ACCG315 Case Study ACCOUNTING AND CORPORATE GOVERNANCE代写

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  • ACCG315 Case Study ACCOUNTING AND CORPORATE GOVERNANCE代写

     
    ACCG315 Case Study
    THE ETHICS OF PROFIT IN THE AUSTRALIAN RETAIL
    INDUSTRY*
    DEPARTMENT OF
    ACCOUNTING AND
    CORPORATE GOVERNANCE
    Faculty of Business and
    Economics
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
    2
    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    Introduction
    The pressures on the Australian retail industry are building. A number of forces are constraining top-line sales
    growth for many leading brands. Some high profile brands have even failed. The remainder are looking at the
    only other way to maintain profits – cost reduction.
    The decisions that the leaders of these businesses make in response to these pressures will be scrutinised
    closely; after all, the major retailers are household-names. Commercial skills will be tested. But the ethics of
    these decisions will also be examined. The criteria of success have arguably become multidimensional.
    Management will not only be judged on what profit they make but the manner in which they achieve it. And,
    accountants are uniquely placed to have a major impact on how these decisions will be made, how outcomes
    will be measured, and, how they are reported.
    A current analysis of the Australian retail industry shows just how real the pressures are on the key decision
    makers within the major retailers in Australia and why action is required.
    Figure 1 Australian consumer prices
    (Source: RBA 2016)
    At a macroeconomic level, the
    Reserve Bank of Australia (RBA)
    has recently detailed the lack of
    price growth in the economy –
    see  Figure  1  (RBA  2016).
    Retailers prefer inflationary to
    deflationary worlds, the latter
    having  a  natural  downward
    impact  on  sales  growth.
    Consumers can’t easily be talked
    into price rises unlike in previous
    times. In fact consumers are
    expecting price reductions. But,
    macroeconomic conditions are
    not the only problem.
    Figure 2 Aldi Sales and Store growth
    (s ource: Low 2016)
    International  retailers  are
    starting to see the opportunities
    in some of the more highly
    concentrated  parts  of  the
    Australian industry. Brands like
    H&M, Zara and Uniqlo have
    entered  various  industry
    segments. In the supermarkets
    space, the giant German group,
    Aldi,  has  been  experiencing
    significant  growth  since  its
    arrival in 2001 – see Figure 2.
    This success has been a major
    contributor to falling prices at its
    main rivals. Some analysts have
    estimated that prices at Coles
    and Woolworths have dropped
    by between 1.5 and 2% during
    2015/16 due to Aldi (Low 2016).
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
    3
    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    Woolworths, in fact, recently announced a $1billion restructure including: the closing of poor performing
    stores; 500 job losses within its head office and supply chain; and, as noted, a major “investment” in sell price
    reductions (Woolworths 2016a).
    And it’s not only competitors in the traditional “bricks and mortar” space causing concern. Woolworths and
    other retailers are also experiencing intense competition from disruptive on-line retail models. It is this
    development that shows that the retail industry is being confronted by both operating challenges and also the
    strategic challenge of entirely new business models
    These new models are stripping costs out of the business, particularly the customer facing infrastructure
    required by the “high street” retailers. Figures vary but some have estimated that on-line sales have increased
    by over 12% during the previous year (NAB 2016). Not bad in a disinflationary environment.
    The industry dynamics facing the major established retailers have, therefore, rarely been more challenging.
    And while some have tried to differentiate themselves from the competition, cost control remains the major
    objective to maintain profit levels in the face of headwinds in sales growth. But what types of decisions are
    being made to reduce cost bases or to otherwise squeeze out incremental return on investment increases? Are
    there any ethical implications or behavioural issues arising from these decisions?
    The Retail Supply Chain: The pursuit of cost savings and the use of power
    There are a number of options for retailers in their drive to reduce costs. The two main areas targeted are
    represented by the Cost of Goods Sold (COGS) and the Cost of Doing Business (CODB). These components in
    relation to total profits are shown in Figure 3.
    Figure 3 The retailer’s profit components
    (Source: Productivity Commission 2014)
    Particularly due to the emergence of internet retailing and the disruptive way it has changed the cost structure
    of retail, a focus on CODB has grown in importance in recent years. These costs, as the name suggests, are
    those required to service the infrastructure of a retailer and include staff costs, occupancy costs such as rent,
    utilities, distribution and selling costs amongst others.
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    A number of companies “outsource” elements of these costs particularly in the areas of distribution and
    information technology services. However, a major focus of retailers has always been on Gross Profits (or
    margins). And there are only two ways that unit gross profits can be improved: either through increasing the
    sell price of the product or decreasing its cost. Given the pressures on the top line sales numbers and therefore
    sell prices, there is really only one way retailers can go in this environment: how to reduce COGS?
    For many retailers, cost reduction strategies have been to source product from overseas suppliers. This has
    very much been the case in the garment industry. Over 60 million people work in the garment industry and
    over 15 million of these work in Asia who supply 90% of the garments imported into Australia (Oxfam Australia
    2016). Given the low wage environment operating in Asia it is natural that garment retailers are increasing
    their sourcing from these countries.
