thus, the members filed a complaint with the HLURB on the ground that the treasurer
failed to account the payments made for the water bills.

B. Main Corporate Governance Issue: Poor Corporate Governance

First let us define Corporate Governance. Corporate governance is defined as a system
whereby shareholders, creditors and other stakeholders of a corporation ensure that
management enhances the value of a corporation.

The characteristics of good

governance include competence, integrity and empowerment. ii

Failure to competently adhere these necessary attributes means that a corporation is
failing in its duty and is guilty of poor corporate governance.
In the instant case, the Board of Directors and the President has failed to properly
discharge their duties when the anomalous transaction has come and gone under their
nose without them even noticing. That there is poor corporate governance.

C. Main Responses, Solutions, and Courses of Action

1. The Board of Directors should have replaced the incompetent and irresponsible
officers who cannot properly discharge their duties.
2. The Association should have engaged the services of an external auditor.
3. The Board of Directors should have been more vigilant in monitoring the acts of its
officers.

D. Actual solutions adopted

The members of the association filed a case with the HLURB for the dismissal of the
treasurer and asked for the proper accounting of the amount paid for the water bills. They
further asked for a Transition Team to replace the Board of Directors as well as the
officers of the association.

E. Evaluation of the Problem, Actual and Potential Solutions

The main problem in this case is the misappropriation by the treasurer of the amount paid
by the homeowners representing their water bills. If we look at the bigger picture, this
problem is not attributable to the treasurer alone. The Board of Directors and the
President are the ones that are primarily responsible for this problem since if it were not
for their lapse of judgment this problem should have not occurred in the first place.
The following factors are what we have considered as the main source of the problem at
hand:
1.

The failure of the board of directors to appoint competent and responsible

officers.

It is the duty of the board of directors to hire, evaluate and even fire top
management; to offer expert advice to management; and to make sure the firms
activities and financial conditions are accurately reported to its shareholders. iii
The Board of Directors in this case failed to exercise the above-mentioned duties.
First, it would appear that the selection of its officers (i.e. President, treasurer, and
officer) was not done under close scrutiny. The appointment was done not on the
basis of the persons expertise and credentials but more on how popular and
closely-related they are to the members of the board.

2. Failure of the President to supervise the actions of his subordinates

A good President is a good decision-maker and must be watchful of potential

problems and able to quickly offer a solution to such problem. The President also
has the responsibility to see to it that his subordinates (i.e. Vice President,
Secretary, Treasurer, and Auditor) are performing their jobs accordingly and
conscientiously for the good of the homeowners and the association as a whole. In
this particular case, there is obviously a lapse on the part of the President because
he was oblivious of the anomalous transactions and he was only able to get ahold
of such information after a case has already been filed concerning such matter.

3. Absence of check and balance between the Board and the Management.
The system of check and balance as also practiced by the government is the
process of.
In the case at bar, the President and the Board of Directors are in amiable terms
such that their proximity to each other prevents the Board from giving an
impartial evaluation of the performance of the officers. The Board tends to just
overlook the negligence and indiscretions of the officers because they do not want
to antagonize the latter and cause a rift between them, which works to the
detriment of the association and the members for they will be the one to suffer
from the connivance between the board and the management.

Having established these problems, the following solutions are offered:

1. Communicating with the homeowners
In corporate governance the concept of communicating with shareholders is suggested as
one of the most effective ways in monitoring the activities of a corporation.
One way for directors to communicate with shareholders is to attend the annual meeting
and be prepared to answer questions about the procedures followed by the audit,
compensation, and nominating committees. (Paki-footnote: Page 264, DIRECTORS:
MONITORING, nasayo yung title nung book at author diba? Walang insert footnote dito
sa Word Starter HUHU. Ito yung book na kinuha natin sa undergrad library.)
Applying this step in the case at hand, the Association must hold an annual or a semiannual meeting in order that they may communicate their concerns and inquiries to the
Board and vice versa. The Homeowners may air their troubles as regards the officers of
the association. The Board of Directors shall inquire into the view point of the
homeowners as to their appraisal of the performance of the officers in their duly
designated duties and take these inputs and use them for evaluating the performance of
the board. Through this, the Board can assess the performance of the officers they have

appointed not only from their narrow perspective-which is highly likely prejudiced--but
from a wider spectrum of reports from sources outside the board-management vernacular.
2. Engage the Services of an External Auditor
There are three main problems that may occur in accounting. First are unintentional
errors. Sometimes these errors are due to miscalculations or due to applying an expense
to the wrong accounting ledger. Second is the need to exercise judgment call whereby
firms account all receivables when they know that some clients might never pay for the
goods or services rendered. And the third is the perpetuation of fraud. Accounting fraud
is probably the largest potential problem with accounting as it is intentional and hurts the
firms stakeholders, including its shareholders. (Footnote din! Chapter 3, Corporate
Governance, pp.2-3.)
In this case, the third accounting problem is the pivotal issue. It is a given fact that the
Association has an auditor of its own. However such fact did not prevent the loss of the
money representing the payments made by the homeowners. The only conclusion that
could be drawn from this then is the presence of conspiracy between the treasurer and the
auditor. The auditor in this case did not do his duty and tolerated the misdeeds of the
treasurer because they are cozy with each other.
This here is where the external auditor comes into play.
External auditors are accountants from outside the firm, who review the firms financial
statements and its procedures for producing them. Their job is to attest to the fairness of
the statements and that they materially represent the condition of the firm. Once they
have completed their audit, they will generate a report. (FOOTNOTE: Chapter 3,
Accountants and Auditors, p. 30)
The Homeowners Association of Queensville Subdivision is in dire need of an external
auditor. Since these auditors are free from the influence of the insiders of the association,
the homeowners can be assured that the audit reports submitted are accurate and credible
and free from any manipulation. The engagement of an external auditor serves as a

protection for the homeowners and the association itself to ensure that the financial
operations are well and properly accounted for and are not being pocketed by the officers.
3. Transparency through disclosure
Transparency is an essential element of corporate governance. Corporate disclosure to
stakeholders is the principal means by which companies can become transparent. The
term disclosure refers to a whole array of different forms of information produced by
companies, such as the annual report which includes the directors statement, the
Operating and Financial Review, the profit and loss account, balance sheet, cash flow
statement and other mandatory items. (FOOTNOTE: Book from the lib ito. Nasayo din
yung complete list. Corporate Governance and Accountability, page 120.

Disclosure has long been recognized as the dominant philosophy of most modern
systems. It is a sine qua non of corporate accountability. (Farrar and Hannigan, 1998,
p.11)
In the instant case, the Board of Directors should impose upon themselves the duty of
being transparent in all their dealings and transactions especially those that concern
money coming from the homeowners. The Homeowners should be given the right to
request or demand to be shown the necessary financial statements directly related to the
operations of the association so they will not be blindsided and will be assured that their
payments and contributions are being used in activities that they are intended for. This is
in consonance with the duty of care and loyalty of the Board to its shareholders-who in
this case are the homeownersthat they must put first their interest and give them a
sense of security in their money and property.

Felipe Alfonso, et al. From the Inside Out: Reforming Corporate Governance in the Philippines by Engaging the
Private Sector in Reforming Corporate Governance in Southeast Asia, p. 304
ii
Christopher Gan. Poor corporate Governance, Market Discipline and Cronyism in the 1997 Asian Crisis in
Corruption and Governance in Asia, Chapter 3, p.46
iii
Jonathan Macey. Board of Directors in Corporate Governance. P.42.