Discuss about the Auditing and Assurance for Wesfarmers.
Wesfarmers Group is engaged in several business operations like liquor, supermarkets, convenience and hotel stores, office supplies, home improvement services, and an industrial division with operations in energy and fertilizers, chemicals, coal, distribution and processing of gas, and safety and industrial products. The company segments comprise of Coles, Home Improvement and office supplies (Bunnings), Departmental stores (merchandise) that includes Target and Kmart, Office works, Insurance, Industrials that includes WesCEF, WIS, and Resources. Initially it started as a farmers’ cooperative in Western Australia but today it is considered as one of the largest and diverse retailer company of the country (Wesfarmers Limited, 2016).
Five laws or regulations that affect the operations of Wesfarmers
The five laws or regulations that affect the operations of Wesfarmers comprise of the following. Firstly, the competition policy that ensures continued development of competition and not safeguarding of businesses from competition. Such competition laws are vital to avoid anti-competitive practices like collusion, cartels, and misuse of market power debarring entry of competitors in the markets or significantly decreasing competition. Secondly, Wesfarmers is highly committed to standards of ethical behavior and conduct in each of its business activities, and promotes and assists a culture of ethical and honest behavior, effective corporate governance, and corporate compliance (Wesfarmers Limited, 2016). In this regulation, Wesfarmers motivates reporting of any type of suspected illegal, immoral, and fraudulent conduct involving its own businesses, and ensures that these people can make a report without fear of reprisal, disadvantage, and intimidation. Thirdly, the regulation of investor engagement bounds the company to identify relevance of providing its shareholders an access to complete details and capability to take part in the company decisions. Fourthly, the conflicts of interest policy that sets out every disclosure obligations of the directors in relation to the conflicts of interest, and methods to be followed when such conflicts of interest arise (Cappelleto, 2010). Hence, directors must not place themselves in such a place where they possess a material interest that can give rise to conflicts of interest. Lastly, the anti-bribery policy defines the roles and duties of the Group in observing the prohibition of bribery.
The fact that Wesfarmers engages in several kinds of activities makes it susceptible to high competition in the market. Its major competitors in the retail sector include Woolworths Ltd and BHP Billiton Ltd. Woolworths Ltd is known as the best food retailers of Australia ahead of Coles. It operates over 3200 stores in New Zealand and Australia, including more than thousand supermarkets under it. It engages in gasoline, electronic services, hotel services, merchandise, etc. BHP Billiton Ltd is regarded as one of the largest resource and mining companies of the world that employs more than 100,000 employees in over 25 countries. It also operates in production of coal, copper, and iron ore. The minor competitors comprise of Myer Ltd and David Jones. Myer is mainly engaged in merchandise services throughout Australia and only has 66 retail stores that fail to compete strongly with Wesfarmers. Even David Jones Ltd is a departmental store of Australia, owned by Woolworths ltd and gives strong competition to Myer itself with 39 stores in Australian territories.
SWOT Analysis of Wesfarmers
Wesfarmers is a company which is dealing in retail as well as retail business. It has expanded its business all over the Australia. This company has its name in almost all the household as well all the business office in Australia. However with the name growing big comes along with huge amount of strength as well as threats. Here is an overview on the SWOT (Strength, Weakness, Opportunities and Threats) analysis of Westfarmers.
Presence over indigenous market: The Company is widely spread all over Australia. It has its registered office in Australia itself. Being a company originated and grown in the home country gives a confidence to the customers and being a company for over 100 years helps in creating a brand in it. The company was manufactured in the year 1914 (Wesfarmers Limited, 2016).
E-commerce: The company has very well understood the need of the customers of today’s world and has entered into e- commerce wherein the customers can choose items online without even going to the stores and that too at a price at which the customer demand as it has products in all range starting from a low range to a standard range.
Multinational growth: One of the major weakness of the company’s is its non- presence in the global market. In today’s fast changing world, presence in the global market is a must to grow its brand value. The brand value needs to be enhanced as the competitors are framing different mechanism to get a strong boost.
Strong Competition: As the company mainly deals in the domestic market, it has to face strong competition against the products by the multinational companies as they offer the products at lower cost due to their global presence. It is the cut throat competition that dents the profit and sales. Hence, strong competition turns out to be a weak point.
Global Market: Since the company deals in household items, office furniture’s as well as natural resources, it has a big opportunity of entering the global market. It has a diversified strategy that can play a vital role in balancing the business. With its wide employee base and experienced board of directors, the company can easily enter the multinational market which will also help it in creating its name worldwide. As it deals in natural resources and depletion of natural resources is a growing concern nowadays, it can gain huge amount of profits by selling it overseas.
