Report: The Ethics of Profit in the Australian Retail Industry

This report investigates the ethical considerations surrounding profit maximization within the Australian retail industry, using Woolworths as a case study. It explores various aspects, including the implications of delaying payments to suppliers, the role of integrated reporting, and the concept of remuneration 'at risk.' The report examines ethical issues related to stakeholder management, the development of internal cultures for sustainable growth, and the accountant's role in product mix decisions. It also addresses the relevance of non-financial measures, performance measurement using a balanced set of measures, and the process of ethical decision-making. Finally, the report considers the application of a sustainable balanced scorecard to promote ethical practices within the retail sector. The analysis highlights the challenges faced by retailers in balancing profitability with ethical conduct, especially in a competitive market.

THE ETHICS OF PROFIT IN THE
AUSTRALIAN RETAIL
INDUSTRY

Table of Contents
ABSTRACT....................................................................................................................................4
Introduction......................................................................................................................................4
Main Body.......................................................................................................................................6
Question-1 Delaying Payments to Supplier in Order to Increase Cash Position.........................6
Question-2 Integrated Reporting and Its Impact on the System..................................................6
Question-3 Concept of Remuneration “at Risk”.........................................................................7
Question- 4 Stakeholders and Ethical Behavior of the Company Towards Them......................8
Question-5 Developing Internal Culture for Long Term Sustainable Growth............................8
Question 6 - Accountants role in resolving the issue of product mix decision...........................9
Question 7- Relevance of Non-financial measures for a retailer...............................................10
Question-8 Measuring Performance on Balance Set of Measures............................................10
Question 9- Ethical Decision Making........................................................................................11
Question 10- Sustainable Balance Score Card..........................................................................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................14

List of figures
Figure 1: Value Chain of Retail Goods...........................................................................................6
Figure 2: Integrated Reporting System............................................................................................7
Figure 3: Developing Organizational Cultures................................................................................9

ABSTRACT
In Australia, the retail sector is an active part of the economy and employment. From the
prospective of customers, it is the retail sector that provides a major link enabling them to have
access to broad range of products from various vendors (Australian Competition and Consumer
Commission). There is a huge change is the retail landscape of Australia and worldwide, which
intensifies pressure of competition on many established and prospective retailers, persuading
them to focus on the way they carry on their business. Particularly, the ongoing e-commerce
development is steering the changes in the expectations and behavior of consumer and at the
same time also creating various opportunities for retail businesses to modify their cost structures
and penetrating into different market segments. The Australian Government tasked a
Commission for undertaking a case study of the costs structures and the actual cost of the retail
businesses in Australia, and, wherever necessary, comparing their costs to their competitors
worldwide.
In the above mentioned study, it was found that the Australian retailers are continuously
operating under various regulatory regimes related to trading hours and planning. This
unnecessarily increases their costs and hinders their innovative ability innovate. However, this
study highlights many cost pressures faced by retailers in the market and their ethics of profit. It
has been found that to some extent, the retail sector protects their overall profitability by
lowering the cost of some goods, by sourcing strategies by retailers and Australian dollar
appreciation. The input costs rise is also partly offset by productivity gains in the retail sector.
Introduction
This report presents the cost- profit dilemma faced by the Woolworths, which is a bricks
and mortar store in Australia. The increased obligatory pressure has reduced the profit of the
firm, which can only be mitigated by the cost reduction strategies. However, not all strategies are
ethical as per the provisions of the Governing authorities. As per Australian Government,
Productivity Commission, 2014, there are many profit ethics which have been listed by the
governing provisions which are to be followed by the retail sector. In order to reduce cost
Woolworths has shut down many of its under-performing units. In order to distinguish from the

