Implications of ASX Corporate Governance Principles for Woolworths Group Limited

The report sheds light on Woolworths Group Ltd.'s adherence to ASX Corporate Governance Principles, risk management approach, and more. The report is structured in terms of its principles and the vital approaches that have been followed by the company.

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Implications of ASX Corporate Governance Principles

Woolworths Group Limited
Executive Summary
The operations, as well as progress of the company depend on the line of action. Further, the pivotal part
is played by the corporate governance regulation and the practice of risk management. If the company
has a strong foundation of corporate government together with an appropriate risk management then the
company can easily combat any adverse situation. Moreover, the operations of the company will remain
undisturbed. In the report, the emphasis is on Woolworths Group Ltd. (Australia) that is listed on the
ASX. The company adheres to the corporate governance principles of ASX. The report is structured in
terms of its principles and the vital approaches that have been followed by the company. The report
initiates with the implication of corporate governance principles on the company followed by the risk
assessment. Further, ASA-570 that deals with the analytical procedure by the auditors is put forward to
the discussion and the ratios of the company are computed for the purpose of evaluation.
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Woolworths Group Limited
Contents
Introduction..................................................................................................................................................................... 3
Implications of ASX Corporate Governance Principles.....................................................................................................3
i. Laying down a solid foundation for management and oversight :............................................................................3
ii. Appropriate structure of the board..........................................................................................................................3
iii. Acting ethically and responsibly:..............................................................................................................................4
iv. Safeguarding of integrity in corporate reporting......................................................................................................4
v. Make timely and balanced disclosure:.....................................................................................................................5
vi. Respecting the rights of security holders:................................................................................................................5
vii. Recognizing and managing risk:............................................................................................................................5
viii. Remunerating fairly and responsibly :..................................................................................................................6
Risk Assessment...............................................................................................................................................................6
Conclusion...................................................................................................................................................................... 10
References......................................................................................................................................................................11
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Woolworths Group Limited
Introduction
There has been a massive change in the supermarket of Australia in the past five years. The pioneer in the
field remains Wesfarmers and Woolworths (Beaton-Wells, 2015). Woolworths is an Australian based
company is engaged in the retail operations. Its segment comprises of Food and petrol that procurement
of the products of food and petrol and reselling to New Zealand. The company has made great strides in
the year 2017 owing to its strong operations. The net profits were in the positive zone and assets were
utilized to the optimum. The analysis will shed light on the corporate governance practices of the
company followed by the risk management approach (Woolworths limited, 2017). The food market is a
highly profitable venture and Woolworths has ensured that it remains a giant owing to its formidable
policies.
Implications of ASX Corporate Governance Principles
The company Woolworths Group Limited follows the Corporate Governance Principles that can be
clearly seen after a thorough study of the Annual Report and Corporate Governance Statement for the
year 2017. The company has followed the following principles as can be seen from the Corporate
Governance Statement:
i. Laying down a solid foundation for management and oversight:
The company board is accountable to its shareholders and other stakeholders. The board has its own set
of responsibilities that have been disclosed by the company in its corporate governance report. Its
responsibilities include analyzing the strategies made and ensuring their implementation, adopting the
financial statements and reports and monitoring the management processes for checking the integrity of
such reports (Woolworths limited, 2017). Further, the selection of CEO and other top-level executives,
considering and monitoring the social, environmental and ethical impacts of company’s activities,
monitoring the relationship of the company with its stakeholder and key regulators & making sure that
the company is following the corporate governance policies through proper review and monitoring
(Roach, 2010).
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Woolworths Group Limited
ii. Appropriate structure of the board
As per the Corporate Governance Principles, a company should have a board that is appropriate in size,
skills, composition, etc so that the duties of the company can be discharges effectively (Kaplan, 2011).
The company Woolworths Group Limited has accordingly set up a self-sufficient structure of board
which comprises of CEO and other independent non- executive directors who have ample knowledge and
experience which helps them in meeting out the Board’s responsibilities and its objectives which are the
main goal for every company (Geoffrey et. al, 2016). In addition, the Board reviews the existing skills
and the skills required of the directors and the board so that the company does not miss any beneficial
opportunities in present and future. Moreover, there are four board committees for assisting the board in
exercising its responsibilities including Nomination Committee, Audit Risk Management & Compliance
Committee, People Performance Committee, and Sustainability Committee (Woolworths limited, 2017).
iii. Acting ethically and responsibly:
The company has set up its code of conduct so that it can work ethically and responsibly. The company
has defined the expected standards of behavior of the people working in the company. The core values
defined by the company are applicable to all the employees of the company, the directors, consultants and
even the contractors of the company (Matthew, 2015). The company has set up various compliance
programs which are specially designed to encourage the individuals so that they report any unethical
practices that come to their knowledge.
iv. Safeguarding of integrity in corporate reporting.