    Make no mistake, this is not high-end fashion. Garments obtained from these countries are specifically to
    service the demand for increasingly lower cost items. As some countries wage rates gradually increase, so
    buyers move to other, lower wage countries to “chase” the margin improvement. If they don’t do this,
    competitors will and the cost advantage will vanish. This is what happened in Bangladesh and, in one supplier
    circumstance, with tragic consequences.
    The RANA Plaza disaster made world-wide news in April of 2013. An 8 storey building in Dhaka in which
    thousands of people, mostly women, worked long hours each day collapsed due to poor construction and
    maintenance standards. The working conditions in these types of factories are appalling with insufficient
    space, light and drinking water: “[they] are literally ‘death traps’ with workers locked inside to prevent theft,
    leaving no way to escape disasters such as fire” (As-Saber 2013).
    The official death toll has been put at 1,134 (Hoskins 2015). And, it is not the only example of its type. Due to
    the pressures from international retailers, poor building and worker regulation, and, managers driving
    relentless volume performance, thousands of people at RANA and elsewhere in Asia have been and are
    continuing to be exploited to produce garments at a cost that is a faction of that which would be incurred if big
    retailers produced in their home markets.
    The international supply chain for the garment industry is big business. At the time of the disaster, Bangladesh
    was earning US$20billion annually and was the second largest supplier behind China. Other countries
    involved include Pakistan, India, Vietnam and Indonesia. In Bangladesh, 3.6 million garment workers often
    work 14-16 hours per day at a minimum wage of A$20 per week (Oxfam Australia 2016). International retailers
    buy direct from manufacturers but these suppliers can also sub-contract out their production to other
    manufacturers. These arrangements can be so complex that at the time of the RANA plaza disaster many
    retailers did not in fact know if they used this supplier (OxFam Australia 2016).
    This lack of transparency is just one reason why groups such as Oxfam regularly compile scorecards of how the
    major retailers are performing when it comes to monitoring its supply chain to ensure against worker
    exploitation (Oxfam Australia 2016). Another charity, Baptist World Aid Australia, monitors suppliers on a
    range of measures such as: the existence of polices relating to supplier arrangements; “knowing your supplier”;
    worker empowerment; and, similar measures. (Baptist World Aid Australia 2016). An example of how one
    Australian company, Cotton On, has developed a policy framework surrounding its supply chain can be found
    here: http://www.cottonongroup.com.au/ethics/ethical-production#vendor-code-of-conduct-323
    Many retailers take an active stance in managing its supply chain. Wesfarmers, for example, acknowledges that
    it has an obligation to monitor the way it sources its products from developing countries and that it had done
    this in a number of ways including through the use of auditing programs. The audit program had the following
    findings for 2016 (Figure 4):
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
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    Figure 4 Wesfarmers Ethical Sourcing Audit Findings
    (Source: Wesfarmers 2016c)
    Oxfam highlights however that whilst some
    retailers may have good intentions when it
    comes to auditing, the practice of “audit
    fraud” is widespread – that is, workers being
    coached by managers to say the right thing
    when independent auditors are around
    (Oxfam Australia 2016). It is not difficult to
    imagine a situation where workers may be too
    fearful to raise concerns for fear of losing their
    livelihoods.
    At the time of the RANA Plaza disaster, Simon
    McRay, of Ethical Clothing Australia, made it
    clear where the international supply chain for
    the garment industry is placed. He said that
    while responsibility for sourcing clothes
    ethically lies with retailers, it is consumers
    who must also realise that there is a reason
    why clothing seems so cheap. “If you’re going
    to buy cheap fashion”, McRay says, “you’re
    buying exploitation there’s no two ways
    around it” (Michael 2013). The international
    charity OxFam in fact believes that consumers
    are willing to pay more for their garments. In a recent survey, they found that 89% of people said that they
    “were willing to pay a little more for clothes to ensure garment workers had safe and decent working
    conditions” (Oxfam Australia 2016).
    In their race to lower and lower costs, are retailers ignoring the goodwill of consumers? Or is it a matter of
    consumers saying one thing but actually doing another when it comes to parting with actual cash?
    Whatever the situation on the consumer’s side, it seems that the international garment manufacturing industry
    is still potential prey to the big retailers. Why? Simply, the big buyers have the power. This is what market
    power is all about; whatever the industry, whatever the country. The same “rules” apply even in a developed
    country market like Australia.
    Strategic theory suggests that having power is a desirable thing. Not having power is to be avoided. Competitive
    strategy is about using power to achieve desired objectives. But when is using your power legitimate?
    The big retailers in Australia’s oligopolistic supermarket industry certainly have plenty of power simply
    because of its concentrated nature (see Figure 5). While there are differing views of how this concentration
    translates to power over consumers, there is plenty of evidence that it does put local Australian suppliers at a
    distinct disadvantage when it comes to negotiations.
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
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    Figure 5 Market shares within the Australian Supermarket Industry
    (Source: Roy Morgan Research 2016)
    In fact, the Australian Competition and Consumer Commission (ACCC) successfully brought legal action
    against the giant Wesfarmers corporation, owner of Coles, in respect to a number of matters relating to the
    treatment of the supermarket’s suppliers. The Federal Court Judge, who found against Coles, was scathing.
    “Coles misconduct was serious, deliberate and repeated”, Justice Gordon said in her judgement. “Coles
    misused its bargaining power. Its conduct was not done in good conscience” (quoted in ACCC 2014).