competition, the major objective to maintain profit is to control cost levels in the face of sales
growth. This report focuses on the types of decisions which have been made by the company for
reducing cost bases and squeeze out incremental return on investment increases.
This study also highlights the ethical implications and behavioral issues arising from
these decisions. Woolworths has targeted two main areas for reducing cost- Cost of Goods Sold
(COGS) and Cost of Doing Business (CODB). According to the words of Beaudoin and et.al.,
2015, the cost of doing business is more focused due to the impacts of e-retailing sector. This
cost includes cost of infrastructure, staff costs, and occupancy costs like utilities, rent,
distribution and selling costs. These elements of cost are outsourced by many companies
particularly those related to distribution and information technology services. These two
elements form a major part in the profit structures and the value chain. Another major focus of
retailers has been on Gross Profits or Gross margins. There are only two ways that any retailing
company can use to improve their gross profits: either through escalating their selling price of
the product or decreasing its cost.
As per the words of Boudreau and et.al., 2015, many case studies based on researches
conducted for the retailing industry reflects that although some retailers may have fine intentions
in context of auditing, there is a wide spread practice of “audit fraud”. In these cases the workers
are coached by the managers to manipulated facts when the independent auditors are around. The
workers have to follow order like these of the management in the fear of losing their jobs. It has
been observed widely that in their battle of lowering cost, the retailers tend to ignore the
goodwill of consumers. Many studies have revealed that it may also be a matter of consumers
who are not sure of spending their money wisely when it comes to parting with cash. Consumers
generally have their own perceptions to the cist and prices of retail products. Whatever the
situation is, it seems that the retailing industry is still a prospective victim of the strategies
followed by the big retailers in reducing their cost and increasing profit.
This is simply because the major players like Wesfarmers and Woolworths have superior
powers when it comes to retail market. This is what counts as the market power. The big and
major players rule while the rest suffer. This rule applies to any sector and any country. Many
strategic theories have suggested that it is desirable to have power in any way possible.

Competitive strategy is all about the use of power for achieving profit objectives. However, the
question which arises here is that till what extent the use of power is legitimate?
Figure 1: Value Chain of Retail Goods
(Source: Moussawi and et.al. 2014)
Main Body
Question-1 Delaying Payments to Supplier in Order to Increase Cash Position
In order to gain financial mileage, many companies deliberately delay payments to
supplier. Notably, this can be regarded as an unethical move as it will be unfair for the suppliers.
If this can improve the financial health of the business, this matter can be overlooked. On this
aspect, if I am approached by the CEO or any other senior manager, my response to the situation
will be negative. Delaying payments to suppliers will would inculcate some serious ethical issues
that may be prove to be more expensive in terms of penalty than the amount it may coat through
delayed payments. However, if this matter moves the company from serious financial crises to a
reasonably better one, I would consider accepting the proposal (Vakharia and et.al, 2014).
Question-2 Integrated Reporting and Its Impact on the System
According to the views of Cheng, M. and et.al. 2014., integrated reporting is a concise
report that presents explanations on company’s activities and operations that result in creation of
value for the company. The report discusses the value creation of the company in the short and
long term. This helps the company in many aspects ranging from designing its remuneration
system and performance. Integrated reporting can be used by a company for the purpose of
reporting organization’s major decisions relating to the future operations. The aim of integrated
reporting is to impart meaning to the data related to performance of any company. Thus, the

main use of this type of report is to facilitate change in performance by identifying the exact
areas of problem which need change in order to perform better. Apart from this function,
integrated reporting also establishes a relationship between information provided by the reports
of the company and its actual performance. This report is also capable of designing the
remuneration system by highlighting the loopholes in the system of wages and salaries provided
to the staff and employees of the company. This initiates a positive change in the company.
Figure 2: Integrated Reporting System
(Source: The International Integrated Framework)
Question-3 Concept of Remuneration “at Risk”
The concept of remuneration ‘at risk’ refers to the agreement executed between an
organization and its working people to sacrifice some part of their income for better performance
of the company. This means if the company does well in a particular year the staff and
employees will be subjected to a better remuneration and additional salaries and vice versa. In
situations where the business does not makes any profit, the same rate will be charged from their
salaries. According to a report, named “Productivity Omission Report”, this type of remuneration
is major issue in various big stake companies. The companies operating on large scale have
many employees working for them and their remuneration amount may run into millions
depending up on the pay scale of the company. Thus, at times when these companies do not
perform well they may enter into an agreement with their employees to sag a part of their salary
in favor of the company (Zhu, 2014).