The following point of safeguarding integrity in the corporate reporting is established through the fact
that all the directors are required to have specific skills set like knowledge of social, political, and
economic scenarios of the concerned company. The director has to have good knowledge of digital
environment so that he can utilize that knowledge in reporting. He should also possess financial
experience and on hand experience of internal controls which shall help him in identifying the loopholes
and rectifying them. He should also be aware of regulatory requirements and finally, he should be able to
assess the risk in reference to administration, financial and risks of material misstatement in corporate
reporting (Woolworths limited, 2017). Therefore, the company has incorporated this safeguard at the
initial point itself with regard to the appointment of its directors and key executives so that only qualified
and experienced personnel are taken on board.
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Woolworths Group Limited
v. Make timely and balanced disclosure:
The company has appointed two company secretaries which are answerable to the board of directors
regarding the functioning of the company. The board of directors in order to make timely and balanced
disclosure has formed 4 board committee to assist them in exercising their work and also for advisory
purposes. Every committee makes their recommendations to the board as early as possible so that the
board can take necessary actions regarding the disclosures on a timely basis. The board has also
appointed independent internal and external auditors for an audit of the books of accounts. Out of them,
the internal audit team is appointed within the company to provide an internal reporting as per the
internal rules and regulations and budgets allotted to each department (Woolworths limited, 2017). The
external auditor report is the key report that is made public along with the financial statements that reveal
that the company has a timely and balanced disclosure approach in corporate reporting.
vi. Respecting the rights of security holders:
The company as per the provisions of ASX and its compliances has an inclusive shareholders information
program in which they periodically communicate all the plans, policies, and material matters through
print and digital media. The shareholders can get a wide range of data on the company’s website like
share prices, dividend declarations, annual meeting dates and various matters affecting shareholders’
interests. The company hosts various investor friendly programs to educate them about the company’s
operations (Livne, 2015). The company has a process to provide every information on a timely basis to
its shareholders so that they can take timely decisions and make investment opportunities with the
company. The Woolworths Company hence follows the principle of respecting the rights of stakeholders.
vii. Recognizing and managing risk:
The company through its regular efforts in managing the risk in regard to the operation, finances and the
management of the company has taken steps like hiring of Company Secretaries in the company,
appointment of Statutory Auditors, establishing an internal control and audit team and forming a
committee of board of directors for recommendation and advisory purposes. Every step taken has its own
relevance and it regularly assesses the risk associated with the company and the remedial measures to
tackle them (Woolworths limited, 2017). The risk committee about the risks advises the board of
directors and vulnerabilities present in the system. The internal control and audit team checks each
transaction and its relevance. The external auditor who audits the financial statements in the light of
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Woolworths Group Limited
applicable regulatory requirements then also checks the audit report prepared by the internal control
team. The investors and the stakeholders are then provided the audit report and director’s report that
clearly states the risks and rewards attained and managed by the company throughout the year (Hoffelder,
2012). Therefore, the company in this way recognizes the risks and the rewards at different hierarchy
levels in the company.
viii. Remunerating fairly and responsibly:
In the year 2017, the Woolworths Group received a Gold Tier Employer status in Australian Workplace
equality index because of the inclusion and creating opportunities for all like a lesbian, gay, bisexual and
transgender. The company believes in achieving gender equality in the company. The company has
appointed at least 40% of Senior Executives as women. There is also no gap between males and females
at equivalent levels. Any gaps in the salaries are expected to be closed by the year 2020 (Woolworths
limited, 2017). The Directors and the Senior Executives are also suitably rewarded and remunerated as
per the performances and the targets achieved. A committee called People Performance committee
reviews the performances of CEOs and its counterparts about their performances and achievements and
makes suitable recommendations for pay hikes (Rezaee & Kedia, 2012).
Risk Assessment
The company Woolworths Group Limited has various businesses that are exposed to a wide range of
risks including financial risks, strategic risks, operational risks, and compliance-related risks. So the
group has maintained a risk management system framework for the management of such material risks.
The group comprises of various companies that deal in foods and beverages, hotel segments etc. The
group as a whole is one of the leading enterprises of Australia. It also operates various supermarkets in
Australia and exports its products overseas.
The strategy of the company has been to focus on 3 areas-
a. Strategies of the company to focus on main areas of the group that is Australian Supermarkets.
