Assessment Of Blackmores Ltd's Financial Statements And ASX Corporate Governance Principles Compliance Essay.

Executive Summary

Executive Summary of the assessment

Focus in each headline the implication of ASX Corporate Governance Principlesfrom your selected company  Conceptualize and explain how to your selected company implements ASX CGC principles (read carefully from reference link A.3 and A.4 to follow)

Risk assessment (When performing an audit, you use risk assessment procedures to assess the risk that material misstatement exists. This step is very important because the whole point of a financial statement audit is finding out if the financial statements are materially correct. How exactly do you assess audit risk?) There are various steps of risk assessment procedures, but your report will focus mainly:

Recognizing the nature of the company, what’s the company’s marketoverview? Who regulates the client? What’s the company’s business strategy? Computation of income statement and balance sheet ratio, and Development of common-size financial statements and focus on relevant audit risk and potential steps to reduce risk .

ASX CGS Principles:

 The Principles and Recommendations are structured around, and seek to promote, 8 central principles:

Lay solid foundations for management and oversight:
Your selected company should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated.

Structure the board to add value:
Your selected company should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively.

Act ethically and responsibly:
Your selected company should act ethically and

Safeguard integrity in corporate reporting:
Your selected company should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting.

Make timely and balanced disclosure:
Your selected company should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.

Respect the rights of security holders:
Your selected company should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively.

Recognise and manage risk:
Your selected company should establish a sound risk management framework and periodically review the effectiveness of that framework.

Remunerate fairly and responsibly:
Your selected company should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders

Assessing Risk with Analytical Procedures: Do Systems-Thinking Tools HelpAuditors Focus on Diagnostic Patterns?O'Donnell, Sarasota  Vol.30,Issue.4, (Nov 2011): 273-283.

The report will analyse the compliance of ASX corporate governance principles by Blackmored Ltd and analysis of its financial statements for analysing the risk. The report further focuses on the nature of the company, business strategies followed by the company, regulating authority of the company and the market overview of the company. It is found from the analysis that the company is complying with all the principles of ASX corporate governance principles.

Principle 1 – Oversight and solid foundation for the management

As per the company constitution the business of the company and its affairs shall be managed by the direction of the board. The board of Blackmores Ltd adopted the formal charter that among various other matters established the structure, composition and responsibilities of board of directors of the company. Further, for the matters that require the approval from the board is also included. Before engaging a director, the board undertakes the required checks and offers the shareholders with all the relevant details required to decide about electing the director (Tricker and Tricker 2015). Thereafter the directors receive the formal engagement letter that includes the expectations, conditions and key terms for the engagement. Summary for the chairman’s and CEO’s duties are analysed and agreed by board and it also includes the description of job for each role.  The orientation programme for is arranged for the new directors for ensuring that they are familiar with governance practices and business of the company. Further, Blackmores is the leader in diversity and they are committed in celebrating and championing the diversity richness (Du Plessis, Hargovan and Harris 2018).

Principle 2 – Board structure for adding value

The company has a nomination committee that includes the entire board and committee of the board. The meetings and proceedings of nomination committee are regulated by provision of the constitution. The main objective of the nomination committee is to advise and assist the boar for performing its responsibilities to the shareholders through assuring that the members of the board are best in discharging their duties as director and those are complied with highest governance standards. The board reviews the composition of the board and analyse the nominations for new engagements from time to time for assuring right balance for experience and skills (Klettner, Clarke and Boersma 2014). Further, the board is delivered with the required information for discharging their duties efficiently and it ensures that –

• All the directors have access to company secretary
• Removal and appointment of company secretary is the matter of decision by the entire board.
• Management are responsible for supplying the required information to the board, quality and timeframe that will allow the board to perform the duties efficiently.