    It was found that Coles demanded continuing payments from suppliers “based on purported benefits to
    suppliers that Coles asserted had resulted from changes Coles had made to its supply chain” (ACCC 2014). The
    scheme was called the Active Retail Collaboration (ARC) program. And, if the suppler refused to make the
    payments, it was found that Coles would threaten the supplier with downgrading the suppliers’ products within
    the supermarket’s range, cease promoting the product, or, ultimately, no longer buy the supplier’s products at
    all.
    In a further proceeding, Coles was also found to have: demanded payments for “profit gaps” for
    underperforming products; sought compensation retrospectively for wastage; and, demanded penalty
    payments for late deliveries when this had not been part of the supply agreement (ACCC 2014).
    Wesfarmers moved to rectify all of these matters. A former Victorian Premier, Jeff Kennett was appointed as
    an independent arbiter to review supplier arrangements at Coles, and if required, recommend financial
    compensation. He ended up ordering Coles to repay more than $12 million to small food and grocer suppliers
    and stated: “[the] ACCC’s involvement in this has been good for the suppliers but the biggest winner is Coles,
    because it’s been forced to move to a more modern way of dealing with those they need most – the suppliers”
    (quoted in Mitchell 2015a)
    Wesfarmers and the industry generally, including Coles biggest competitor Woolworths (also the target of
    supplier complaints) have moved to the creation of a voluntary “Food and Grocery Code of Conduct”. The
    code, which is administered by the ACCC:
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
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      “sets out minimum obligations for retailers and wholesalers relating to the making of grocery supply
    agreements
      requires retailers and wholesalers to act lawfully and in good faith
      prohibits retailers from threatening suppliers with business disruption or termination without
    reasonable grounds
      establishes minimum standards of conduct by a retailer when dealing with suppliers, such as
    payment, de-listing, standards and specifications for fresh produce, and the allocation of shelf space
      requires retailers and wholesalers to provide annual training to employees whose role includes
    direct involvement in buying grocery products, and their managers, on the requirements of the
    Code”.
    (See the Code at the ACCC’s website: https://www.accc.gov.au/business/industry-codes/food-and-
    grocery-code-of-conduct)
    It is early days in the operation of this code but it’s not going to be the only thing that the big supermarket
    retailers need to look out for. There are other ways retailers can push the boundaries of appropriate behaviour
    in the pursuit of cost advantage.
    Supplier deals: Creative negotiations, creative accounting
    Australian supermarkets are not alone in using their power over suppliers. For example, the giant British
    supermarket company, Tesco PLC, has also been found to be using its muscle not only in negotiating tough
    deals with suppliers but being creative in the way that these are being accounted for as well.
    Through a number of scenarios, Tesco was found by an independent enquiry to have “knowingly delayed
    paying money to suppliers in order to improve its own financial position” and that “even in circumstances
    where a debt had been acknowledged by Tesco, on occasions the money was not repaid until over 12 months
    later with some amounts taking up to 24 months to be repaid”. (Groceries Code Adjudicator 2016).
    The enquiry found this to be unreasonable behaviour. It was recommended that finance and buying teams at
    Tesco would be trained in the findings from the investigation – a pointed reminder that Tesco management
    needed to improve its administrative and ethical standards.
    Both in the UK and in Australia, and in addition to the simple (if unfair) tactic of delaying supplier payments,
    another area that is notorious in retail as being open to commercial and accounting manipulation is the area
    of supplier rebates. These are the supplier payments made to retailers based on things like:
      volume purchases (dollar or percentage discounts either paid at the point of purchase from the
    supplier or from register “scan data” of sales to customers); and,
      Promotional rebates (also known as “over and above” or “Co-op” rebates) negotiated with suppliers
    for any number of scenarios but typically for things like: favourable placement of the supplier’s product
    on shelves; to share advertising costs; or, in return for other promotional expenditures incurred by the
    retailer.
    Accounting for so-called “volume rebates” is guided by the standard AASB 102 Inventories, as reductions in
    the cost of inventory and hence Cost of Goods Sold while promotional type rebates tend to be accounted for as
    reductions or reimbursements of a retailer’s selling expenses and hence of Cost of Doing Business. On the face
    of it, the accounting treatment required seems relatively straightforward. But this has not stopped the senior
    managers and financial officers at some major Australian retailers from getting into some very difficult
    situations.
    The management of the Wesfarmers operated Target chain of stores, for example, has been shaken up for
    allowing some questionable rebate deals to significantly impact its 2016 half year results. In a company
    announcement to the ASX (Wesfarmers 2016a), the company said that it had been brought to its attention that
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
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    previous management had negotiated increased rebate deals for the first half of 2016 in exchange for future
    supplier cost increases - in effect, bringing forward cost reductions (through rebates) in exchange for future
    invoice cost increases. As at the December 31 reporting date, reported profit was $74m; it should have been
    $53m. Not material for the Wesfarmers corporation as a whole, but deeply embarrassing.
    The announcement stated that: “Wesfarmers Managing Director, Richard Goyder, expressed his
    disappointment with the actions of those involved”. But, in the press conference announcing the issue, he was
    a little more candid: he described the actions taken by previous management as “mind-blowingly stupid”
    particularly given that any benefit would have been reversed in subsequent periods (quoted in Mitchell 2016).
