CASE STUDY ANALYSIS Cases seldom present examples of perfect or totally flawed situations

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CASE STUDY ANALYSIS Cases seldom present examples of perfect or totally flawed situations. The bestmanaged companies have some weaknesses and poorly-managed companies, some strengths. However, the evaluation of weaknesses must be made in the context of the resources - monetary, human, etc. - available to the company. Any recommendation for change should carefully weigh the organizational costs, and should avoid damage to the company’s strengths when trying to improve its weaknesses. In preparing cases, the following suggestions may be helpful: 1. Familiarize yourself with the facts of the case. Consider the industry, the competitive context, and the core strategic tasks that the firm should excel at. Ground your responses in knowledge of the firm and its strategy. 2. Adopt a management posture to analyze cases. Your analysis should highlight what you, the manager, see as strengths or weaknesses. 3. Do not automatically assume a case represents a good or a bad situation. Adopt a framework which will allow you to evaluate each case on its merits. 4. Support your analysis with case facts. Most cases will not contain all the data you might like. Nonetheless, you’ll be surprised how easily you can make accurate inferences and useful assumptions if you give the current management the benefit of the doubt by assuming (in the absence of data to the contrary) that they are running the business the way you would run it – smartly!! If there are contrary data, it’s wise to think again. Maybe they’re right, and your task then is to understand why the company does what it does. Written Requirements NOTE: Some requirements may seem demanding; however, they facilitate grading and enable papers to be returned in a timely fashion. Remember to put your name on the upload. 1. This is a management report expressing your supported opinion based on the business situation/problem/issue presented to you in the case study. The question will help you address the problem and answers to those questions should be embedded within your case or in exhibits. 2. Use Tables and Exhibits to present quantitative analyses. Where possible, use Tables and Exhibits to present calculations and quantitative analyses. You will be evaluated on the clarity of the presentation as well as the quality of the analysis. Font in Exhibits must be 10-point or larger; 12 point is preferable. This means the printed font (be careful if you use the “size” command!). Ensure that your exhibits have clear labels and that you have referred to each of the exhibits in the text. Do not have an exhibit that is NOT mentioned within the text of the report. 3. Don’t put case exhibits within the narrative portion of your case analysis. 4. Support your assertions with evidence drawn from case facts and your analysis. 5. Calculations are only the beginning of the analysis. You must interpret them and assess their managerial implications and significance for the decisions under discussion. Don’t be misled that your goal is just to solve the accounting problem. While you are expected to solve the accounting problem that is presented to you, don’t just solve the accounting problem; solve the business problem (the big picture) go beyond the obvious. 6. Include Cover Page which includes your name, case name, and the due date. Do not put your name on any other pages of your paper, including Exhibits. 7. The report should be double-spaced, in 12-point font. Number each page sequentially (including Exhibits) except the cover page. Narrative cannot not exceed two pages. 9. Run your spell-checker program. Proofread your paper. Look up rules of grammar/punctuation about which you are unclear. Make sure you know the difference between “it's” and “its”. Use these two words correctly. 10. Do not copy lengthy portions of assigned articles or text into your papers. I am interested in your work, not someone else's. Further, your case analysis must explain events in a specific context. The text and readings, on the other hand, provide general explanations not necessarily relevant to the specific case context. 11. If you briefly reference the work of others (including assigned readings), you MUST ACKNOWLEDGE THE SOURCE using appropriate footnotes. Failure to do so is plagiarism. 