Takeovers: The Company is well efficient with the trend of past takeovers. It has quite well managed the entities which it has taken over in the past. The biggest one was the takeover of Coles through which it emerged as the leader of Australian retailers (Wesfarmers Limited, 2016). The company can still keep an eye on the emerging markets and can expand to any new division with the takeover schemes. New division will provide further chances of elaboration and play an important role in cementing the position of the business. Moreover, this will provide more advantage in terms of skills and goodwill.
Local Production: As the company is not entering in the global market, it depends on the local labours. The labour cost in Australia is quite high. This results in higher costs of the products being offered to the customers. If the company will not shift its production to low- cost regions of the world, it would become difficult to maintain cost- effective products for its customers (Boyd, 2016).
Specialized Products: The Company is not being able to offer specialised products at a price at which the competitors are being able to offer the same. As a result of which the demand of its products are falling constantly. Its non- global presence is a big threat (Kruger, 2015).
Five accounts susceptible to misappropriation or fraudulent financial reporting
The five accounts that are susceptible to fraudulent financial reporting or misappropriation within the financial statements of Wesfarmers Group are as follows:
Inventory- Throughout Wesfarmers group, there are huge amounts of inventories. These inventories are at risk of being damaged, stolen, or becoming obsolete that is especially true for items like clothing and food. As per the annual report of 2015, the total expenses on inventory for the entire Wesfarmers Group were $43,045 million. Besides, being a business with large retailing operations, it has a substantial amount of physical inventories in various locations. Hence, there is also a risk of inventories being incorrectly recorded and misplaced. Even keeping a track of these inventories is an extremely problematic and complicated task due to Wesfarmers’ sheer size.
Sales- With a massive number of occurrence customers moving towards internet shopping, there still exists a huge chance that fictitious sales may arise because internet data is highly subjective to hackings and manipulation both externally and internally (Lapsley, 2012). As a result, such sales can be overstated by the Group to depict more effective and advantageous results to the stakeholders. This is evident from the fact that online sales within Wesfarmers Group enhanced by 51% in the year 2015, thereby paving ways for misappropriation and fraudulent activities.
Account receivables- The valuation of Wesfarmers Group encounters with a high and extreme volume of sales allocation transactions offered on credit. Hence, ageing accounts become susceptible to misappropriation or fraudulent reporting because it can be difficult to track who has or has not paid back their credit. This can further result into incorrect valuation of trade and other accounts receivable in the financial statements of the Group (Livne, 2015). The credit terms provided by the Group extend up to thirty days on trade receivables.
Cash- Wesfarmers Group employs thousands of employees in its business that aims to cater millions of customers across the globe. Therefore, it is more likely that there are huge cash receipts from the customers. These further results into creation of risks in the balance sheet account because of huge cash balances (Livne, 2015). Besides, the major reason why cash is susceptible to misappropriation of fraudulent activities is that it can more easily be diverted than credit card payments or customer checks. Wesfarmers have obtained $67484 million cash receipts from its customers and this proves the fact.
Expenses- Wesfarmers Group pays over $59,100 million expenses as per its annual report of the year 2015. These comprise of expenses related to freight, occupancy, amortization and depreciation, impairment, employee benefits, and raw materials. Some of these expenses are easily susceptible to misappropriation or fraudulent activities in the financial statements of the company. The fraudster can easily be able to establish false vouchers or documents in support of the enhancement in expenses, thereby gaining a position to minimize its tax liability. However, generally, companies do not tend to enhance their expenses; instead, they understate it to make revenues attractive in the eyes of investors (Roach, 2010).
Wesfarmers’s corporate governance arrangements
The Board of Directors at Westfarmers Limited is a good example of strong corporate governance set up. It aims at meeting all the corporate governance obligations thereby serving in the best interests of shareholders and providing satisfactory returns. The management designs the internal controls that are monitored by the audit and risk committee on a timely basis to ensure that the integrity in financial reporting is maintained (Wesfarmers Limited, 2016). It is also the duty of the directors to ensure that such internal controls are in place to ensure that there is compliance with the legal and regulatory requirements and enable preparation of financial statements that is free from material misstatements or errors or frauds (Manoharan, 2011).
The reasons for placing reliance on the control environment at Westfarmers are as under:
The Board comprises of a majority of independent directors which ensures that the director is free from any business or such other relationships that could have the impact of materially influencing the business decisions and the independence is also assessed on a regular basis to ensure unbiased decisions (Wesfarmers Limited CG, 2016).
A Nomination Committee chaired under an independent director performs reviews of each non-executive director and makes recommendations to the Board with reference to the same. Thus with the key focus on scheduling individual performance reviews of the Board and consideration of feedback from major shareholders, the nomination committee ensures that the decisions of the company are taken in the best interests of the stakeholders (Hoffelder, 2012).
