This case study analyses the Australian retail industry and the ethical implications of the decisions taken by the management to increase profitability. It also discusses the importance of ethics and the consequences of not following them.
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ACCOUNTING CASE STUDY ASSIGNMENT 1
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Contents ABSTRACT...............................................................................................................................3 INTRODUCTION......................................................................................................................4 RESPONSE TO THE CASE QUESTIONS..............................................................................6 CONCLUSION........................................................................................................................11 REFERENCES:........................................................................................................................12 2
ABSTRACT This case study has helped me to know about the ways in which the various retailers in Australia exploit the weaker groups in their business just so they can survive in this intense pressure which is hovering over the Australian retail industry. It was a surprise to me the that in the RANA plaza disaster, many of the retailers didn’t even know if the victims were their suppliers. This level ignorance and exploitation made me wonder what the future of businesses hold for the world. This case study also enlightened me about how, even after the audit processes, the managers manage to intimidate the workers which lead to false or incomplete audit(Adelaja, 2015). The case study helped me know and understand one very important thing about how corporate work. The major goal, all the managers assume is that of profit but in reality, this is not the case as achieving profits is now considered as a short term goal. For any company or organisation to survive in the long term, they need to operate with the intention of protecting the welfare of all the stakeholders. They need to achieve profits ethically i.e. by taking care of theinterestofallthestakeholders(shareholders,employees,customers,suppliers, government, etc) Lastly, the most important thing that I have learnt while solving the questions of this case study is that the ways in which industries manages to survive in the long run, keeping in mind the interests of the stakeholders are extremely important for them to run successfully (Bierman & Smidt, 2010). This case study helped me in knowing the importance of ethics and what consequences they might get for the companies that don’t follow it. 3
INTRODUCTION The Australian retail industry is compressing because of several forces which is leading to its major fall in sales and hence the downtrend in profits. These forces, collectively are leading to give the decision makers of such businesses a hard time to effectively think of ways to survive in this intense pressure. The crux of this case study is to find what type of decisions the management of such businesses are taking in order to increase their profitability and hence survive in this industry for long. Along with the type of decisions taken, keen focus will be given on how they are planning to retain their profitability levels and whether such decisions have any ethical implications or are giving rise to certain behavioural issues which may be of concern. Competitors to this industry are not only the international brands who are entering the Australian retail industry but also the online space which is getting extremely popular. They can retain their profitability levels only through cost reduction strategies. Now to reduce the COGS, many retailers have sought to outsource the elements of this cost particularly in the areas of distribution and information technology. They tend to outsource these to nations where labour is comparatively cheaper. Now in case of the garment industry, we saw how the big retailers outsource the production to overseas suppliers particularly to countries like Bangladesh, India etc. These suppliers were affected tremendously due to poor working conditions, low wages and other factors as seen in the RANA plaza disaster in Bangladesh. And surprisingly, these big retailers didn’t even have the idea of whether those labourers were supplying their products(Dayananda, Irons, Harrison, Herbohn, & Rowland, 2008). This isn’t the only thing; the suppliers were delayed payments just so that the retailers could show increased cash positions in their financial statements. Hence, we see how the big retailers over shadowed the suppliers taking advantage of the presumed power they have thereby exploiting the suppliers. It was considered that the managers were seeking for short term gains while ignoring the long term benefits to the company by using all the unethical means just to ensure high levels of profit margins. Studies were conducted to know why the managers tend to have this behaviour and in conclusion it was stated that the separation of ownership from the managers incentives lead to such decisions. To solve this more integrated remuneration system was adopted like the performance measurement system aiming at the welfare of the stakeholders. Hence, for any manager to earn higher incentives, the company as a whole had to perform well. Thus, this case study shows how the Australian Retail Industry in facing the pressure and working on it to ensure their survival. In the case study, we observe one very important thing, it’s not about achieving the ultimate goal, it’s about 4
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how one achieves such goals, the ways or measures used to achieve the goals. In this case study there has been various analysis on how the big corporate in the retail industry are trying to increase profits by various unethical means(Menifield, 2014) . 5