    Further, he said that up to 10 people had been involved in the arrangements with suppliers and that “there is
    no excuse for this conduct. We set very clear directions and expectations at Wesfarmers crystallised in our code
    of conduct and supported by detailed group policies, divisionally specific accounting policies and regular staff
    training”. And further, he said, “we encourage and expect adherence to a strong culture of managing for long-
    term sustainable growth over short term gain which is regularly reinforced by the Wesfarmers board and which
    should have guided behaviour” (quoted in Beattie 2016).
    The fall-out for Target’s management has been significant. As noted in the Wesfarmers announcement, while
    “Target Managing Director Stuart Machin has stated he was not aware of the accounting issues in the first
    half”, he “has accepted his share of the responsibility given his leadership role and has chosen to resign from
    the Wesfarmers Group” (Wesfarmers 2016a).
    And, even though the previous Target Chief Financial Officer had resigned in December 2015 to take up a role
    in the UK, events in Australia caught up: his new UK employer advised when the news broke that his
    appointment would be “postponed” following “recent media reports of an investigation into supplier payments
    at Target” (Pets at Home Media Release 2016a). Ten days later, the company announced that by “mutual
    agreement” he, in fact, would not be taking up the role of CFO. (Pets at Home Media Release 2016b)
    Tough treatment? Well according to Wesfarmers boss Goyder, himself an experienced CFO: “[if the former
    CFO] wasn’t aware of the questionable transactions, he should have been aware” (quoted in Mitchell 2016).
    This is a reminder that CFOs need to uphold the highest of standards. Difficult, particularly when non-financial
    managers are carrying out commercial negotiations, often poorly documented (sometimes over the phone),
    desperate to get the right profit results by balance date. CFOs in any retailer need to watch out for requests for
    balance date adjustments concerning accrued revenue and the creation of debtor balances at these times based
    on these apparent negotiations.
    Yet another recent instance where the issue of rebates has been a primary focus is in the disastrous outcome
    for the iconic electrical retailer, Dick Smith Group (DSG). Its road to failure started with previous owner,
    Woolworths, selling DSG to a private equity firm, Anchorage Capital, for $93m in November, 2012 – a year
    later it was floated on the ASX with a market capitalisation of over $500m. But within 2 years, administrators
    McGrathNichol had been called in.
    Explanations of how a seemingly successfully turned around company could have so spectacularly sunk into
    failure are continuing. However, the processes of administration will take their course and one of those is a
    report to creditors by the administrators (McGrathNichol 2016).
    One of the key emphases of this report was DSG’s reliance on rebate income. In the year ended June 30, 2015,
    DSG’s reported Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) was $72m. If rebate
    income was excluded, EDITDA would have been a loss of ($119m). This demonstrates just how important
    rebates were to DSG.
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
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    Figure 6 Rebates compared to EBITDA - FY15
    (Source: McGrathNichol 2016 p48)
    The break-up of the types of rebate is shown in Figure 6 where the main types of rebate were scan (volume
    purchase) rebate and the previously described “over and above” type rebates for things like reimbursement of
    promotional expenses. The administrators have stated that a large proportion of these rebates were
    appropriately applied (e.g. to COGS at time of sale) and were regularly tested by the external auditors
    (McGrathNichol 2016 p48). Nevertheless, it seems there was at least some not appropriately accounted for.
    The administrator’s report made a number of telling observations concerning this point and other issues:
      “Poor and declining performance appear to have led to Management making decisions on what stock
    to buy (and at what volumes) based on the rebate attached to the stock, rather than customer
    demand;
      Rebate-driven buying contributed to a build-up in inventory and encouraged poor product mix
    decisions;
      In periods of low profitability, some rebates provided a short-term incentive for Management to
    prefer a certain supplier and product, because the rebate increased profit in the month of purchase,
    rather than when the product was sold (as ordinarily would be the case);
      Purchasing decisions increasingly based on rebates ultimately leads to a slowing of inventory
    turnover rates, as the products are generally less popular with customers. Eventually, in the case of
    DSG, heavy discounts were needed to sell the rebated stock, destroying the margin uplift that the
    rebate sought to achieve; and,
      In some cases, the stock could not be sold at all and became obsolete” (McGrathNichol 2016 p48).
    It seems that things started to go horribly wrong in Christmas 2014. Trading did not meet expectations. In
    subsequent months, management made a provision for aged and inactive stock of $20m. In October, 2015, an
    independent consultant identified that, in fact, $60m of stock should be written off.
    The Board ultimately accepted this with a consequent, dramatic impact on profit guidance. In addition, sale
    activity to clear this aged, low margin stock only cannibalised sales of active, high margin stock
    (McGrathNichol 2016 p50). The reasons why DSG board and senior management didn’t get onto this situation
    earlier is unclear. But, the end was now not far off. Poor merchandising and ranging, and, poor inventory
    management were sinking this famous retail brand.
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
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    From a supplier’s point of view, rebates are offered to retailers to move stock. It’s no surprise that in some
    instances, suppliers adjust their margins downwards for stock that they think may be becoming aged. A lack
    of astuteness from merchandise buyers, a desire to make buying decisions that appear will lower COGS, and,
    maybe even greed, will eventually impact profit as it did at DSG if the stock can’t be sold. What appears to be
    a good deal, may end up being a weight.
