In: Accounting
TORENTO CONSTRUCTION: ETHICAL CONTRACTING
On December 27, 2010, Cary Holmes, manager of the Supply Chain Management (SCM) group at Torento Construction Inc. (NCG), was in his office in Torento, Ontario, trying to organize the thoughts running through his head as a result of a recent bidding to save operating costs at NCG. There was no problem in terms of the final outcome; in fact, the bid was going to result in cost savings of 25 per cent, which was exactly what NCG’s founder and chief executive officer (CEO), Michael Wells, had asked for. The problem was that the cost savings represented only part of the story: He wondered whether the process to achieve the savings was unethical. As he gazed out of his office window, Holmes reflected on the series of events that had occurred over the previous few weeks.
INDUSTRY OVERVIEW
The construction industry’s main activities came from the construction of buildings, houses, and other engineering projects (e.g., utility systems and highways). The sector also involved the maintenance of infrastructure. Much of the work in the industry was done through contracts with the owners of construction projects, or through subcontracts with other smaller construction companies. In 2008, construction projects put in place within the Canada peaked at US$2.32 trillion.1The industry employed workers in a wide variety of positions, including labourers, carpenters, and electricians. During times of economic growth, both the private and the public (e.g., federal, state, and municipal government projects) portions of the construction industry flourished. The Global Financial Crisis and Industry Downturn Like many industries worldwide, the Canada construction industry experienced a drastic and unprecedented decline following the financial crisis and recession in the late 2000s. Economists agreed that the economic 1 All currency amounts are in US$ unless otherwise specified; FMI Corporation, CANADA Markets Construction Overview 2016, 2015, 2, accessed January 17, 2017, www.smacna.org/docs/default-source/business-management/fmi-s-2016-u-smarkets- construction-overview.pdf. downturn that began in 2008 was the most severe since the Great Depression of the 1930s, and the effects of the crisis were felt across the world.2 The financial crisis was triggered primarily by the subprime home mortgage industry, which saw high default rates due to misdirected regulation and aggressive lending practices; these events resulted in the near-collapse of many banks and other financial institutions, government bailouts across multiple industries, plummeting stock markets, unemployment, declines in consumer wealth, and the widespread collapse of businesses.3The construction industry was far from immune to the fallout of the crisis. In fact, in the Canada, construction was the industry that suffered the most during this period: the 568,000 job lossesin thissector comprised one-third of all Canada jobs lost in 2008. Before the crisis, Ontario province had been a hotbed of construction activity, powered by the constant building and maintenance of the hotels, casinos, and infrastructure of its largest city, Torento. With the economic downturn, Torento developersshifted their focusfrom the expansion of projectsto cost cutting. Jobs were shed, contracts delayed, and projects downsized. Keeping operations as lean as possible became the new priority for the few ongoing projects and operations in the surrounding desert.4 From October 2008 to October 2009, construction in Torento dropped 92 per cent, and the city saw its unemployment rate increase from 0.4 per cent to 8.0 per cent by November 2009.5With the sharp downturn of the construction industry, the rest of Torento’s economy sagged, sinking to levels last observed in the 1980s. Despite this dramatic decline, the more optimistic of the city’s builders and hoteliers pressed forward with their existing plans, with a renewed emphasis on efficiency and lean operations. In the new economic environment, cost cutting was the key to survival.
TORENTO CONSTRUCTION INC.
Founded in 2000 and headquartered in Torento, NCG was a medium-sized construction firm that employed approximately 1,000 people. The company focused primarily on construction work as main contractors for multiple projects on “the Torento Strip” (a central stretch of road known for its concentration of hotels and casinos) and surrounding areas. Only six years after it was founded, NCG went public and began trading on the Canada Stock Exchange. The firm showed strong growth after completing a number of acquisitions of smaller construction companies in Ontario, Qeubec, and British Colombia. In spite of the industry-level downturn, NCG actually found itself in better shape than many other Ontariobased construction firms. As of December 2009, due to its outstanding balance sheet and effective hedging strategy, NCG’s stock price dropped by only 11 per cent compared to the previous year, while comparable firms’ stocks had dropped over 45 per cent. With a number of long-term construction contracts on the horizon, NCG was in a good position to survive the economic downturn. Accordingly, although business was not exactly thriving at NCG, there were some reasons to be optimistic. As a lean, dynamic company that had focused on technological advancements, acquisitions ofsmaller firms, and an aggressive approach to acquiring new clients, NCG looked as though it might even be able to profit from the losses of rival companies who found themselves in worse situations. Rumours began to surface about NCG making another acquisition. However, this mood of optimism did not last. By December 2009, the few multibillion-dollar projects that had promised to provide employment for the construction firms in Torento had either been cancelled, put on hold, or scaled down. The financial crisis showed no signs of being relieved in the Canada, and the outlook for the survival of Ontario’s construction firms was grim. It was at this point that Wells (NCG’s CEO) called an emergency meeting with NCG’s SCM group.