RESPONSE TO THE CASE QUESTIONS (1) Australian Business Ethics is a little different from the traditional ethics since it does not only include concerns whether a company treats it’s consumers fairly or are honest about their business practices but rather also considers honest negotiations and respect for one’s privacy and individuality(Peterson & Fabozzi, 2012). ‘Good Faith’ in the given case study is underlying this aspect of Australian Business Ethics. The retailers and wholesalers are expected to act in good faith. Since already stated how the big retailers are spoiling the suppliers, The ACCC came up with The Food and Grocery Code of Conduct which gives several guidelines for the Australian super market industry. Good faith means the retailers and wholesalers should be honest about their negotiations with suppliers. The contracts between the two parties should not contain any provisions that might not be in the interest of the supplier(Rivenbark, Vogt, & Marlowe, 2009). (2) The Food and Grocery Code of Conduct is a voluntary code because there already exists various laws in this space of protecting the interests of the suppliers namely, Competition and Consumer Act 2010. The code doesn’t wish to override the existing laws. Also by making the code voluntary, it can honestly be checked about the integrity of the big retailers or wholesalers i.e. those who voluntarily adopt to these codes are considered to be concerned about the welfare of the suppliers, thus giving such retailers a competitive edge in the eyes of the consumers. Another reason why the code was made voluntary could be that it would help the retailers to customise their agreements or contracts with the suppliers as all the provisions may not hold true in general. Also, considering the fact that this code necessarily emphasises on protecting the interests of the suppliers, if made a law, might get distress from the retailers end(Seitz & Ellison, 2009) . (3) Purchasing or pricing power of retailers in general means the extent to which a retailer has funds to make purchases from the supplier. Now these are the powers which give the big retailers the edge and hence the presumed right to exploit the suppliers. For instance, a big 6
retailer should use this power to ensure that the purchases from the suppliers are of the required standard(Fridson & Alvarez, 2012). Hence the purchasing power of the retailers can be used appropriately to set standards on the quality of purchases they make from the suppliers. Hence the suppliers would clearly be aware of what are the quality expectations from the end of the retailers. Thus using any such power which gives an edge to the retailers over the suppliers would be appropriate to the extent it is ethical and does not involve exploitation of the interests of the suppliers. Now whether this decision making power as a senior manager is legitimate or not can be truly justified with the need of the situation. If the situation demands the senior management to exercise the power, the decision making power might be considered legitimate. Also, such decision making power can only be legitimate when they are exercised to the extent it is ethical and doesn’t lead to any sort of exploitation of any other stakeholder and in turn leads to achieving of desired objectives(McLaney & Adril, 2016). (4) Had I been the CFO and the CEO expected me to do something unfair or something which my knowledge of integrity doesn’t allow, to disagree or a say no to the senior management is really not simple. Hence, given the situation, I would firstly make the CEO sit and talk and explain to him the long term consequences his decision might have on the company. To delay the payments to the suppliers in order to increase the cash positions is unfair. As the CFO, I would suggest ethical ways the cash positions can be improved(Girard, 2014). For example, by having honest terms of credits with the suppliers, these credit terms could be made more stringent, Or the creditors to my company could be given discounts if they agreed to clear their dues earlier(Zyla, 2013). As the CFO, I would try to convince the CEO to take decisions that prefer long term sustainable growth over short-term gains. Giving examples of companies who were penalised for taking such decisions would help me give the CEO a look at the consequences which might be faced by the company given that the decision of delaying the payments to the suppliers is taken(Piper, 2015) . (5) 7
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In developed countries, the working conditions for the employees are way better because the organisations tend to follow the standards of employment as stated the International Labour Organisation (ILO). Now, following these standards usually tends to increase the cost of doing business for them. As we have seen in the case given how the international brands are outsourcing the productions to the less developed nations in order reduce costs. Now the labour costs are way less in these nations also very low investments are required for the working conditions in such nations. This gives rise to the question whether same standards applytoorganisationsindevelopedandlessdevelopednations.Inmyopinion,the employment conditions need to be uniform in all the nations or else the bigger retailers tend to take advantage of this because all they really care about is increasing profits, be whatever. But obviously the extent to which such standards are uniform will vary. Firstly, the populations as well as the employment rates in the less developed nations. Secondly, because the less developed nations necessarily depend on the industries at the developed nations for employment opportunities for their vast unemployed or under employed population(Zack, 2009). (6) Taking into consideration the fact that the survey shows that 89% of the people in Australia are willing to pay more if that means protecting the employees. Being a part of the senior management team, I would convince the CEO and the Chief Marketing Officer to adapt to the cost leadership model. The advantages of this model is basically that it gives the organisation orcompanyacompetitiveadvantageasour’swouldprobablybetheonlycompany considering the welfare of the employees. Also, there is a common perception among the consumers that cheap or low priced garments are not of a standard quality. There’s a section of the society which believes that expensive garments have better quality. Also taking into consideration the fact that in today’s world Corporate Governance plays vital role in retaining the customers and making them loyal towards our brand using the increasedpricing to protect the employees against exploitation could play an important role. Hence, the reasons above justify why the cost leadership model should be used(Taillard, 2013). (7) The only way to make sure that the workers are truthful in the entire audit process is to have a one on one interview with each worker, where there won’t be anyone from the management present to intimidate the workers, forcing them to say the right thing. Also, as an independent 8