ASX Corporate Governance Principles

Principle 3 – Act ethically and responsibly

The company re-launched its code of conduct for employees, senior executives and directors during October 2016. The main objective of the code is to assure that the employees and directors are trustworthy, honest and are committed to highest standards of business, professional and personal behaviour (Beekes, Brown and Zhang 2015). It further assures that the employees and directors act in a way that is consistent with the best practices of the commercial and public business and are committed towards transparent and open communication with regard to all the dealings. Company takes into consideration the issues like safety, health and environmental issues as important for the customers, employees, business success and communities. Further, the code of conduct includes the value based behaviour it expects from the employees in the company within the company. It also established the basic behaviour that are expected from the customers, distributors, suppliers and other who act on behalf of the company (Young and Thyil 2014). These behaviours are called as the ‘the Blackmores way’ and the behaviours are focussed towards ‘doing the right thing’ in all the locations where it works.

Principle 4 – Safeguarding the integrity in respect to financial reporting

The company is committed towards transparent auditing and reporting system of the financial performance of the company. Company’s board has formed an audit and risk committee that reports to the boards. Further the committee must have at least 3 members, all members shall be non-executive director and majority shall be independent. The board shall chaired by the independent director who shall not be the chair of board (Lama and Anderson 2015). External auditors of the company are asked to be present in the AGM and shall be prepared to answer the questions of shareholders regarding audit conduct and content and preparation of auditor’s report. Before getting the approval from the board the financial statement of the board for the particular financial period, the board receives a declaration from the CFO and CEO that as per their opinion, financial statements of the company are maintained properly and are complied with the appropriate standards of accounting and presents true and fair view of financial status of the company and opinion are established based on the sound risk management system and internal control of the company (Appuhami and Bhuyan 2015.).

Principle 5 – Making disclosures in balanced and timely manner

Principle 1 - Oversight and solid foundation for the management

The company has established policies for assuring that the disclosures of all the material aspects regarding the entity are taken place in timely, balanced and honest manner for ensuring that all the investors are able to access the material information equally that includes the position, governance, performance and ownership (Chapple, Clout and Tan 2014). Further, as the company is listed under ASX, it complies with the Listing Rule 3.1 that is the Continuous disclosures. Te executives of the company are informed regarding the requirements and separate board agenda that cover the requirements with regard to the continuous disclosures that are discussed in each meeting of the board. 

Principle 6 – Respecting the shareholder’s right

Blackmores strives to communicate the investors and shareholders regarding the pertinent information in regular, detailed, timely and factual manner. Information to the shareholders are communicated through –

• Annual financial report
• Disclosure to ASX
• Explanatory memoranda and notices of the AGM
• Quarterly and half yearly reports and newsletter of the shareholders that offer the shareholders with the details of profit performance and other interest matters (Chan, Watson and Woodliff 2014).

Principle 7 – Identify and manage risk

Blackmores board has formed the audit and risk committee that reports to the board directly. Further the committee must have at least 3 members, all members shall be non-executive director and majority shall be independent. The board shall chaired by the independent director who shall not be the chair of board (Council and Exchange 2014). The structure and composition of the committee and the attendance of the members at company’s meetings are mentioned in the director’s report that is available in the official website of the company. It is the board’s responsibility to maintain, establish, demonstrate and operate the appropriate framework for the business controls.

Principle 8 – Provide remuneration in fair and responsible manner

The board established the People and Remuneration Committee and the primary objectives of the committee are to consider the policies and strategies of remuneration and provide recommendation to board that is most beneficial to the shareholders and company (Salterio, Conrod and Schmidt 2013). The committee directly reports to the board of the company. Further the committee must have at least members; all members shall be non-executive and independent. The board shall chaired by the independent non-executive director.

Nature of the Company

Blackmores is a leading brand of Australia which is engaged in manufacture of medical supplements and vitamin, mineral and nutrition supplements. The company is one of the leading brands of this sector. The main purpose of the company is to provide best natural health solutions to the people (Blackmores.com.au 2018). The company utilizes its knowledge on medical supplements and mixes such with innovative practices so that it can produce the best medical supplements for its customers. The head office of the company is situated in Sydney, Australia. The company is engaged in sustainable practices and also proper waste management so that the business can respond to the needs of the society.