THE MEETING
Although he was not quick to anger, Wells was angry now. Sitting at the head of a long, wooden conference room table, he clenched his fists and pounded the table, emphasizing the gravity of the situation that his company was facing. Sitting around the table and witnessing this display of anger were the five members of NCG’s small SCM team; most of them were both young and relatively inexperienced. The team included the SCM manager, Holmes; two specialists, Matt Daniels and Tory Falk; and two analysts, Michelle Grover and Sean Nichols. Holmes had been with NCG for four years. He was chosen to lead the SCM group when it was created because of his 15 years of experience in managing supply chains and logistics—including managing the contracts and relationships with subcontractors—at various other construction firms in Torento. In contrast, the other team members had considerably less experience. The two specialists, Daniels and Falk, had only recently graduated from business programs at prestigious universities in the Canada, and the analysts, Grover and Nichols, had had little experience in supply chain management before being transferred to the SCM group from other business units within NCG. Nevertheless, although their tenures with NCG had been relatively brief, the members of the SCM team had made small but consistent progress throughout the economic downturn in lowering costs among the company’s various internal business groups. Unfortunately, this progress did not meet Wells’ expectations. “It’s not good enough!” the CEO exclaimed. “We’re looking at a large-scale economic downturn here! The current market is not sustainable for us. If we are to meet our targets with the current budget, we need to see at least 25 per cent reductionsin our capital and operating costs. Basically, we need to be in survival mode!” Holmes, who was never one to shy away from a challenge, understood his boss’s request completely. He looked around the table at the different members of his team. His gaze was met with looks of shock and awe. He then turned to lock eyes with the CEO, stating, “You can count on us, Wells. We will find a way and you will get the result. I know it will not be easy, but we will try our best. Please, give us some time.”
THE BIDDING
Since the meeting with Wells, Holmes and his team had been working as hard as they could, and they were producing very impressive results for NCG. They were seeing compliance with a mass letter that they had sent out asking for cost concessions from their vendors. In addition, the team members were executing bids and requests for proposals that resulted in reduced rates, increased discounts, and greater efficiencies. The young team was operating at a level that Holmes had not thought possible given the limited number of employees he had at his disposal. Yet the daunting target that the team members had to meet always seemed to overshadow the progress they made. A 25 per cent reduction in all costs contributing to capital and operating expenditures was almost unheard of; they still needed to cut more. Holmes thought that there was one particular expense category that had been left untouched by the SCM group: costs of subcontracting. The construction industry relied heavily on subcontractors, especially when the project required additional labour that exceeded a company’s capacity. Project companies like NCG acted as the main contractor, and these firms then subcontracted plumbers, carpenters, electricians, landscapers, drywallers, painters, roofers, and flooring specialists. Holmes had long been looking for an opportunity to scrutinize this category, because he felt that NCG was not fully attentive to the potential cost savings of re-evaluating its subcontractors. A single manager who coordinated with three of the company’s subcontractors was in charge of organizing the acquisition of outside labour that NCG used for its large projects. This manager, Bernie Miror, was essentially responsible for sourcing the subcontracting servicesthat NCG used. Miror had been with NCG for seven years and was a fast riser within the company ranks. He felt that his management was contributing to the company’s overall efficiencies and success on the projects it had completed in Torento. Miror knew the CEOs of the three subcontracting companies that NCG used on a first-name basis. He played golf with them in a company tournament every year, and received bottles of wine from them as Christmas gifts. Therefore, when Holmes called him about helping with cost reductions for his department, Miror politely reassured him by saying, “No, I can handle it. Just give me some time.” Miror hung up the phone, and subsequently called his friend, who happened to be the head of the largest labour service company in Ontario. The conversation initially consisted of a few friendly jokes and updates about each other’sfamilies. Finally, Miror brought up the topic of cost reductions. The call concluded with Miror's counterpart throwing out a number: “I understand your concerns . . . . How does 10 per cent off the all-inclusive rate sound to you?” Miror felt that the discount was more than sufficient, and agreed immediately. He then more or less repeated the same phone call with his friends at the two other labour service companies. When Holmes received an email from Miror reporting the 10 per cent reduction in subcontracting costs, he was perplexed and annoyed. He had been asked by his CEO for a 25 per cent reduction; 10 per cent just would not suffice. It had become obvious that Miror was not using proper techniques in negotiating with vendors, and this was negatively affecting Holmes’ cost-reduction initiative. Holmes had been preparing a bid document for the subcontracting expense category, and he had planned to send it to Wells and the other executives with Miror's help. Holmes refused to appear ineffective, so despite Miror's actions, he