    There was no separate internal audit function at DSG. Even if there was, would this have made a difference?
    Would an internal auditor have questioned what was basically a commercial, merchandising practice? One
    could at least expect that they would get involved with questions of compliance with accounting standards
    concerning the recognition of rebate income and the valuation of stock, but further complications can arise
    depending on the reporting structures of internal audit functions.
    Some report to Chief Financial Officers (CFO), some to Chief Executive Officers (CEO) while some even directly
    to the board. Potential conflicts of interest arise if reporting to CFOs (questioning your boss), while there is
    potentially a loss of focus and sometimes skills if CEOs are charged with the responsibility of internal audit
    (CEOs tend to have their minds on profit). Likewise, a lack of time and supervision may arise if internal
    auditors report directly to boards.
    While an internal audit function can be a useful part of a governance function generally, it may not represent
    a complete solution to questionable management and financial business practices. Other controls need to be
    considered as well.
    Controlling decision making: Measuring, reporting and rewarding performance
    The discussion so far concerning the apparent use of buying power by big retailers to take advantage of either
    an international or domestic supplier base (and the backlash against these actions), and, the cases described
    above where commercial rebate negotiations were undertaken to achieve illusory financial benefits, points to
    one of the great temptations of organisational life:
    Management decision making that may bring short term benefits but which may negatively impact the
    performance of the company in the longer term. What’s driving this and how may this behaviour be controlled?
    Attempts to resolve these questions have generally been included within discussions concerning the “agency
    dilemma”. Put simply, this theory suggests that the separation of the owners of the company (the shareholders)
    from the managers (and directors) of the company as part of the development of the modern corporation, has
    caused a problem because management will act out of self-interest not necessarily in the interests of the
    company. It suggests that this needs to be mitigated by “artificially” aligning each party’s interests in some
    way.
    In recent times, the mechanism through which this has been attempted has been the design of senior
    management’s remuneration. The way that this has been done in practice has been to reward senior
    management based on measures such as Total Shareholder Return (TSR). Rewards also include amounts paid
    in equity, and, importantly, that a proportion of total remuneration is “at risk” – that is, management will gain
    only if shareholders gain.
    A Productivity Commission study into company remuneration practices called by the federal government in
    2009 after what was seen as the excesses of the period leading up to the Global Financial Crisis (GFC) identified
    the structure of CEO remuneration (Productivity Commission 2009). Structures are typically defined by: a
    fixed element; a short-term incentive payment (STIP) - paid as cash bonuses typically paid in the current year;
    and, a long-term incentive payment (LTIP) - typically paid by the issuing of shares based on performance over
    a longer timeframe.
    Figure 7 shows that the bigger the company, the greater the “at risk” component is (that is, the STIP and LTIP
    elements). Presumably, agency issues are greatest the larger the company?
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    Figure 7 CEO Remuneration  Structure
    (Productivity Commission 2009)
    At Dick Smith Group, the remuneration structure for Key Management Personnel (KMP) in 2015 is shown in
    Table 1.
    Table 1 – Remuneration Structure for Key Management Personnel at DSG - 2015
    Fixed (i.e. Base
    salary)
    STIP (cash)
    LTIP (shares)
    CEO
    44
    34
    22
    Other KMP
    (incl.CFO)
    51
    27
    22
    (Source: Dick Smith Group 2015)
    The STIP element was paid as cash bonuses and based on measures such as: sales, cost of doing business
    (CODB) and EBITDA. Financial measures made up to 60-70% of the required measures; the remainder were
    based on operational measures. In respect to the LTIP element these were based on the measures Total
    Shareholder Return (TSR) and Earnings per Share (EPS) growth. “Long term” performance was measured over
    a 3 - 4 year time period (DSG 2015)
    For the sake of comparison, Woolworths KMP remuneration structure for the 2015 year is shown in Figure 8.
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    Figure 8 Remuneration structure for Woolworths Key Management Personnel (KMP) 2015
    (Source: Woolworths 2015)
    Woolworths STIP payments were based mostly on financial measures including Net Profit After Tax (NPAT),
    other profit measures such as EBITDA, Gross profit, or, controllable profit (depending on the manager’s
    position), Sales, and, Return on Funds Employed (ROFE) and CODB. Some other operational measures were
    apparently used but these were not identified by the company in its remuneration report. And, further, NPAT
    was defined as a “gateway” measure: if this was not achieved, no STIP would be awarded at all. The company’s
    LTIP rewards were, in a similar way to DSG, based equally on TSR and EPS outcomes (Woolworths 2015).
    While Woolworths continues to be a successful company, some analysts have criticised its relentless pursuit of
    profit. A well known stock analyst David Errington from Merrill Lynch speaking at a results presentation said:
    "The elephant in the room is Woolworths in the last five years has taken its eyes off the ball in
    focusing on customers because it's been focusing on the (profit and loss) – you have taken
    margins up to record levels and this is fertile territory for Aldi" (quoted in Mitchell 2015b).
    Woolworths’ emphasis on gross margins has been quite clear as shown in Figure 9.
