Accounting Case Study

This case study examines a range of accounting problems that affect not only large Australian companies, but other multinational companies around the world. My approach to answering the question is to present the content in a narrative format using the primary sources provided and other secondary sources listed in the reference section. Create links between accounting topics and real accounting scenarios. One of the concepts that intrigued me the most was the principle of integrated reporting. It revolutionized financial reporting.Integrated reporting is essential in ensuring that the needs of external stakeholders are met and proper decision making is enforced. The guiding principles of an integrated report include strategic emphasis, materiality, future outlook and connectivity, strategic relations, conciseness, and reliability. Also, the meaning and importance of voluntary code is the topic that does not only improve quality of service but also initiates competitiveness of the company. The purpose of this code is to deliver increased protection, as well as reduce the burden of doing business.

Knowledge and skills learnt from this case include experimental, emotional, and complementary concerns that accountant face on a day-to-day basis. Understanding roles of every stakeholders will not only improve usefulness of accounting but also enhance integrity and transparency. Another intriguing topic explored is the conflict of interest faced when forced by superiors to forego the payment of suppliers in order to improve the financial position of the company. Late payments, fabricated financial reports, and changing contractual terms are a reflection of poor leadership and prevailing culture of the organization. Significant accounting change and development has been propelled by the need to understand information relating to managers and stakeholders.

Introduction

The industry under discussion is the Australian Retail Sector. Immense pressure is faced by key decision makers within the major retail corporations in Australia. The biggest concern is that most CEOs and managers are judged by the amount of revenues and profits that they generate, irrespective of the ways or methods which they use to generate such margins. Companies sampled for this case include WestCorp, Woolworths, and Tesco Group. Analysis by the Reserve Bank of Australia shows that the biggest macro-economic factor affecting the retail sector is the lack of price growth in the economy (Macquarie University 2016, p.2, para.3). In fact, retailers have a preference for inflationary markets because it does not have a natural downward impact on sales growth.

The challenges that have arose in the industry is the massive and potential entry of multinationals, such as H&M and Zara. In the supermarkets sector, companies such as Aldi have been experiencing significant growth which essentially contributes to the continuous fall in prices. A graphical representation of this point is shown below.

(Macquarie University 2016, p.2)

Other issues discussed include the use of power in pursuit of profits and minimizing costs (Macquarie University 2016, p.2, para. 4). The paper also explores ethics of profit in the Australian Industry by discussing the role of stakeholders in promoting a responsible and transparent company. They key issue discussed in the case is the problem of capitalism and building the company’s objectives around the profit motive without considering the fact that the entity would be hurting other stakeholders. One of the most important stakeholder is the employee (Carroll 2017, p.90). The structure of the remuneration system for companies, such as DSG and Woolworths, is typical of most big entities whereby power to change the remuneration system is given to the shareholders.

Some of the stakeholders described include shareholders, employees, customers, lenders, and suppliers. To attract top employees, the firms have to offer conditions that are attractive. Companies such as Woolworth and Tesco maximize employee’s salaries and benefits based on particular skills and experience. The national government and regulatory authorities ensure that companies comply with regulations and they also ensure they avoid disputes and promote infrastructure and security. Being the most critical stakeholders in the company, customer’s concerns will ensure that companies behave ethically and increase efficiency in order to maintain loyalty, as well as attract new customers. For the local community, the company can ensure business ethics is enforced by providing employment and creating a safe working environment.

Among other socio-economic factors discussed, there is the justifiable concern of suppliers and workers in less developed countries and how they are essential in maintaining the supply chain. Companies are increasingly faced with dilemma to divert away from the profit criteria. In fact, the scenario explains that more customers would be willing to pay an extra dollar as long as employees in less developed countries can be paid better. Other concepts discussed include the view on good faith, theory of power, audit fraud, integrated reporting, and the voluntary code. The subsequent paragraphs discuss these issues in detail.