Principle 2 – Board structure for adding value

Blackmores ltd is a leading brand in medical and health supplements which has a market capitalization of about $ 1.5 billion. The company has employed of around 1000 people across Asia- Pacific and includes BioCeuticals, natural health products for pets. The teams of Blackmores ltd in Asia comprises of marketing and sales personnel and also healthcare personnel (Blackmores.com.au.2018). The company reaches out to 17 markets which is situated across the world. The company has been claimed to be the number 1 brand in health food store brand and number 9 in Australia’s most trusted brand in vitamins and supplements. The company has generated a net profit after tax of $ 58 million as per the financial statements of 2017.

The business of Blackmores ltd is regulated by relevant accounting standards which have been issued by Australian Accounting Standard Board (AASB) and in addition to this; it is also regulated by Australian Stock Exchange (ASX).

The company aims to better the performance of the company by ensuring that the company takes advantage all the opportunities which are there in order to improve the business strategies and competitive advantage. The company wants to focus on the strengths of the company in order to increase the revenues of the company.

Ratio calculation

Ratio	Formula	Result
Income statement ratio
Operating profit margin	Operating profit/revenue *100	15.70
Net profit margin	Net profit/revenue *100	10.57
Return on shareholder's equity	Operating profit/shareholder's equity*100	48.22
Balance sheet ratio
Current ratio	Current assets / Current liabilities	1.81
Quick ratio	Quick assets / Current liabilities	1.22
Debt equity ratio	Total liabilities / shareholder's equity	1.30

Common-size statement

Horizontal analysis

Income statement

Particulars	2017	2016	Amount	Percentage
Sales	692790	717211	-24421	-3.40%
Promotional and other rebates	-143547	-118771	-24776	20.86%
Other income	545	1086	-541	-49.82%
Revenue and other income	549788	599526	-49738	-8.30%
Expenses
Raw material and consumable used	236184	214263	21921	10.23%
Employee benefits expenses	120209	134933	-14724	-10.91%
Selling and marketing expenses	51141	49177	1964	3.99%
Depreciation and amortisation	8411	7045	1366	19.39%
Operating lease renal exp	7942	4496	3446	76.65%
Professional and consulting expenses	8923	9168	-245	-2.67%
Repairs and maintenance	5172	4683	489	10.44%
Freight expenses	9809	10906	-1097	-10.06%
Bank charges	1300	2099	-799	-38.07%
Other expenses	14466	17535	-3069	-17.50%
Net expenses	463557	454305	9252	2.04%
Earning before interest and tax	86231	145221	-58990	-40.62%
Interest revenue	384	462	-78	-16.88%
Interest expenses	4564	2272	2292	100.88%
Net interest expenses	4180	1810	2370	130.94%
Profit before tax	82051	143411	-61360	-42.79%
Income tax expenses	24023	43391	-19368	-44.64%
Profit after tax	58028	100020	-41992	-41.98%

Balance sheet

Assets	2017	2016	Amount	Percentage
Current assets
Cash and cash equivalents	34251	37653	-3402	-9%
Trade and other receivables	132146	134636	-2490	-2%
Inventories	84794	116486	-31692	-27%
Other assets	7471	5849	1622	28%
Total current assets	258662	294624	-35962	-12%
Non-current assets
Property, plany and equipment	74207	67626	6581	10%
Investment property	2160	2160	0	0%
Other intangible assets	32293	32736	-443	-1%
Goodwill	29461	29371	90	0%
Deferred tax assets	9960	12257	-2297	-19%
Other assets	1320	628	692	110%
Amount advanced to related parties	4111	3960	151	4%
Total non-current assets	153512	148738	4774	3%
Total assets	412174	443362	-31188	-7%
Liabilities
Current liabilities
Payables	124365	160478	-36113	-23%
Current tax liabilities	1811	24204	-22393	-93%
Provisions	11549	7588	3961	52%
Other liabilities	4831	9	4822	53578%
Total current liabilities	142556	192279	-49723	-26%
Non-current liabilities			0
Interest bearing liabilities	78968	55446	23522	42%
Provisions	1372	1134	238	21%
Other liabilities	235	3655	-3420	-94%
Deferred tax liabilities	10224	10255	-31
Total non-current liabilities	90799	70490	20309	29%
Total Liabilities	233355	262769	-29414	-11%
Net assets	178819	180593	-1774	-1%
Equity	178819	180593	-1774	-1%