    Figure 9 – Woolworths Gross Margin performance 2008-
    2015
    (Source: Mitchell 2015b)
    It’s the retailer’s dilemma: should you pursue
    profit or should you pursue market share
    promising greater profits but only in the
    longer term?
    This raises issues concerning non-financial
    measures generally. Market share is a classic
    retail non-financial measure; there are others.
    Woolworths new CEO Brad Banducci has
    recently reviewed the key measures he wants
    to use in the business to drive business
    transformation (Woolworths 2016a)
    A key change has been the elevation of “sales
    per square metre” - this will now be included
    as part of the LTIP reward scheme. Short term
    measures will also now include a renewed
    focus on customers and team performance.
    How this will be implemented has not been
    communicated in detail but the fact that the
    CEO elevated the discussion of these new and
    revised measures in the latest earnings announcement indicates a re-focus of measurement priorities
    (Woolworths 2016b p3).
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
    13
    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    The use of non-financial measures in any performance management system is not new. Management
    accountants advocate their use particularly given their ability to be a “leading” indicator of future performance.
    A reliance on financial measures only, may actually create adverse consequences. Non-financial measures can
    be more targeted, measuring the performance that is important to delivering on chosen strategic drivers. And,
    it’s the acknowledgement of the legitimate importance of the stakeholders of organisations that is proving to
    be the catalyst for a more extensive view of what performance management is all about.
    To be sure, the capitalist system is built on the profit motive and the remuneration structures described for
    DSG and Woolworths are in fact typical of most major companies. Indeed the big companies often use the
    same remuneration consultants to design these systems.
    Indeed, the structure of remuneration systems has become a major point of contention particularly for ASX
    listed companies. Institutional shareholders and their proxy advisors have significant power to bring about
    change in remuneration structures given the ability for shareholders to vote against company remuneration
    reports and consequently to force elections for new directors. Some of these proxy advisors believe that
    performance targets should, in fact, remain focused on financial targets. Amongst other reasons, it is argued
    that they are easily measurable and objective.
    But a recent example of where this idea was not necessarily fully accepted by a major company was the
    Commonwealths Bank’s (CBA) intention to base senior pay on customer, community, and, people metrics as
    well as financial measures. CBA chairman David Turner maintains that the bank was doing the right thing on
    this issue saying that
    “…we need a balanced set of measures between financial, people and community to set even
    standards for our business, and position us for a successful future" (quoted in Yeates 2016).
    But, after some major fund managers and advisors flagged that that they would vote against this, CBA backed
    down. Turner defended the original move. “Sustainable success” he said on the day of the AGM,
    “is not a binary issue of whether you make X profit or Y profit on a particular day of the week
    because that doesn’t encompass how behaviours change and how an organisation will evolve”
    (quoted in Bennet and Garvey 2016)
    Maybe from a company perspective, at a board level, it seems there is an increasing recognition that business
    models need to be sustainable. And for this to happen, the expectations of stakeholders, other than just simply
    shareholders, are increasingly being acknowledged.
    Wesfarmers for example, extensively report on sustainability activities. The company’s experiences with the
    RANA Plaza tragedy has only heightened this awareness. In Wesfarmers 2016 results presentation
    (Wesfarmers 2016b), CEO Richard Goyder, made it quite clear the place the company has in Australian society
    by showing the total value created for stakeholders (see Figure 10)
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
    14
    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    Figure 10 Wesfarmers Stakeholder Value Creation
    (Source: Wesfarmers 2016b)
    True, it is expressed in dollar terms but it is clearly demonstrating that in terms of “stakes” in a company,
    shareholders comprise, in fact, a relatively small part. This type of reporting, along with the major international
    moves to concepts such as Integrated Reporting <IR>, may be signalling that the emphasis on financial
    performance measurement and its reporting is undergoing significant change – a change that is being driven
    by arguments based on the need to take a more holistic view of strategic performance management.
    Conclusion: What role for the accountant?
    The big retailers in Australia need to act on this change. They are high profile. With the ability of customers,
    and others, to take to social media they are constantly in the public eye. It is therefore even more important to
    think about all parties who have a legitimate “stake” in the company.
    The example of 7Eleven in Australia is a case in point. The recent extensive publicity concerning its
    questionable employment practices particularly in respect to the underpayment of a mostly international
    student workface - a workforce vulnerable because of its relatively weak bargaining position - is a striking
    example of how a major retail brand can be exposed (Chung 2016). It may be the ultimate demonstration of
    how the employment relationship should not represent simply an expense line item in an income statement
    for a company but a vitally important stakeholder that needs to be managed for the long term. The ease with
    which whistle-blowers can take to social media now, possibly makes this relationship more fundamentally
    important than it has ever been.
    The other instances highlighted in this case have explored the idea that commercial decision making can no
    longer be thought of as being driven by profit criteria alone. The justifiable concern for suppliers in less
    developed countries and the use of power by big retail buyers generally show that supply chain analysis can’t
    just be about “COGS” and “CODB” reductions.
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
    15
    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    Likewise, the short-termism demonstrated in the discussion concerning supplier negotiation over rebates and
    other allowances in the pursuit of cost reduction, indicates that the emphasis on profit and the behavioural
    consequences arising from this need to be considered. How accountants approach this decision making as part
    of the senior management group, and, what advice they provide to key personnel, will have a major bearing on
    how the strategies of the big organisations will be viewed by all of its stakeholders.
