ACCG315 Case Study The Ethics of Profit in the Australian Retail Industry
ets 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 7 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.
ACCG315 Case Study
The Ethics of Profit in the Australian Retail Industry
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 qACCG315 Case Study The Ethics of Profit in the Australian Retail Industry 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 t
he 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 rd ASX Corporate Governance Council 2014, Corporate Governance Principles and Recommendations 3 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 uite 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 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” 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?
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