Question 1: The concept of Good Faith

Good faith is the requirement to act honestly and justly by keeping promises without taking unfair advantage over the other party. Under the Australian competition and consumer commission, it takes place when a wholesaler and retailer are required to exercise their powers reasonably and within the set purpose and agreement. The code outlines that for good faith to be effective, the parties must act honestly and not arbitrarily. Secondly, they should cooperate to achieve the purpose of the contractual agreement (Smith 2013, p.2). The first standard in good faith is reasonableness. Under common law, good faith dictates that both parties have to exercise their powers reasonably and meet legitimate interests of their partners. ACCG requires suppliers to deal with their retailers and other clients without duress and with the fundamental principle of fair dealing.

A retailer may keep possession of goods that do not have a title if they could only prove that they purchased the goods in good faith (Smith 2013, p.2, para.5). The doctrine is also classified as the innocent purchaser or bon a fide purchaser doctrine. This means that the purchaser acquires property with no knowledge of defective items. In commercial law, this doctrine ensures that there is ease in flow of goods.

Question 2: Voluntary Code

According to Council of Australian Food Technology Association (2008, p.23), voluntary codes are only applicable to those individuals on businesses that subscribe to them. Under the Food and Grocery code of Conduct, they are described as voluntary codes due to a number of reasons. The first reason is that they only effective subject is the organization or individual that has signed up for them. Secondly, they are a set of non-legislatively necessary commitments. Also, it has to be agreeable between one or more organizations. They are also applicable in a consistent manner and are supposed to achieve a consistent outcome. It contains a general statement of obligations, canons, and technical agreements pertaining operation aspects such as dispute resolution powers and reporting requirements.

The ACCC does not want to legislate the Food and Grocery Code for a number of reasons. To begin with, they further public policy on food through the use of a non-regulatory approach. Therefore, they complement traditional regulatory regimes. More so, it is considered voluntary because it ensures avoidance of jurisdiction and constitutional obstacles that are usually involved in legislative development and implementation.

Question 3: Strategic Theory of Power

Strategic theory objectifies leadership techniques by using variables that affect power in contingency control of entities. It is true that having power is better than being powerless, but it is not prudent and ethical to abuse such power. For instance, the big retailers in Australia’s Supermarket industry have huge power due to their concentrated nature. This, therefore, puts suppliers at a distinct disadvantage because the powerful players will have control over the negotiations (Department of Accounting and Corporate Governance, p.5, para. 20). An example is the West farmers Corporation whereby they were found to threaten suppliers or actually downgrading the supplier’s products. It is, therefore, appropriate to use power only when the decision is morally good.

Decision making can be controlled and measured by artificially aligning the interests of the management and those of shareholders. Traditionally, managers have been given full authority over the finances and decision making on behalf of the shareholders. Decision making can be assessed through strategic performance measurement and reevaluation.

Question 4

My response would be to explain to the CFO that such a decision would not feasible and ethical and, therefore, I would pay the supplier as agreed in the original contract and report the transaction in the books. A Chief Financial Officer needs to uphold the highest set of standards and integrity, especially when put in such a precarious position by the manager. Such decisions are important in a retailer/public entity because of the need to report accrued revenues and debtor balances; parameters that are time based and are pegged on apparent negotiations.

As an accountant, improper revenue recognition is considered a fraud risk. Decision making based on the company’s profitability may bring about short term benefits, but it will eventually impact negatively on the company’s long term performance (Macquarie University 2016, p.10, para. 2). More so, this is obviously an ethical issue because late payments based on improving the company’s financial position is not only a breach of ethical codes but also a compliance problem.

Question 5: Appropriate Frameworks and Standards

There are justifiable concerns for international student workforce/international laborers, especially on how big retailers use questionable employment practices in determining the pay for individuals from less developed economies. Therefore, developed country standards and employment conditions should be applicable across the jurisdiction in which multinational corporation’s operate. Supplementary principles and standards should be enforced to ensure enterprises accept voluntary and regulatory approaches to policies affecting their employees.

