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Recognizing the nature of the company, what’s the company’s market overview? Who (if anyone) 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

Principles of Corporate Governance as per ASX

The main purpose of this assignment is to analyze the financial statements of Blackmore ltd which operates in Australia. The assignment will be analysing how the company follows and implements the ASX Corporate Governance Principles in the business. In addition to this, the major risks which the business faces are identified as per the requirement of the assignment. The assignment will also be including horizontal analysis and various key ratio computation for the purpose of understanding the financial performance of the business. The report will be concluding with suggestions as to how the business can overcome the risks which the business faces.  

  1. Laying Solid foundation and oversight for management: As per the business charter of the company, the management of affairs are done by the board of directors. The board of directors Blackmores ltd has formally adopted the charter of the business in order to promote structure, responsibility and composition of the board of directors(Klettner, Clarke and Boersma 2014). In such a charter all important guidelines are mentioned and also includes all those matter for which the approval of the board of directors are important. The board of director ensures that the business’s activities are accordingly for the benefit for the shareholders. The financial statements state the responsibility on the auditors for which areas of different directors are covered. In case any new director or senior-level management enters the company, an orientation program is developed by the company in order to educate them about the Corporate Governance requirements of Blackmores ltd.
  2. Board Structure for adding value: The company has an established nomination committee which comprises of members of the board of directors and other personnel. The meetings of the nomination follow the provisions of the board charter. The nomination committee is responsible for appointing significant individuals as directors or non- executive directors of the company(Salterio, Conrod and Schmidt 2013). The committee also looks into the processes of the business and ensure whether standard of corporate governance is followed or not. The nomination committee ensures that the employee or even the directors who are nominated to be appointed have the necessary skills and experience to add more value to the management of the company (Aggarwal 2013). The company secretary is responsible to report to the board of directors for overall management of the company.
  3. Act ethically and responsibly: Blackmores ltd has a code of conduct which is applicable to all employees, executives and directors which was launched in October 2016. The code of conduct ensures that the employee of the business follow the highest ethical principles and act in an honest and trustworthy manner(Drumwright, Prentice and Biasucci 2015). The code also provides that the employees and the directors of the company follow the principles consistently and also ensure that there is transparency in the operation of the business. The company takes into consideration issues like safety, health and environmental issues into consideration while conducting the operations of the business. The code provides a basic framework or guidelines for the purpose of ensuring that the employee of the company contribute to the value addition of the company and also follow highest ethical standard (Weiss 2014). The code also establishes principles which is related to the basic behavior which is expected from distributors, suppliers, customers of the business. All this ethical approach from the point of view of the company is known as Blackmores way and the company is keen on complying with the highest level of corporate governance standard where ever the company operates.
  4. Safeguard the integrity in corporate reporting: The company has a audit and risk management committee which looks after the audits and compliance with the various standard in the company. Blackmores ltd is committed to promote transparency in the audit procedure of the company which would measure the financial performance of the company effectively. The audit committee is made up of non-executive directors of the company and the majority of which are independent(Fung 2014). The chairman of the audit and risk management committee is a non-executive independent director. The auditor of the company needs to be present during the annual general meeting of the company so that any question regarding the annual report and auditor’s report of the company can be justified by the auditor. The annual report also consists of information and declarations from the CFO and CEO of the company regarding important developments which took place during the year. it is the responsibility of the auditor of the company to ensure that the financial statements are showing true and fair view and no item of the financial statement are misrepresented. This promotes the integrity of the financial statements of the company (Gao and Jia 2016).
  5. Making Disclosures in a balanced and timely manner: Blackmores ltd has policies which are such established so that the disclosure requirements of material items of a financial statements are effectively done. The disclosure requirements are also to be done in a balanced, timely and fair manner in order to ensure that the investors and the stakeholders of the company are able to access information about performance, management and operations of the company(Guidara, Khlif and Jarboui 2014). As the company is listed in ASX, therefore the listing rules which requires continuous disclosures has to be complied by the company (Mayorga 2013). In order to ensure that the continuous disclosure requirements are maintained effectively in the business, the board of directors conducts meetings to discuss the agenda and about the requirements of continuous disclosures.
  6. Respecting the rights of Shareholders: The company is committed towards informing any developments which occurs in the business to the shareholders. The board of directors ensures that the company communicates with the investors regarding every development in detailed and timely manner(Johnston and Morrow 2014). This is where the continuous disclosure principle as required by ASX comes in useful for the company. Other alternatives which are used by the company for communicating information to the shareholders are annual financial reports, quarterly or half yearly performance reports of the company, explanatory memos and notices which are issued during a meeting of the company. In this the company is able to respect the rights of the shareholders.
  7. Identify and Manage Risks: The audit and risks committee which is established by the board of directors of Blackmores company is responsible for managing the risks of the company effectively(Arjaliès and Mundy 2013). The committee directly reports to the board of directors and the committee comprise of a majority of independent non-executive directors. The structure of the committee and the members who makes the committee are mentioned in the annual reports of the company for the year 2017. The board of directors on the recommendations of the audit and risk management committee establishes policies and practices which can enhance businesses control over the risks of the company. The board also needs to ensure that appropriate framework is followed by the business in preparation of the financial statements and also maintaining the policies of the company.
  8. Provide remuneration in fair and responsible manner: The company has established a remuneration committee and the primary objectives of the company is to consider the remuneration policies and structure of the company(Asafo-Adjei 2015). The committee provides recommendation to further improve the remuneration policies of the company so that the company might be able to retain top level employee of the company such as directors, managers. The board is headed by an independent non-executive director of the company. 