Although there have been many risks attached to this sector including competitors, discounters, and
digital entrants (Woolworths limited, 2017).
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Woolworths Group Limited
b. Culture- the company focuses on the customers first and to create an ethical environment for the
employees of the organization. The group takes care of the health and welfare of the whole team. Further,
the company is transparent in business and with its investors (Lapsley, 2012).
c. Capital management – the company focuses on capital management. It aims at maintaining a strong
credit rating.
ASA-570 deals with requirements and explains the use of analytical procedures by the auditors. The
standard also explains how the analytical procedures help the auditor in forming an opinion and overall
conclusion of the financial statements. It also requires the auditors to investigate the fluctuations or
differences from the expected values (Gay & Simnet, 2015). As per this standard, the main objectives of
the auditor should be to obtain reliable and accurate audit evidence with the help of substantive analytical
procedures and further design and perform the analytical procedures to check the consistency and
accuracy of financial statements (Niemi & Sundgren, 2012).
The analytical procedures that are used by auditor comprise of –
a. Comparison of the account balances of the unadjusted trial balance amounts with previous year trial
balances.
b. Calculation of significant ratios and comparison of current year ratios with prior year ratios and the
industry ratios.
c. Ratio computation and comparison with the figures of the previous year
d. Regression analysis can be even put to use
Particulars 2017 2016 Industry average
Return on assets 7% -10%
6.53%Return on assets
before significant
items
6% 3%
Return on equity 17% -27% 12.90%
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Woolworths Group Limited
Return on equity
before significant
items
17% 14%
Net profit margin 3% -4%
3.77%Net profit margin
before significant
items
3% 1%
Gross profit
margin
29% 28% 26.28%
Expense ratio 88% 94% n/a
Cash return on
sales
6% 4.50% n/a
Earnings per share $1.19 per share -$0.97 per share
n/aEarnings per share
before significant
items
$1.10 per share $1.16 per share
Price earnings ratio 21.3 times -21.2 times 20.82 times
Earnings yield 5% -5% n/a
Dividends per
share
$0.84 $0.77 n/a
Examples of Ratios of Income Statement from the Annual Report and Financial Statements for the year
2016:
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Woolworths Group Limited
Audit risk can be assessed with audit procedures and analytical procedures. In the first case, the auditor
uses his audit procedures outlined in audit program to understand the risk attached to the business. Some
risks may be inherent in nature while other risks may be arising due to business operations (Fazal, 2013).
Analytical ratios also help in understanding the risk its percentage in the business. For example- GP Ratio
and NP Ratio explain the earning capacity that shall be helpful in finding out the return on investment by
the business.
Potential steps to reduce or mitigate risk can be hiring and appointing of independent statutory and
internal auditors, Hiring of experts in case of valuation, merger or starting of new ventures etc,
Implementation of High-end digital technology and use of digital media to store and recover data in case
of any data loss (Manoharan, 2011).
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Woolworths Group Limited
Conclusion
As per the total assessment of Woolworths, it can be said that the success of the company is highly
attributable to the presence of strong corporate governance. It has ensured proper disclosure and
compliance that has led to the effective framework. The ratio computation is an indication that the
company has performed reasonably well in the year 2017 and it is one of the vital reasons for a strong
framework. Further, the risk management and practices of the business is effectively constructed that
helps the company to flourish. Hence, keeping into consideration the scale of operations, it can be said
that the business should have an internal and external auditor who can manage the complex activities.
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Woolworths Group Limited
References
Beaton-Wells, C. (2015) Harper Review: a mixed basket for Coles and Woolworths. [online] Available
from http://theconversation.com/harper-review-a-mixed-basket-for-coles-and-woolworths-39640
[Accessed 20 April 2018]
Fazal, H. (2013) What is Intimidation threat in auditing?.[online]. Available from:
http://pakaccountants.com/what-is-intimidation-threat-in-auditing/ [Accessed 21 April 2018]
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-House and
Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons. [online]
30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309 [Accessed 9 April 2018]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and practice. The
Accounting Review [online]. 86(2), pp. 367–383. Available from https://doi.org/10.2308/accr.00000031
Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative Research in
Accounting & Management. [online]. 9(3), pp. 291-292. Available from https://doi.org/10.1111/1468-
0408.00081
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies. [online] Available from:
http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-
remedies?full [Accessed 9 April 2018]
Manoharan, T.N. (2011) Financial Statement Fraud and Corporate Governance. The George
Washington University.
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct? The
Accounting Review. [online]. 90(2), pp. 495-527. Available from https://doi.org/10.2308/accr-50871
[Accessed 21 April 2018]
Niemi, L., and Sundgren, S. (2012) Are modified audit opinions related to the availability of credit?