12. Financial Formatting. Check your exhibits to make sure you are properly formatting financial information. When preparing columns of financial information, you must first decide whether to present whole numbers, or whether to show the “cents.” (There are rare cases in which we show more than two decimal places for financial information – if you present more than two decimal places, you must have a very compelling argument for why more than two are necessary.) If you choose to show “cents” you must show exactly two decimal places for every number in the column (you should not show some numbers with two decimal places, some with one, and some with none!). Further, financial figures in a column must be aligned on the decimal point, or, in the case of whole numbers, the implied decimal point (e.g., right-justified). Further, in the U.S., we use a comma to separate every three digits of the whole numbers. When adding a column of numbers, (or when subtracting numbers) an underline is used to separate the numbers being added (or subtracted) from the resultant sum (difference). For the exclusive use of j. zhu, 2021. NA0514 Houston We Have A Problem: They Paid Themselves Bonuses! Pascale Lapointe-Antunes, Brock University Deborah McPhee, Brock University Amanda Walsh’s first year as Vanderville Plastics Company’s (VPC) controller had been quite tumultuous. She had discovered on her first day on the job that VPC’s financial situation was precarious, and had since witnessed a change in ownership, repeated requests for funding to the new owners to help alleviate VPC’s severe cash flow issues, and more recently, the sudden resignation of Peter Giroux, the company’s Chief Financial Officer (CFO). As a result of Giroux’s resignation, Amanda was now acting interim CFO and reported directly to Michael Stratton, the Chief Executive Officer (CEO). A consultant had been hired by the new owners to better understand the causes of VPC’s cash flow shortages, and he never seemed satisfied with Amanda’s answers. Michael wanted the consultant to make all of his requests to Amanda through him. However, Amanda had no choice but to answer one of the owners’ questions when he called her to enquire about a $1 million decrease in accrued liabilities in January 2006. Amanda discovered to her great disbelief that the new owners did not know about the recent payout of bonuses for the 2005 financial year. Scared and angry, Amanda started to think about the succession of events since she came to VPC to better understand what this all meant, what was likely to happen next, and what she should do. VANDERVILLE PLASTICS COMPANY VPC, a plastics injection molding company, was founded in 1962 by the Vanderville family. A major player in the plastics industry, they supplied products to original equipment manufacturers (OEM) in the health care industry. The Canadian plastics industry was a sophisticated, multi-faceted sector encompassing plastic products manufacturing, machinery, molds, and resins. The plastics industry was very fragmented. There were many hundreds of small and medium enterprises (SMEs), and about a dozen large firms (500+ employees) operating domestically. It was estimated ----------------------------- Copyright © 2018 by the Case Research Journal and by Pascale Lapointe-Antunes and Deborah McPhee. This case study was prepared as the basis for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The authors wish to thank Carolyn Conn, Eric Dolansky, John Lawrence, James Moore, Barbara Sainty, Kevin Veenstra, and the anonymous CRJ reviewers for their helpful suggestions on how to make this a more effective case. An earlier version of the case was presented at the 2016 Annual Meeting of the North American Case Research Association in Las Vegas, Nevada, United States. Houston We Have A Problem: They Paid Themselves Bonuses! 1 This document is authorized for use only by jicheng zhu in Internal Audit MSA taught by CHRISTINA WILLIAMS, Northeastern University from Jul 2021 to Dec 2021. For the exclusive use of j. zhu, 2021. that about 95 percent of this sector was Canadian-owned. The industry was concentrated in Ontario, Quebec, British Columbia and Alberta. VPC was located in Meadowbrook, a small borough close to Vancouver, British Columbia, Canada. VPC’s location was strategically selected to be near an area heavily populated by hospitals. The Vandervilles had planned to pass on their company to their two children, but the latter made it clear they wanted to pursue other opportunities. Private equity firms were very interested in working with firms in the plastics industry to earn a lucrative return because plastics manufacturing had grown faster than the general economy, and twice as fast as other manufacturing businesses over the past decade. Globally, plastics was also thought of as one of the industries that would drive innovation, technology, and the knowledge jobs of the future. As word spread that the Vandervilles were looking to sell, VPC quickly became an attractive target for private equity investors. A Miami based private equity firm (Miami) acquired VPC in 1996 for $20 million and sold 20% of VPC’s common shares to some of the senior employees (see Exhibit 1). Miami planned on buying out several smaller companies to leverage the relationships that VPC had already established with high profile multinationals. They kept the company name because the Vanderville family was highly respected in the industry. Between 1996 and 1998, VPC acquired one company from New York City (New