Blackmores ltd is a company which operates in Australia and in engaged in the manufacture of medical supplements, vitamins and other nutrition supplements. The company is considered to be a leading brand in its sector and the company is committed to provide the best health solutions to the customers (Blackmores.com.au. 2018). The company conducts innovative researches so that the management can develop or improve medical supplements which can benefit the consumers of the country significantly. The head office of the company is situated in Sydney, Australia. The company is committed to ensure that the management follows sustainable practices to ensure that there is no wastage of resources of the company (Blackmores.com.au. 2018). The company is engaged in responding to the needs of the society and developing products as per the needs of the society.

Blackmores ltd is considered to be one of the leading brands which provides medical and health care supplements and the company has a market capitalization of $ 1.5 billion.  The company mainly deals in healthcare supplements and vitamins and the company also provides health products for pets as well (Blackmores.com.au. 2018). The company has established its business in 17 markets which are spread across the world. In Australia the company is regarded as one of the best brand which provides health nutrients, vitamins and supplements. In addition to this, the company has a positive image and enjoys brand loyalty in Australia and therefore it is one of the trusted brand of Australia in healthcare field. The company has generated a net profit after tax of $ 58 million as per the financial statements of 2017 (Blackmores.com.au. 2018).

Blackmores ltd is regulated by the relevant standards which has been issued by Australian Accounting Standard Board (AASB) and also the company is listed in Australian Stock Exchange (ASX) and therefore it is regulated by ASX as well. In addition to this, the business is also regulated by other ethical organization as well.

Risk Assessment

The company aims to improve the performance of the business and also aims to take advantage of every opportunity which the company has in the world.  The business strategies of the company are focused on achieving competitive advantage. The company proposes that the people should invest in the wellbeing of themselves and on products which are made of natural sources. The company expertise in health, nutrients and medical healthcare products which are developed considering the general wellbeing of the society and general public. 