auditor, I can make the worker trust me, by making them confide in the conversations and assure them that this wouldn’t lead to any sort of loss from their part. Also, another important measure to ensure that the workers say the truth is by showing them the various statutes and laws which clearly prescribe the protection of the interests of such workers and the penalties towards the company, in case any unfair means are adopted. Another important measure that can be taken in order to ensure that the workers say the truth is by making them aware of the laws that have been created for their protection, stating the benefits of the law and how they can use them in their favour. Thus, all the workers are scared about is losing their jobs, once the internal auditor ensures that their jobs will be protected, it might be easy to make the workers say the truth(Mattessich, 2016). (8) Integrated reporting is a framework for long term investment decisions for businesses which aims at reporting how the organisation’s strategies and performance lead to value creation. These integrated reports will not be taking the place of financial reports. The motive of these reports is to find a relationship between the financial measures and how such measures affect the stakeholders. As we know, now a day, we are shifting from the concept of shareholders to stakeholders. Hence, Integrated Reporting (IR) focusses on communicating to its providers of capital how they are creating value for them by interlinking the financial statements with the Integrated Reports(Paul, 2014). This system is going to the change the performance and remuneration system design from the view point that the remuneration of the Key Manager Personnel, will now depend on to what extent they are providing their services to help the company create value for all the stakeholders. This necessarily is including two components, i.e. LTIP (for the long term) and STIP (for the short term). (9) The remuneration currently is a combination of three elements i.e. a fixed pay, Short Term Incentive Plan (STIP) and a Long Term Incentive Plan (LTIP). The latter two elements are what is being considered as the ‘at risk’ component of remuneration. STIP includes the cash bonuses which are based on Net Profit after Tax (NPAT), Gross Profit or other measures of profits. LTIP includes those payments made in the form of equity shares based on the performance in the long term (usually 3-4 years) and are measured through the Total Shareholders Return (TSR) and the Earnings per Share (EPS). Since these two components 9
are based on variables dependent on the performance of the company as a whole, there exists the uncertainty element or the ‘at risk’ element(Pratt, 2009). Now, a company which has a higher market share or higher market cap will have a larger ‘at risk’ element in their remuneration structure because this risk element necessarily depends on the welfare of all the stakeholders and having a higher market share means more number of stakeholders. Thus, in all the big companies the risk element is higher because of the very basic foundation that big companies incorporate more from the society and so they have look for the welfare of all those. Thus their remuneration will depend on how well they are keeping their huge stakeholder base. (10) Stakeholders of a company are those set of people or organisations that either directly or indirectly participate in the operations of the company. These can be classified into two categories, namely, Internal and External stakeholders. Internal Stakeholders are those which are directly responsible for the operations of the company(Rayman, 2009). For e.g. Management,Employees,etc.Externalstakeholdersarethosewhicharenotdirectly responsible for the operations of the company. For e.g. Government, Banks, etc. The stakeholders of a large supermarket company would be a.Customers b.Suppliers c.Shareholders d.Creditors e.Government f.Employees g.Commercial Banks, etc. With the fact that the big retailers have the pressure of public as they can easily be seen to be criticised, it is important for such retailers to be careful with every step they take. The accountants can help such retailers in all their strategic decision making in order to ensure that they are ethical to the stakeholders. Stakeholders are the people whose welfare the company has to ultimately take care of, if they plan to survive in the long term. Hence, with the long term perspective, every big retailer has a responsibility towards the stakeholders regarding their ethical behaviour. 10
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CONCLUSION TheabovecasestudygivesusaninsightofhowtheAustralianRetailIndustryis compressing. The big retailers need to work on this and know for the fact that with the increased use of social media, the customers have immense power. Hence, it is very important of the retailers to work according to the welfare of all the stakeholders. It is also been noticed that the key managerial personnel needs to be trained in a way that they understand the need of working for the welfare of the stakeholders, thereby having a long term perspective. Also, it is to be noted that the employees indeed form a part of the stakeholder’s concept(Rosenfield, 2009). Other instances state how a company can only survive in the short run if they focus on profit maximisation. In today’s world, more focus is given to wealth maximisation which means maximising wealth of the stakeholders of the company. Hence, by just reducing the costs and thereby increasing the profits a company cannot survive in the long run. Major concern needs to be shown for the needs of the suppliers in the less developed countries and the presumed powers of the big retailers in the context that cost reductions aren’t everything(Schroeder, 2014). 11
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Zack, G. M. (2009).Fair Value Accounting Fraud: New Global Risks and Detection Techniques.Hoboken: Wiley. Zyla, M. L. (2013).Fair value measurement.Hoboken: Wiley. 13