    Accountants have always been in a critical position within the organisation when it comes to control. They are
    also now in a pivotal position to help to define, promote, and, implement performance measurement and
    reporting which can be the drivers of not only profit driven decision making but also decision making that is
    viewed by society as being ethical. This is the challenge now confronting the accountant.
    Required Readings
    ASX Corporate Governance Council 2014, Corporate Governance Principles and Recommendations 3 rd edn
    http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf
    The  International  Integrated  Reporting  Council  2013,  The  International  <IR>  Framework
    http://integratedreporting.org/wp-content/uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-
    FRAMEWORK-2-1.pdf
    Australian Competition and Consumer Commission 2015 Food and Grocery Code of Conduct
    https://www.accc.gov.au/business/industry-codes/food-and-grocery-code-of-conduct
    Accounting Professional and Ethical Standards Board 2010, APES 110 - Code of Ethics for Professional
    Accountants http://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
    16
    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    References:
    Australian Competition and Consumer Commission (ACCC) 2014, Court finds Coles engaged in
    unconscionable  conduct  and  orders  Coles  to  pay  $10  million  penalties,  December  22
    https://www.accc.gov.au/media-release/court-finds-coles-engaged-in-unconscionable-conduct-and-orders-
    coles-pay-10-million-penalties
    As-Saber, S. 2013, Bangladesh disaster shows why we must urgently clean up global sweat shops”, The
    Conversation, May 6 http://theconversation.com/bangladesh-disaster-shows-why-we-must-urgently-clean-
    up-global-sweat-shops-13899
    Baptist World Aid Australia 2016, “The 2016 Australian Fashion Report; The truth behind the barcode”, April
    20 https://www.baptistworldaid.org.au/assets/Be-Fair-Section/FashionReport.pdf
    Beattie  F.  2016  “Wesfarmers  confirms  Target  scandal”,  Businessnews.com.au  April  11
    https://www.businessnews.com.au/article/Wesfarmers-confirms-Target-scandal
    Bennet, M. and Garvey, P. 2016, “CBA hit with bonus backlash”, The Australian, November 10 p25
    Chung, F 2016 “Panel member says ‘jury is out’ on whether 7-Eleven can survive without underpaying staff”,
    news. com.au, May 13 http://www.news.com.au/finance/business/retail/panel-member-says-jury-is-out-on-
    whether-7eleven-can-survive-without-underpaying-staff/news-story/8f9545ba197f4b58482d05c260ba5586
    Dick Smith Group 2015 Annual report http://www.asx.com.au/asxpdf/20150818/pdf/430kvhrl8cpg0l.pdf
    Groceries  Code  Adjudicator  2016,  Investigation  into  Tesco  PLC,  January  26
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/494840/GCA_Tesco_plc
    _final_report_26012016_-_version_for_download.pdf
    Hoskins,  T.  2015  “Reliving  the  RANA  Plaza  factory  collapse”,  The  Guardian,  23  April
    https://www.theguardian.com/cities/2015/apr/23/rana-plaza-factory-collapse-history-cities-50-buildings
    Low,  K.  2016  “Aldi  to  grow  by  16%  a  year”,  Sydney  Morning  Herald,  July  27,
    http://www.smh.com.au/business/retail/aldi-to-grow-by-16-per-cent-a-year-20160726-gqe77u.html
    McGrathNichol 2016, The Dick Smith Group: Report to creditors pursuant to Section 439A of the
    Corporations Act 2001, July 13 http://www.mcgrathnicol.com/app/uploads/DS-Australia-Report-to-
    Creditors-13-July-2016-updated-15-July-2016.pdf
    Michael, S. 2013 “Death Toll from Rana Plaza building collapse in Bangladesh hits 1000” News.com.au, May
    10  http://www.news.com.au/world/asia/bangladesh-collapse-toll-passes-1000/story-fnh81fz8-
    1226639325170
    Mitchell, S. 2015a, “Jeff Kennett tells Coles to pay $12m to suppliers June 30” Sydney Morning Herald,
    http://www.smh.com.au/business/retail/jeff-kennett-tells-coles-to-pay-12m-to-suppliers-20150630-
    gi19wv.html
    Mitchell, S 2015b, “Woolies slashes 400 jobs to turbocharge cost cuts”, Australian Financial Review, May 7
    Mitchell, S. 2016 “Target scandal claims another victim”, Sydney Morning Herald, April 13
    http://www.smh.com.au/business/retail/target-scandal-claims-another-victim-20160412-go43jz.html
    NAB 2016, On-line Retail Sales Index, April 28 http://business.nab.com.au/nab-online-retail-sales-index-in-
    depth-report-march-2016-16472/
    Oxfam Australia 2016, Still in the dark: Lifting the cloak on the global garment trade, April
    https://www.oxfam.org.au/wp-content/uploads/2016/04/Labour-Rights-Still-in-the-Dark-Report.pdf
    Pets at Home Media Release 2016a, April 1 Pets at “Home Group PLC: Update to CFO Appointment”
    http://investors.petsathome.com/investors/rns/rns-announcement/12760550
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
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    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    Pets at Home Media Release 2016b, April 11 Pets at “Home Group PLC: Update to CFO Appointment”
    http://investors.petsathome.com/investors/rns/rns-announcement/12772218
    Productivity  Commission  2009,  Executive  Remuneration  in  Australia,  December,  Canberra
    http://www.pc.gov.au/inquiries/completed/executive-remuneration/report/executive-remuneration-report.