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

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%

Audit risks refers to the misstatements which might be present in the financial statement of the company and the same might not be detectable by the auditor of the company (Dow, Watson and Shea 2013). The audit risk which are analyzed on the basis of the calculated ratios and horizontal analysis of the financial statement are given below:

  1. The debt equity ratio of the company is shown as 1.30 in the table which shows ratio computation. The debt equity ratio of the company is greater than one which signifies that the company has used debt capital more than equity capital in the capital structure mix(Wolfson 2017). This is very risky as the business has to face burden of interests as well as there might be overstatements or understatements of debt capital to improve the balance sheet of the company.
  2. The intangible assets of the company which are goodwill which is shown in the balance sheet of the company might be misstated. The figure of goodwill is depicted at same value in 2017 as it was depicted in previous year 2016. There has been no amortization to the intangible assets and therefore the auditor needs to consider the fact that there might be some misstatement or manipulations(Covello and Merkhoher 2013).
  3. There has been significant change in the value of inventory from the previous year’s figure. The inventory value has decreased from previous year and that to by an immense amount which suggest that there might be certain manipulations in the same or there might be certain misstatements or omissions in the financial statements which the auditor of the company must check.  

The recommendation which can be suggested to overcome or avoid the risks are given below in details:

  1. The auditor needs to check the value of debt which is shown in the financial statements and also verify the value from checking relevant documents which are related to the debt which can be legal papers of debt, maturity detail. The auditor also needs to verify if the debts which are presented are really of long-term nature or not.
  2. The auditor also needs to verify the intangible assets of the company and ensure that the value which is shown in the financial statement is fairly represented. The auditor also needs to check whether there is any amortization or impairment losses which is applicable to any intangible assets of the company.
  3. The auditor needs to review the inventory records which includes ledgers, inventory budgets and all receipts and issues notes and invoices. This can help to establish the actual value of inventories of the business.  

Reference

Aggarwal, P., 2013. Impact of corporate governance on corporate financial performance. IOSR Journal of Business and Management (IOSR-JBM), 13(3), pp.01-05.

Arjaliès, D.L. and Mundy, J., 2013. The use of management control systems to manage CSR strategy: A levers of control perspective. Management Accounting Research, 24(4), pp.284-300.

Asafo-Adjei, M.A., 2015. Regulation of executive directors remuneration in South Africa: the road to achieving good corporate governance (Doctoral dissertation, University of Cape Town).

Blackmores.com.au. (2018). BLACKMORES Vitamins & Supplements - Australia's #1. [online] Available at: https://www.blackmores.com.au [Accessed 27 Apr. 2018].

Covello, V.T. and Merkhoher, M.W., 2013. Risk assessment methods: approaches for assessing health and environmental risks. Springer Science & Business Media.

Dow, K.E., Watson, M.W. and Shea, V.J., 2013. Understanding the links between audit risks and audit steps: The case of procurement cards. Issues in Accounting Education, 28(4), pp.913-921.

Drumwright, M., Prentice, R. and Biasucci, C., 2015. Behavioral ethics and teaching ethical decision making. Decision Sciences Journal of Innovative Education, 13(3), pp.431-458.

Fung, B., 2014. The demand and need for transparency and disclosure in corporate governance. Universal Journal of Management, 2(2), pp.72-80.

Gao, X. and Jia, Y., 2016. Internal control over financial reporting and the safeguarding of corporate resources: Evidence from the value of cash holdings. Contemporary Accounting Research, 33(2), pp.783-814.

Guidara, A., Khlif, H. and Jarboui, A., 2014. Voluntary and timely disclosure and the cost of debt: South African evidence. Meditari Accountancy Research, 22(2), pp.149-164.

Johnston, A. and Morrow, P., 2014. Commentary on the Shareholder Rights Directive.

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.

Mayorga, D., 2013. Managing continuous disclosure: Australian evidence. Accounting, Auditing & Accountability Journal, 26(7), pp.1135-1169.

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.

Weiss, J.W., 2014. Business ethics: A stakeholder and issues management approach. Berrett-Koehler Publishers.

Wolfson, M.H., 2017. Financial crises: Understanding the postwar US experience. Routledge.

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