To curb against worker exploitation and determine the appropriate standards, accountants employ methods such as compiled scorecards, supplier arrangement policies, and worker empowerment (Macquarie University 2016, p.5, para.8). Other methods to determine the appropriateness of the standard include self-regulatory practices and approaches that enhance employee awareness of firm’s policies. By doing so, employees will have a remedial action by either forwarding their grievances to the management or taking a more aggressive route, such as whistle blowing. It is also imperative to distinguish labor-intensive industries from the rest. Many social activists do not consider this fact when addressing anti-sweat shop concerns (Brown and Stern 2012, p.4).

Questions 6: Cost/Price Leadership Model

According to Oxfam (2016), customers are willing to pay a little more for clothing to ensure that clothing workers from developing countries can access safe and decent working conditions (Macquarie University 2016, p.4, para. 2). To ensure the company’s management agrees to consider this idea, there is a number of factors I would put across. To begin with, in a bid to cover cost incurred in paying more to employees, technological innovation would be the surest way of increasing efficiency. The company can be easily a cost leader creating cheaper ways of production

More so, by increasing the employees’ pay, they can be able to improve operating efficiency. Better pay means a more dedicated work force. Another argument, from an accountant’s point of view, would be that low price customers would be disloyal to the brand and, therefore, an increase in price results in loyalty because high prices are usually associated with good quality. One key competitive strategy that will be applicable in this case is goodwill and positive publicity.

Question 7: Audit Fraud

While conducting the audit, SAS 99 requires that accountants and auditors address the risk of override on the internal control systems. In this instance, the problem lies with the chief directors and employees in organization. Therefore, the first step would be to provide an oversight on the board of directors and other senior managers. This will ensure transparency and explanations on significant variation in certain components that are under investigation (Vona 2011, p.85). More so, I would directly participate in hiring and approval of company consultants, including the independent auditors.

Separation of duties is one important aspect in determining the employees who are coerced to cover up for the management. The underlying theory in this approach is that no individual employee will be but in a position whereby they can commit fraud and at the same time conceal such activities. Therefore, one individual’s work will be checked and balanced for another individual’s results. This will also ensure that errors are detected, and intentional misstatements in the financial statements will be checked (Vona 2011, p.87). Lastly, I would recommend anti-fraud policy and appropriate trainings in order to ensure that employees do not abuse the company’s resources.

Question 8: Integrated Reporting

IR was developed with the focus on bringing cohesion and efficiency in the reporting process. To begin with, it serves to advance the quality of information that is presented to investors, therefore, resulting in efficient use of capital (The International Integrated Reporting Council 2013, p.2) Secondly, it ensures accountability for most departments of the company, as well as ensure understanding of its interdependencies. It also promotes decision-making and enforces actions that are centered on construction of strategic value.

Integrated reporting seeks to improve performance and social capital in the company. In enhancing performance and remuneration system, the integrated report provides high level information on employees and senior executives. It discloses the current period as well as other factors that influenced the nature of future remuneration policies. The disclosure indicates the extent in which remuneration values are fixed or variable (The International Integrated Reporting Council 2013, p.16). Senior executives are usually instrumental in determining the company’s policies, and, therefore, the role of IR will be to identify KPIs that are used to improve senior executive remuneration.

Question 9: “At Risk” Component

”At risk” component of remuneration links a portion of the manager’s pay with the company’s performance. This means that managers receive large incomes when the company is performing well, and they receive low remuneration when the performance is poor. This kind of payment structure is not popular, but it ensures that the senior management meets certain requirements. It fluctuates depending on their performance standards (Parmenter 2011, p.87). They are termed as ‘at risk’ remuneration because they earn their compensations based on variable results, usually affected by numerous external factors. It appears as a larger component of company remuneration in big companies because it motivates them to achieve set volume, as well achieve the right balance between the base wage and commission components. It drives them towards greater productivity, as well as maximizes financial returns for the company. An accountant’s role in defining remuneration policies ranges from analysis of risk factors, compliance issues, liaison with auditors to oversight of internal remuneration control system.