Evidence from Finnish SMEs. European Accounting Review. [online]. 21(4), p. 767-796. Available
from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 21 April 2018]
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Woolworths Group Limited
Rezaee, Z & Kedia, B. L. (2012) Role of Corporate Governance Participants in Preventing and Detecting
Financial Statement Fraud. Journal of Forensic & Investigative Accounting. [online]. 4(2), pp. 176-205.
Available from: doi: 10.1016/j.sbspro.2014.06.041 [Accessed 20 April 2018]
Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.
Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online] Available
from: https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports/
Annual_Reports [Accessed 20 April 2018]
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Woolworths Group Limited
Appendix
Common Size Balance Sheet
WOOLWORTHS GROUP LTD (WOW) CashFlowFlag
BALANCE SHEET
Fiscal year ends in June. AUD in millions except per share
data. 2016 2017 Common size
Assets 2016 2017
Current assets
Cash
Cash and cash equivalents 948 909
Total cash 948 909
4.03369
9
3.96666
1
Receivables 434 410
1.84665
1
1.78914
3
Inventories 4558 4080
19.3940
9
17.8041
5
Prepaid expenses 330 334
1.40413
6
1.45749
7
Other current assets 1156 1260 4.91873
5.49834
2
Total current assets 7427 6994
Non-current assets
Property, plant and equipment
Land 1436 1435
6.11011
8 6.262
Fixtures and equipment 13937 14015
59.3013
4
61.1581
4
Other properties 3628 3654
15.4369
8
15.9451
9
Property and equipment, at cost 19000 19105
Accumulated Depreciation -10738 -10667 -45.6897 -46.5483
Property, plant and equipment, net 8263 8438
Equity and other investments 108 118
0.45953
5
0.51492
4
Goodwill 3637 4216
15.4752
8
18.3976
3
Intangible assets 2341 2316
9.96085
4
10.1064
8
Deferred income taxes 1110 372
4.72300
2 1.62332
Other long-term assets 616 461
2.62105
4
2.01169
5
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Woolworths Group Limited
Total non-current assets 16075 15922
Total assets 23502 22916 100% 100%
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 490 253
3.25971
3 1.88947
Capital leases 0 0 0 0
Accounts payable 4809 5068
31.9917
5
37.8491
4
Deferred income taxes 40 81
0.26609
9
0.60492
9
Deferred revenues
Other current liabilities 3653 3422
24.3014
9
25.5563
9
Total current liabilities 8993 8824
Non-current liabilities
Long-term debt 3868 2775
25.7317
7
20.7244
2
Capital leases 3 2
0.01995
7
0.01493
7
Pensions and other benefits 165 172
1.09765
8
1.28454
1
Minority interest 311 350 2.06892
2.61389
1
Other long-term liabilities 1691 1266
11.2493
3
9.45481
7
Total non-current liabilities 6039 4566
Total liabilities 15032 13390 100% 100%
Stockholders' equity
Common stock 5252 5615
61.9997
6
58.9439
4
Other Equity -69 -42 -0.81454 -0.4409
Retained earnings 3124 3797
36.8787
6
39.8593
3
Accumulated other comprehensive income 163 156
1.92421
2
1.63762
3
Total stockholders' equity 8471 9526 100% 100%
Income Statement
INCOME STATEMENT Common size
Fiscal year ends in June. AUD in millions except per share 2016- 2017- 2016 2017
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Woolworths Group Limited
data. 06 06
Revenue 58276 55669 100% 100%
Cost of revenue 42677 39740
73.2325
5
71.3862
3
Gross profit 15599 15929
26.7674
5
28.6137
7
Operating expenses
Sales, General and administrative 12964 13134
22.2458
6
23.5930
2
Other operating expenses 12033 11686
20.6482
9
20.9919
3
Total operating expenses 24997 24820
42.8941
6
44.5849
6
Operating income -9398 -8891 -16.1267 -15.9712
Interest Expense 246 194
0.42212
9
0.34848
8
Other income (expense) 11004 11217
18.8825
6
20.1494
5
Income before income taxes 1360 2132
2.33372
2 3.82978
Provision for income taxes 520 650
0.89230
6
1.16761
6
Minority interest -1113 60 -1.90988 0.10778
Other income -1113 60 -1.90988 0.10778
Net income from continuing operations 840 1482
1.44141
7
2.66216
4
Net income from discontinuing ops -3188 111 -5.47052
0.19939
3
Other 1113 -60
1.90987
7 -0.10778
Net income -1235 1534 -2.11923
2.75557
3
16