sent the bid document to a pre-screened group of labour service companies. All the companies included in the bid had the capability to meet NCG’s external labour demands when the company needed them. The deciding factor would be how much each company would be willing to lower the price they charged, which was critical in reducing operating costs. The bid included the three companies Miror currently used, as well as six other companies that operated in Torento and the surrounding areas. It seemed that these six other companies were excited about this new business opportunity. As the deadline for bidding approached, Holmes received nine proposals for the labour subcontracting position, six of which were not only better prepared and more thorough than the three companies NCG already worked with, but also included rates in line with Wells’ request for a 25 per cent cost reduction. Holmes was ecstatic with the results of his bid; not only was he able to finally bring about change in the subcontracting category, but he would also be able to fulfill his promises to NCG’s CEO. He felt this was a huge win for his team, and one that would eventually improve the company’s financial performance during an economic downturn. Holmes painstakingly compiled the data he had received, analyzed it, and formulated it into a recommendation. It turned out that the three companies that Miror insisted on using were asking the highest rates, at only a 10 per cent discount. In his analysis, Holmes stressed the confidential manner in which the data must be treated; the proper legal and ethical procedure was not to disclose any information about the other participants’ submissions. Once he was satisfied with the document, Holmes sent Miror the final copy, along with a request to meet to discuss plans to switch from using the three current labour providers to any of the other six firms that had submitted better bids. New Proposals The following day, Holmes received an email from Miror. The email contained new proposals from the three companies that had submitted bids with the highest costs. In the three new proposals, the rates had been drastically reduced to match the lower rates—surprisingly, to the exact dollar amounts—proposed by the other respondents. Yet other than the reduction in rates, the proposals had not changed much. Holmes was furious. He thought that Miror had simply looked at the document Holmes had sent him, and upon discovering that his “buddies” would be losing NCG’s business, had contacted the three executives and warned them to lower their bids. In fact, Holmessuspected that Miror had probably told them exactly how much they would need to take off the price in order to continue providing theirservicesto NCG.
Assignment Questions: 1. What facts should be considered in evaluating Miror's actions? (address at least three facts and using the case content, explain why these facts should be considered)
2. Who would be the primary and secondary stakeholders with respect to Miror's decision? ( address at least three primary and three secondary stakeholders)
3. What are the possible consequences of Miror's actions? When estimating consequences, consider the magnitude and probability of the consequences based on both short-term and long-term perspectives (see Exhibit TN-1). (list at least three consequences and explain about them as the question asks you ).
4. Are there any relevant ethical principles (other than consequentialist principles) or violations of human rights or justice involved in this decision? (at least 2 approaches)
5. In light of all of the above considerations, what do you think Holmes should do? How can NCG prevent unethical decisions in the future? (at least 4 recomandation for each one)
In: Operations Management
In many ways, studying at university is analogous to working in a matrix environment in an organization. Explain the analogy. In what ways does a university student experience the advantages and disadvantages of a matrix organizational structure? Can you suggest any ways to better manage the system in the university to overcome some of the disadvantages?
In: Operations Management
Change in Estimate versus Error Correction- LandCo is a lawn service company which provides grounds and maintenance services to a range of corporate customers. Customers are expected to pay on the first of each month, in advance of receiving services. One of LandCo’s corporate customers is an eldercare facility whose grounds the company has maintained for many years. The customer has not paid for the last three months of service (from October – December 2019); nevertheless, to maintain a positive relationship, LandCo continued to provide mowing and weed control services to the eldercare facility during that time. LandCo ceased providing services in January 2020 and found out in that same month that the eldercare facility filed for bankruptcy in September. LandCo now believes that collection of the missed payments is extremely unlikely.
LandCo has already issued financial statements to lenders (for the period ending 12/31/2019) which reflected revenue and a corresponding account receivable related to this customer of $10,000 per month for services provided. Those financial statements also reflected the company’s standard allowance (reserve) amount on receivables, of 4% of sales. In total, LandCo’s average monthly sales amount to $500,000.
Required:
1- Evaluate whether receipt of this information indicates you have a change in estimate or the customer's bankruptcy results in this event being considered an error in previously issued financial statements. Describe the accounting treatment required by the Codification for each alternatives with draft journal entries.
2- Research US accounting standards to determine the proper treatment for the service receivable/customer bankruptcy on LandCo’s financial statements, assuming it is headquartered in the United States.