Question 10: Stakeholders and Ethics

Stakeholders are defined as any party that has interests in the company and can either be affected or affect the business. The three primary stakeholders of any company are the investors, customers, and employees. Among other interested parties, they include the community, government, and trade associations. In large supermarkets, customers define the purpose of the company, and, therefore, the organization cannot survive if they do not serve the needs of the customers. To add on, employees are the second most important stakeholders because they deliver the product consumed by the customers. Among other stakeholders described in Woolworths and Tesco’s case, there are also the lenders and suppliers. The lenders provide funding for the strategic purposes of the company, while suppliers ensure continued productivity through delivery of raw materials or finished products.

The concept of stakeholders is important to enhancing ethical behavior in companies. More so, it creates a framework whereby management is given fiduciary responsibility to use the company’s human capital and financial resources in order to ensure that other stakeholders’ interests are served (Carroll 2017, p.90). Employees are also required to act ethically through creating an occupational structure that is fair and equitable towards other stakeholders.

Conclusion

Continued drop in commodity prices results in deflation, and it will not only impact the retailers but also the Australian dollar. Drops in prices significantly reduce the dollar which then lowers company’s profits. This, in turn, results in more pressure on the federal budget which reduces funds allocated to infrastructure and other amenities. Moreover, it will result in shedding of jobs and decline in the gross domestic product.

Secondly, entry of innovative global retailers has built up competition which principally intensifies the productivity gap. With over 140,000 retailers in Australia’s retail sector, the industry faces high competiveness and these trends and current trading conditions do not look to stop anytime soon. More so, expansion of retail trading through online systems has resulted in more challenges to the current retailers. Labor productivity remains below other less developed countries, and this forces companies to seek labor from less developed countries (Lewis and Gilman 2012, p.90). Despite the minimal costs incurred, ethical concerns have been raised regarding exploitation of employees in developing countries. Workplace practices is another issue that impacts the performance of the retail sector. Workplace employment conditions are essential in shaping productivity outcomes.

In controlling these issues, accountants have an oversight responsibility ranging from financial and non-financial duties. In a bid to remedy such issues, the paper discusses the following factors: the principle of good faith, voluntary code, audit fraud, integrated reporting, accounting standards, and the strategic theory of power. Other related issues include how to deal with stakeholders in the company and the aspects of price leadership approach in improving welfare of employees. Also, ethics in business has been applied by OECD countries in a bid to provide guidance to policy makers on how to deal with irresponsible practices. The principles of integrity and transparency form the basis of OECD’s ethics code, and they are in line with Australia’s Values and Ethics Code to the Public Service (Lewis and Gilman 2012, p.98).

References

Brown, K. Drusilla and Stern Robert. (2012)The effect of Multinational Production on Wages and Working Conditions. University of Michigan.

Carroll, A. B. (2017). Business & society: Ethics, sustainability & stakeholder management. Place of publication not identified: South-Western.

Council of Australian Food Technology Association, & Australian Institute of Food science and Technology. (2008). Food Australia: official journal of CAFTA and AIFST. North Sydney, Australia, Council of Australian Food Technology Associations.

Lewis, C. W., & Gilman, S. (2012). The ethics challenge in public service: a problem-solving guide. San Francisco, CA, Jossey-Bass, A Wiley Imprint. http://www.books24x7.com/marc.asp?bookid=46255.

Macquarie University Department of Accounting and Corporate Governance. (2016). ACCG315 Case Study: The Ethics of profit in the Australian Retail Industry. Macquarie University.

Parmenter, D. (2011). Winning CFOs: implementing and applying better practices. Hoboken, N.J., Wiley. http://www.books24x7.com/marc.asp?bookid=40897.

Smith, Travers. (2013). Good Faith: What Does it Mean. Travel Smith LLP.

The International Integrated Reporting Council 2013, The International Framework http://integratedreporting.org/wp-content/uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf

Vona, L. W. (2011). The fraud audit: responding to the risk of fraud in core business systems. Hoboken, N.J., Wiley. http://www.books24x7.com/marc.asp?bookid=43303.