Final answer:
When a CAE notices a possible conflict of interest in contract bidding involving the CEO, the appropriate action is to gather evidence and report to the audit committee chair. This ensures proper governance and oversight while preventing immediate escalation to potentially biased parties. It aligns with the corporate governance framework meant to protect shareholder interests.
Step-by-step explanation:
If a chief audit executive (CAE) suspects that a supplier was given an unfair advantage in the bidding on a contract due to the CEO's involvement with the supplier's board, the CAE should handle the situation with caution and integrity. The best course of action would be to obtain supporting documentation and present the findings to the chair of the audit committee. This approach maintains the appropriate chain of command and governance structures without immediately escalating the issue to the board of directors or senior management, where a conflict of interest might be present. It's essential that the audit committee, which is responsible for overseeing the financial reporting and disclosure process, is informed of any such suspicions. They are in a good position to ensure a thorough investigation without bias. Additionally, contacting an outside institution, like the auditing firm hired by the company or large shareholders, could be a step considered if the audit committee does not adequately address the CAE's concerns. In corporate governance, the board of directors is elected by the shareholders and is the first line of oversight for top executives. Other governance institutions include an independent auditing firm and outside investors, especially major stakeholders. In cases like Lehman Brothers, it was observed that these governance measures did not stop the inaccuracy of financial information. But in theory, these mechanisms are put in place to prevent such scenarios and protect the interests of shareholders.