Question- 4 Stakeholders and Ethical Behavior of the Company Towards Them
As per the opinion of Mason and et.al, 2014, a stake holder is an individual person or a
group which gets affected by the actions of business as well as affects the action of corporation.
Stake holder could be categorized into two groups’ internal and external stakeholders.
Employees, managers and owner of the company are internal stakeholders and suppliers, society,
government, creditors and shareholders are external stakeholders. A large retail organization is
having both external as well as internal stakeholder. It external stake holders comprised unions
and government and relationship with suppliers. Non- government organization, suppliers and
workers in supply chain are the main external stake holder of large retail organization.
Stakeholders require ensuring that managers behave ethically and not take risk with
investor’s capital by engaging in capital which could hurt the company’s reputation. They want
that they receive maximum return on their investment. It is an important concept as customers
are the most critical stakeholders and company work with efficiency in order to create loyal
customers and attract new one. The same can be done through developing ethical culture as a
profession in an organization. The issues relating to business ethics which are required to be
resolved with patience comprise Profit versus higher wages; production versus pollution;
survival versus needs of stakeholders etc. These are the situation in which appropriate decision
can be taken only with application of ethical behavior.
Question-5 Developing Internal Culture for Long Term Sustainable Growth
An organizational culture is shaped by the founder of the organization which tends to
emerge over time by actions and values which contribute to the initial success. The culture of a
company can be managed through creating awareness regarding the leaders of the organization
and the HR professionals. For sustaining and managing culture elements of the organization
focused efforts are needed in right direction which supports organizational effectiveness. An
organization's early culture is significantly impacted by its founders. With time, there is
development of behavioral norms that are consistent with the values of the organization. In some
organizations, like, Wesfarmers, the CEO responded to the resolution of conflicts which hashed
out in TARGET hierarchically. The CEO claimed that they promote strong organizational
culture that provides long term sustainable growth in short term gains. Although, in most
organization culture emerges naturally; however, the consistency of strong cultures often begins

with a common process known as "values blueprinting,” this process involves an honest
conversation with the leaders from the organization. Once the framing of culture is done, a
values committee may be established by the organization which is directly linked to leadership.
This value committee ensures that the organization’s culture is alive and well. For blueprinting
values to work, organizations require to hire people who themselves live the values and have the
necessary competency required by the job.
Figure 3: Developing Organizational Cultures
(Source: Katzenbach and et.al., 2015)
Question 6 - Accountants role in resolving the issue of product mix decision
Retail industry is not only the one who is using its power over supplier; as the same is
applied in almost every industry to the extent it is possible. Provision relating to rebate has been
specified in AASB 102 ‘Inventories’ which provides the same is reduced in cost of inventory
and promotional type of rebate are required to be accounted as reduction or reimbursement from
retailer’s selling expenses. In present scenario as it has been stated by Dick Smith Group that as
the stock has been purchased on the basis of rebate rather than the demand of customers; the
same has resulted into poor and declining performance (APES 110 Code of Ethics for
Professional Accountants).

Accountants should be involved in decision relating to product mix; as their suggestion
relating to goods whether they are in demand or not is more appropriate. As they maintain the
goods on daily basis; thus they know more appropriately that even in case rebate is provided the
good should be purchased or not. It is not necessary that goods should be purchased if they are
available at discount; it is necessary that the product should be in demand as well. In case the
product is not in demand than even after decrease in overall cost no overall profit will be
represented in books of accounts. Moreover, poor performance will be observed as not benefit of
reduced price have been attained by the organization. In order to identify the issue relating to
poor performance it is necessary that details regarding the stock should be ascertained from the
accountant. According to ASX Corporate Governance Council, through assessing the details the
reason behind the poor performance of organization could be assessed as well as an appropriate
solution for the same can also be ascertained.
Question 7- Relevance of Non-financial measures for a retailer
Non- financial metrics can be specified as measures which cannot be specified in
monetary terms. Measures such as customer satisfaction, market share and new product adoption
rate are assessed as non-financial measures. These measures are vital for a retailer in same
manner as financial measures. An advantage which can be gained through assessing non-
financial metrics is that it provides closer link with long term organizational strategies. Financial
evaluation is usually done after a certain period of time which can be quarterly, annually or any
other interval as per convenience of organization. However, non-financial metrics are assessed
on regular basis; thus increment in efficiency eventually results into profit.
Non-financial metric are important for retail industry as well as any other industry. A few
non-financial metrics which can be applied by a retailer are interim research result or customer
indices which provide an indication relating to future cash flow which cannot be ascertained in
another way. Another non-financial metric is evaluated environmental performance and quality
provided to customer. These categories assess to determine weightings of each dimension.
Question-8 Measuring Performance on Balance Set of Measures
As a CFO, I would prefer my performance to be measured by balance set of measures
rather than on simple financial measures. According to opinion of Info Entrepreneurs, for the
purpose of balance set of measures, a balance score card can be used which measures and