The Board Charter also sets out the various principles of ASX that are compiled by Westfarmers and is set out with the aim to ensure honest and ethical behavior and suspend illegal and undesirable conduct (Wesfarmers Limited CG, 2016). Thus there is certainty about the quality of business being conducted by Westfarmers and the ASX principles’ compliance reaffirms the same.
The Securities Trading Policy and Market Disclosure Policy are designed to ensure compliance with insider trading laws and checks on the list of prohibited transactions under the Corporations Act (Manoharan, 2011). Thus share transactions by Directors are subject to this scrutiny on a regular basis. The Market Disclosure Policy also ensures that the company complies with the regular disclosure obligations with reference to the market sensitive information to ensure that the confidentiality of the shareholders is retained (Wesfarmers Limited CG, 2016).
The Audit and Risk Committee has direct access and communication with the company’s external auditors, Group Assurance and Internal Audit management committees. This facilitates the monitoring of adequacy of controls and making alterations from time to time as per the requirements (Gay & Simnet, 2015). The Risk Management Framework at Westfarmers is reviewed on an annual basis to facilitate the establishment of controls that are essential for the risk exposure and crisis management of the company (Wesfarmers Limited, 2016).
Thus the above factors combined with the Code of Conduct at Westfarmers make it a reliable company as the overall controls environment is governed by various committees set up for different purposes. These guiding set of principles and reporting framework at various levels is tested and approved by the external auditors which make reliance more acceptable.
Audit Plan affected by the scandal
Upon analysis, it can be noticed that Target had displayed bad performance during the last year due to the market competition and such pressures. To compromise this situation, Target asked its suppliers to pay 25% rebate on the stocks that were already marked down and promised to make up for the same during the second half of the year (Wesfarmers Limited, 2016).
The fact that almost ten of the staff members were involved required a closer supervision of the sales returns; write down of obsolete stocks and rebates.
It would be surprising to note that due to the modern systems, it is possible to obtain information about the sales and margins on an hourly basis and so the excuse of not being aware about the performance cannot be believed to be practical (Parker, 2016). Hence the audit plan should incorporate the requirements to track these abnormal fluctuations in the rebates and make a detailed analysis and discussion with the management about the same (Wesfarmers Limited CG, 2016).
The audit plan can also incorporate checks at various managerial levels to ensure that items like rebates and discounts are verified by the team. As systems are in place, information is readily available but the integrity of the people cannot be verified by systems for which the audit plan has to include certifications from the management (Christensen, 2011).
A few noteworthy points are listed below:
- Audit plans should focus on the accuracy and periodicity of the payments and whether it is in line with the provisions of the contract.
- A complete audit trail should cover the complexities of the contract and the wide spectrum of earning rebates.
- There is a difference in rebate earned in comparison to rebate collected and this gap needs to be analyzed.
- There should be various checks performed like claim counts versus utilization and whether the rebate payment formula gives the same results as calculated by the systems.
- Analysis and comparison of rebates quarter wise.
- Test verification of the rebate claims that are denied, paid or on COB, etc.
- Setting up of automatic filters for non-rebatable claims.
- Verification of the rebate files submitted to the top management in the company and the documents submitted to the auditor for verification.
- Obtaining external confirmations on a random basis from various parties. Confirmation ensures that the payment is made and therefore, a strong assessment can be done.
- Review the master set up for rebates processing, logics applied, accruals and calculations on monthly basis and review of the reconciliations between the estimated rebates and actual rebates received (Baldwin, 2010).
- Review total rebates received and total rebates paid and the report for unpaid rebates.
- Review the series of payments received from the same party and the settlement payments done where the percentage is under doubt (Parker, 2016). This will help to keep the fund under evaluation and ensure a smooth functioning.
- Cash flow problems related to the rebates can be analyzed by the management and submitted to the auditors (Baldwin, 2010).
Thus these are the few points that can be added to the audit plan and make the audit more effective in dealing with the eye wash happening in the rebates section. This will help in the audit plan of 2017 and will ensure that that the activities of Wesfarmers are under control.
From the above it can be ensured that the audit plan and policies play a pivotal role in shaping the destiny of the organization. Wesfarmers has operated in a strong fashion however, it is subjected to challenges. The challenges pour from competitor and various other circumstances. The frauds and scandals have highlighted the flaws in the auditing process. Therefore, the management and the audit department should stress on a proper planning so that any future issues are neutralized. Moreover, the report signifies that the company has strong fundamentals and to have a better position it must increase its brand value.
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