    Productivity Commission 2014, Relative Costs of Doing Business in Australia: Retail Trade, September,
    Canberra http://www.pc.gov.au/inquiries/completed/retail-trade/report
    Reserve Bank of Australia, 2016 Quarterly Statement on Monetary Policy, August
    http://www.rba.gov.au/publications/smp/2016/aug/pdf/statement-on-monetary-policy-2016-08.pdf
    Roy Morgan Research 2016 April 15 http://www.roymorgan.com/findings/6762-supermarket-sweep-aldis-
    share-of-aussie-market-still-rising-201604142258
    Wesfarmers Ltd 2016a “Target update – Supplier rebate arrangements investigation” News Release April 11,
    http://www.wesfarmers.com.au/docs/default-source/asx-announcements/target-update---supplier-rebate-
    arrangements-investigation.pdf?sfvrsn=0
    Wesfarmers  Ltd  2016b  Full  Year  Results  Briefing  Presentation,  August  24
    https://www.wesfarmers.com.au/docs/default-source/results-presentations/2016/2016-full-year-results-
    briefing-presentation8b0a1b6999c863f7bfccff00000e9025.pdf?sfvrsn=2
    Wesfarmers  Ltd  2016c,  Sustainability  Review
    http://2016.sustainability.wesfarmers.com.au/media/1821/sustainability-review-extract.pdf
    Woolworths  Ltd  2015  Annual  Report
    http://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf
    Woolworths  Ltd  2016a,  Update  on  Operating  Model  Review,  25  July
    http://www.woolworthslimited.com.au/icms_docs/185806_Woolworths_Limited_Update_on_Operating_
    Model_Review.pdf
    Woolworths  Ltd  2016b  Results  Presentation  Webcast,  July
    http://www.woolworthslimited.com.au/content/Document/Woolworths%20Limited%20Update%20on%20
    Operating%20Model%20Review_Webcast%20Transcript.pdf
    Yeates, C. 2016 “CBA Facing Investor Backlash on Executive Pay”, Sydney Morning Herald, November 7
    http://www.smh.com.au/business/banking-and-finance/cba-facing-investor-backlash-on-executive-pay-
    20161103-gshs0g.html
    ACCG315 Case Study
    The Ethics of Profit in the Australian Retail Industry 
    18
    All rights reserved. This case may not be reproduced, copied for commercial purpose/profit or stored in a
    retrieval system without prior written permission from Associate Professor Rahat Munir.
    Questions for Ethics Case Study
    1. If you are the Chief Financial Officer and you are approached by the CEO or other senior manager to
    deliberately delay the payment to the supplier simply to improve your company’s cash position, how would
    respond? On what grounds would you base this response?
    2. What is Integrated Reporting <IR> and what is it trying to achieve? How do you think the use of this
    framework may change performance and remuneration system design?
    3. What do you understand by the concept of an “at risk” component of remuneration? Why do think it appears
    to be a larger component of total remuneration for CEOs and senior management the bigger the company as
    found by the Productivity Commission report?
    4. What is your understanding of who the stakeholders of a company are? Who do you think are the
    stakeholders of a large supermarket company? Why is the concept important to ideas concerning the ethical
    behaviour of companies?
    5. The CEO of Wesfarmers made a statement in response to the Target rebate issue saying that “we encourage
    and expect strong adherence to a strong culture of managing for long term sustainable growth over short term
    gain” (p7). How can this type of culture be developed inside an organisation?
    6. The Administrators report into the Dick Smith Group stated that “poor and declining performance appear
    to have led to management making decisions on what stock to buy based on the rebate attached to the stock,
    rather than customer demand” and that “rebate driven buying contributed to a build-up in inventory and
    encouraged poor product mix decisions” (pp8-9). Given that these were buyers’ decisions and that accountants
    would not directly be involved in this, what responsibility do accountants have in identifying this type of
    problem? If there is some level of responsibility, how would you go about identifying these issues?
    7. Why does management accounting theory promote the idea of using “non-financial” measures – that is, to
    not simply rely on “financial” measures? Provide some specific examples of what may be important non-
    financial measures to a retailer. What relevance can this concept have to the idea of what it is to be an “ethical”

    ACCG315 Case Study ACCOUNTING AND CORPORATE GOVERNANCE代写
    organisation?
    8. As a CFO, would you prefer your performance to be measured and remunerated based on simply financial
    measures (for example, TSR) or on a more balanced set of measures? Why? Would this differ if, instead of the
    CFO, you were a more junior accounting officer?
    9. Do requirements for ethical decision making differ across the accounting specialisations of financial or
    management accounting, internal or external audit? Are there common principles applicable regardless of
    area? In what circumstances may they differ?
    10. A well-known performance measurement and reporting framework is the “balanced scorecard”. How can
    ethical and sustainability issues be incorporated inside this framework?
    ACCG315 Case Study ACCOUNTING AND CORPORATE GOVERNANCE代写