manages performance based on some predefined performance criteria. On the other hand
financial measures, just measure performance on the basis of work done or hours contributed.
The various performance perspectives of the Balanced Scorecard provide ideal criteria for
considering performance measurement and tracking improvement and accruing benefits to the
person. Knowing what areas of the work are to be measured for calculating remuneration, a good
measurement system will examine the set offs for changes in performance. This puts the person
in a better position to manage performance proactively. One of the major challenges with this
type of performance measurement is to select the areas to be measured. The priority here is to
identify quantifiable factors that can be clearly linked to the drivers of success. They are known
as key performance indicators (KPIs). If I would be junior CFO, my views would still be in
favor of balance set of measures.
Question 9- Ethical Decision Making
The main concept and requirements for ethical decision-making remain constant
across the accounting specializations of financial or management accounting and also in internal
or external audit. There are some common principles which are applicable regardless of the area,
and circumstances in which they may apply. Ethical decision making is a subject that includes all
aspects of human life. Time and circumstances may change but their applicability in all business
decisions remains constant. Some basic principles of professional ethics are:
 Having knowledge of being in a functional role which provides professional superimpose
on every other role depending on local and culture.
 Dependence of morality, with clear language and motivational presentations.
 Foundation of ethical and professional self-understanding. The people, who have an
understanding of their professional work and the related philosophy and relationship with
lives of other people, achieve a moral sense and therefore they develop a feeling of
commitment to those.
Question 10- Sustainable Balance Score Card
According to the views of Parmenter 2015, the new approach of SBSC attempts to
simplify the rising ambiguity related to the legitimacy by re-allocating the performance
indicators into Balance Scorecard perspectives. Furthermore, it also determines which

perspectives have fascinated the strongest sustainability reporting. By doing so, it potentially
allows the company’s strategy of sustainability management into a set of dashboard
measurements. Conceptually, the problem of applying sustainability in the SBS model is to
identify the key determinants of sustainable development that managers have to manage by
determining, observing, scheming for improving their performance. Management should also
define the economic goals and the non-economic social goals of enterprise stakeholders by
incorporating them into the fundamental system of objectives. As per the views of Tairan Huang
and et.al, 2014, the sustainable development of any company depends upon the economic
dimension and also on the requirements of CSR domain. It is essential to improve performance
of business in all the three directions of sustainable development that is economic, social and
environmental at the same time.
Conclusion
It can be concluded from the report that with growing complexities of ethical and
legitimate issues, the big retailers in Australia need to act on this change. These retailers are
always in the eyes of public with increased approach of the customers, and other stakeholders, to
the social media. Any ethical and illegitimate act may not go un-noticed. It therefore becomes
even more important to consider all the groups who have a rightful “stake” in the company. In
the race of gaining more profit, many companies restore to actions which are not lawful. There
are various ways of increasing profit, however not all ways are said to be ethical. One such case
was experienced in the case study provided above where there was a mechanism of delaying
payments to the supplier to improve financial health.
These types of cases can be seen every day in various business houses. Thus, a system
called integrated reporting is devised which keeps a check on the activities of the business.
Developing strong organizational cultures like the Wesfarmers is the need of the hour. Many
companies have also restored to measurements like reducing the book value of their inventories
and using undue influence on the suppliers. These issues not only destroy the image of the
company but also inculcate huge amounts. Sustainable Balance Scorecard must be devised for
the purpose of measuring and managing performance of the organization and of its employees.