The audit risks of Blackmores ltd which the company might face are given below in details:

• The debt equity ratio of the company which is shown at 1.30 which signifies that the amount of debt which is used by the business is more than the equity capital(Heikalet al.2014). This can create a risk over the company for the interest the company needs to pay.
• As per the financial statements there has been a significant fall in the value of inventory from the analysis of 2017 and 2016 results. The fall in the value of inventory suggests that there might be some manipulations or material misstatements in the inventory records which can affect the profitability and affect the financial statements of the company(Sadgrove 2016).
• The employee benefits expenses of the company which is shown in profit and loss account for both the years 2016 and 2017. The amount which is shown in the profit and loss account is of significant value which might be overstated or understated which leads to a risk of material misstatements which can affect the net profit of the company directly(Masoom 2013).

In order to overcome the audit risks which are mentioned above the auditor needs to apply the following measures:

• The company needs to reduce the debt of the business and keep it at a balance with the equity capital of the business. The company needs to attain an appropriate capital structure mix for such a purpose(Graham, Leary and Roberts 2015). The auditor need to ensure that the debt amount which is stated in the financial statements are accurately stated and no misstatements are present.
• The auditor needs to verify the stocks of the business by reviewing the stock ledgers accounts maintained by the company. If there is a need for further evidence, he can physically verify the stock to avoid risks.
• The employee benefit expenses which is shown by the business needs to be checked by the auditor to ensure that such expenses are actually incurred by the company. The auditor needs to check various records and also identify what are the benefits which the business provides to the employees.

Reference

Appuhami, R. and Bhuyan, M., 2015. Examining the influence of corporate governance on intellectual capital efficiency: Evidence from top service firms in Australia. Managerial Auditing Journal, 30(4/5), pp.347-372.

Beekes, W., Brown, P. and Zhang, Q., 2015. Corporate governance and the informativeness of disclosures in Australia: A re?examination. Accounting & Finance, 55(4), pp.931-963.

Blackmores.com.au., 2018. BLACKMORES Vitamins & Supplements - Australia's #1. [online] Available at: https://www.blackmores.com.au [Accessed 26 Apr. 2018].

Chan, M.C., Watson, J. and Woodliff, D., 2014. Corporate governance quality and CSR disclosures. Journal of Business Ethics, 125(1), pp.59-73.

Chapple, L., Clout, V.J. and Tan, D., 2014. Corporate governance and securities class actions. Australian Journal of Management, 39(4), pp.525-547.

Council, A.C.G. and Exchange, A.S., 2014. Corporate governance principles and recommendations . ASX Corporate Governance Council.

Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate governance. Cambridge University Press.

Graham, J.R., Leary, M.T. and Roberts, M.R., 2015. A century of capital structure: The leveraging of corporate America. Journal of Financial Economics, 118(3), pp.658-683.

Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

Klettner, A., Clarke, T. and Boersma, M., 2014. The governance of corporate sustainability: Empirical insights into the development, leadership and implementation of responsible business strategy. Journal of Business Ethics, 122(1), pp.145-165.

Lama, T. and Anderson, W.W., 2015. Company characteristics and compliance with ASX corporate governance principles. Pacific Accounting Review, 27(3), pp.373-392.

Masoom, K., 2013. The Entrepreneur's Dictionary of Business and Financial Terms. PartridgeIndia.

Sadgrove, K., 2016. The complete guide to business risk management. Routledge.

Salterio, S.E., Conrod, J.E. and Schmidt, R.N., 2013. Canadian evidence of adherence to “comply or explain” corporate governance codes: An international comparison. Accounting Perspectives, 12(1), pp.23-51.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Young, S. and Thyil, V., 2014. Corporate social responsibility and corporate governance: Role of context in international settings. Journal of Business Ethics, 122(1), pp.1-24.