York) that continued to operate independently, and two companies from British Columbia that were amalgamated into VPC (Meadowbrook) (see Exhibit 1). Meadowbrook handled the administration, tax planning, and strategic planning for both locations. By 2005, VPC had grown to 400 employees in Canada, and 120 employees in New York City. The organizational structure included a Board of Directors made up of the equity owners, the Chief Executive Officer (CEO), Michael Stratton, and the Chief Financial Officer (CFO), Peter Giroux, CPA, CA. There was no separate audit committee. Peter Giroux and Michael Stratton reported directly to Miami. The Vice Presidents of Manufacturing, Commercial Services, Sales, and Engineering (the VPs) reported directly to Michael and were one level below Peter. The Human Resources (HR) Director was on the level below the VPs, and the Controller another level below. In turn, each VP had managers and supervisors with staff reporting to each of their positions. New York’s General Manager (GM), Brent Wiseman, reported to Michael (see Exhibit 2 for the organizational chart). AMANDA WALSH Amanda Walsh graduated from Simon Fraser University’s business school with a concentration in accounting in 1998 before pursuing a Certified Management Accountant (CMA) designation1. Amanda had been employed by a major electronics supplier as an Assistant Controller for five years when she started to feel that she was no longer challenged. She applied for the position of Controller at VPC in November 2004. It was a smaller organization that suited her desire to be more involved with dayto-day operations and major decision making. Amanda was interviewed by VPC’s HR Director, Janis Turner, Peter, and Michael in early December. After the interview, she was even more excited about the prospects of joining VPC. She could be working for someone who could teach her a lot and doing some interesting and challenging things. It was exactly what she wanted. She received her letter of employment offer at the end of December 2004. VPC paid salaries between the 75th and 90th percentile for the industry. Bonuses were paid if VPC met the performance targets established by its owners. Amanda’s bonus could range 2 Case Research Journal ? Volume 38 ? Issue 1 ? Winter 2018 This document is authorized for use only by jicheng zhu in Internal Audit MSA taught by CHRISTINA WILLIAMS, Northeastern University from Jul 2021 to Dec 2021. For the exclusive use of j. zhu, 2021. between 10% and 15% of her salary. She resigned from her position with her previous employer in January 2005 and began her employment with VPC in February 2005. AMANDA’S RUDE AWAKENING On February 7th of 2005, her first day at VPC, Peter introduced Amanda to her team a senior financial analyst, a financial analyst, an accounts receivable coordinator and an accounts payable coordinator (see Exhibit 2). Peter remained evasive when she asked for the latest financial statements and told her to spend some time learning about VPC by meeting with the senior financial analyst instead. After a week of avoiding her requests, Peter finally provided Amanda with the management letter prepared by VPC’s auditors, a large international accounting firm, for the year ended November 30, 2003. The letter was dated September 30, 2004. It included an overview of the audit, a discussion of significant accounting, financial reporting and auditing matters, recommendations for improvements in internal controls, a summary of unadjusted differences (SUD), and consolidated financial statements. To her disbelief, Amanda discovered that the financial statements for the years ended November 30, 2002 and 2003 were still draft (see Exhibit 3). The balance sheets looked terrible, VPC was incurring large losses, and the following note was printed on the title page: The Company’s current banking agreements have now expired. The Company is currently in negotiations between management and the Company’s banking syndicate regarding the establishment of new credit facilities and covenants. As a result, the Company’s ability to continue as a going concern and to pay down existing credit facilities is dependent on generating adequate cash flows from operations over the upcoming year, and the continued financial support of its shareholders and creditors. Depending on the final resolution of these matters, the financial statement presentation and related disclosure in the notes to the financial statements for the long-term debt and financing costs will be modified to reflect the circumstances noted. Should the financial statements require release prior to this date, then significant adjustments to the financial statements would be required, to disclose these going concern assumptions and the possibility that the going concern basis may not be appropriate; for example if repayment were to be demanded for the existing credit facilities. This disclosure is currently not reflected in this draft of the financial statements.” 