External Audit and Investors

¶ … boards of this type of organizations accountable?

The boards of this type are accountable to the company and its stakeholders/shareholders. They are responsible for the company's overall success. Such a board has to ensure the integrity of its own actions as well as those of the company and should make every effort to present a factual and frank presentation of its current outlook to the company's stakeholders.

Shareholders, thus, are the number one entity to whom such boards are accountable. If shareholders are not happy with the way in which a board is directing a company, they will likely not be shareholders for long or will place pressure on the board for changes in leadership.

The board is also accountable to employees, to members, to supporters and to investors. The rules and regulations that govern a board's actions are the means by which a board is held accountable, but the stakeholders are the ones who really must see that the board is abiding by its charter or mandate and successfully leading the company towards the achievement of its goals. This means actually conducting legitimate audits and not simply allowing such conflicts of interest as described above (one of the original founders of the company performing the so-called external audit, for example).

2. Did Jack make the right decision to invite the two new investors and accept their conditions? (Explain why you think it was correct or describe what you would have done different)

This was not necessarily a mistake on Jack's part, since it was clear that he intended to make his exit from the company eventually. Giving the new investors a role on the board and even an executive position for one of them was a selling point for securing their investment. Thus, Jack received what he wanted -- investment money to move the company forward -- and the investors received what they wanted -- involvement in the company's affairs (to varying degrees).

3. Did the investors make the right decision by investing in RC? (Explain why you think it was the right decision or describe what you would have done different)

No, their due diligence was insufficient. They should have had the company externally audited before investing in it and/or agreeing to run it either silently or as CEO (and not by the same auditor who was also a co-founder of the company -- for there is clearly a conflict of interest in such a case). The allure of being part of a company like RC most likely trumped the requisite DD that should go hand in hand with a major investing decision. As the external audit would have proved, RC was insolvent -- its books were totally fabricated (by mistake, of course); nonetheless, what the investors invested in was nothing more than a shell. Had they hired an external auditor prior to their decision, the true nature of the company would have been made apparent to both them and Jack Robbins.