2 "Possibly not a going concern?!" When Amanda said those words out loud, they did not sound real. "How can I have so many responsibilities for the financial operations of this company and not even know the auditors think VPC might not be a going concern?" Amanda was angry and hurt...and, she felt betrayed. Neither Peter nor Michael had mentioned such significant issues at any point during her interview. Amanda immediately went to Peter to ask him why. Peter told her they didn’t want her to decline their offer because of it. He asked her to please not worry, that he could clarify what was going on, and that everything would be fine. He went on to explain that when Miami acquired VPC in 1996, the Canadian dollar was trading in the mid- to high 1.30s to the US dollar, eventually reaching the low 1.60s for a good part of 2001 and 2002. The strong US dollar gave Canadian companies in labour intensive industries a major competitive advantage over their US competitors because it kept their labour costs much lower, and their margins Houston We Have A Problem: They Paid Themselves Bonuses! 3 This document is authorized for use only by jicheng zhu in Internal Audit MSA taught by CHRISTINA WILLIAMS, Northeastern University from Jul 2021 to Dec 2021. For the exclusive use of j. zhu, 2021. high. This was reflected in the multiple of earnings before interest, taxes and depreciation (EBITDA) VPC had to pay for the three companies acquired in the late 90’s. Miami had worked with a syndicate of well-known banks to fund the purchases, leaving VPC with $30 million US debt. Exhibit 1 shows the ownership structure. In 2003, the Canadian dollar appreciated dramatically, reaching the high 1.20s by the end of the year, and pretty much everyone in the industry suffered significant setbacks. VPC got to the point where they couldn't service the debt anymore. The banks allowed VPC to operate under forbearances for a while, but soon enough the company had to start trading off preferred equity in exchange for some of the debt. The original banks eventually sold their debt and preferred equity at a discount to two other private equity firms from Texas (Houston) and New Jersey (Jersey) (see Exhibit 1). Houston, Jersey and Miami agreed VPC should take advantage of the debt transfer that had happened to clean up its balance sheet before finalizing the 2003 audit. The audit would be done retroactively so VPC could avoid the going concern note and secure third-party financing, and Miami contain its losses. VPC’s financial statements were prepared in accordance with US generally accepted accounting principles (GAAP) to satisfy the needs of its American owners. Peter was not able to complete the debt restructuring because Houston and Jersey needed to agree on new payment terms for the restructuring to comply with SFAS 15.3 According to Peter, Houston was great to work with, but Jersey was more difficult and not very supportive. They were confrontational, particularly with their co-investors from Houston. To complicate matters further, Miami was seeking an exit strategy, and talks were underway on this initiative. Peter told Amanda he still hoped to have everything finalized by the end of 2005. Amanda left Peter’s office still perplexed about VPC’s financial position and why Miami was seeking to exit. Amanda realized she had no choice but to stick with VPC for now. Reputation was important, and she did not want anybody to think she was a quitter. Plastics was still a great industry, and she would definitely be challenged. Her job was just going to be more difficult than she had thought. AMANDA SETTLES IN Amanda did not regret her decision as she settled into her new position. Her direct reports were qualified and pleasant. Peter was present and involved, and he was always available to answer her questions or concerns. She was learning a lot. Peter kept Amanda’s interactions with the VPs and Michael to a minimum. Peter and Michael tightly controlled the flow of information within and outside of VPC. Most of the corporate governance documentation, such as the shareholders’ agreement, were not made available to Amanda. Few of the internal controls were documented, and the job descriptions were not current. The organization chart had not been updated in years. Amanda watched cautiously every month when representatives from Miami, Houston and Jersey came to town and met with Michael and Peter for board meetings. The VPs of Sales, Commercial Services, Manufacturing and Engineering sometimes joined them for parts of the meetings. Peter also maintained complete control over HR and payroll. Amanda was perplexed about the apparent lack of HR integration. Both Dora Parsons, the payroll manager, and Janis reported to Peter. Dora submitted the payroll to BER, the external payroll service. She made changes for wage rates, new hires, terminations, reviewed BER's payments for accuracy, and she examined BER's report of changes made