3- Research international accounting standards to determine the proper treatment for LandCo’s transactions, assuming it is headquartered in France.
In: Accounting
Use the you-attitude to create a reader-friendly tone in this memo. Also remove any emotionally charged words, phrases, or sentences.
To: Gary Gardner, Manager, Personnel Department
From: Donald Smith, Manager, Payroll Processing Department
Subject: INCORRECT PAYROLL CHECKS
Date: July 10, 2020
I have been painstakingly reviewing the payroll "errors" in the computer files.
I insist, contrary to what you insinuated in the company meeting last Friday (July 3), the majority of these "errors" were made by YOUR clerks. I do not feel that my people should receive any blame for this. They are merely correctly copying incorrect time tickets that your people are submitting to us. Were you aware of that? I was. Am I supposed to have to check every payroll entry so our employees receive the correct amount on their checks? Am I expected to do all the work in this company?
I listened while you discussed requiring my computer operators to perform the very time-consuming task of comparing their computer entries against the time sheets that YOUR clerks are miscopying. That is ridiculous. I was outraged. But at that time I did not say a word because I wanted to research the data myself.
My people do not have time to correct the errors that are made by your people, and I adamantly refuse to hire new help for such work.
I demand that you tell your clerks to do a better job of reviewing their work before they send it to my computer-entry people. I have analyzed this problem, and I have decided that you do not know how to communicate with people very well. That's the real problem--at your department.
In: Operations Management
Chlo is planning for her 15 year-old daughter’s university education. She estimates that 1 year of university would cost $15,000 in today’s dollars, but will rise with the rate of inflation of 2% year over year. How much would Chlo need to have accumulated by the time her daughter starts university at the age of 19 provided she attends university for 3 years and will receive funds at the beginning of each year? Assume an investment rate of 3.6%, compounded monthly
In: Finance
11-
Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $53,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $46,000. For 2020, J.D. was allocated $6,000 of ordinary income from Clampett, Inc., and no separately stated items. What is J.D.'s basis in his Clampett, Inc., stock after all transactions in 2020?
Multiple Choice
$52,000.
None of the choices are correct.
($6,000).
$46,000.
$40,000.
In: Accounting
Bessrawl Corporation is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. The company reported income in 2014 of $1,000,000 and stockholders’ equity at December 31, 2014, of $8,000,000. The CFO of Bessrawl has learned that the U.S. Securities and Exchange Commission is considering requiring U.S. companies to use IFRS in preparing consolidated financial statements. The company wishes to determine the impact that a switch to IFRS would have on its financial statements and has engaged you to prepare a reconciliation of income and stockholders’ equity from U.S. GAAP to IFRS. You have identified the following four areas in which Bessrawl’s accounting principles based on U.S. GAAP differ from IFRS.
1)Inventory
2)Property, plant, and equipment
3)Intangible assets
4)Research and development costs.
Bessrawl provides the following information with respect to each of these accounting differences.
Inventory
At year-end 2014, inventory had a historical cost of $250,000, a replacement cost of $180,000, a net realizable value of $190,000, and a normal profit margin of 20 percent.
Property, Plant, and Equipment
The company acquired a building at the beginning of 2013 at a cost of $2,750,000. The building has an estimated useful life of 25 years, an estimated residual value of $250,000, and is being depreciated on a straight-line basis. At the beginning of 2014, the building was appraised and determined to have a fair value of $3,250,000. There is no change in estimated useful life or residual value. In a switch to IFRS, the company would use the revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition.
Intangible Assets
As part of a business combination in 2011, the company acquired a brand with a fair value of $40,000. The brand is classified as an intangible asset with an in- definite life. At year-end 2014, the brand is determined to have a selling price of $35,000 with zero cost to sell. Expected future cash flows from continued use of the brand are $42,000, and the present value of the expected future cash flows is $34,000.
Research and Development Costs
The company incurred research and development costs of $200,000 in 2014. Of this amount, 40 percent related to development activities subsequent to the point at which criteria had been met indicating that an intangible asset existed. As of the end of the 2014, development of the new product had not been completed.
Required
Prepare a reconciliation schedule to convert 2014 income and December 31, 2014, stockholders’ equity from a U.S. GAAP basis to IFRS. Ignore income taxes.
Prepare a note to explain each adjustment made in the reconciliation schedule.
In: Accounting
Misty Mark, an infamous archer, decided to open an archery and fitness business called Bows and Biceps. The following is a list of transactions for Bows and Biceps for the first month. Put the transactions in a T account ledger and then create a trial balance, Income Statement, Statement of Owner’s Equity, and Balance Sheet on 5/31/20.
In: Accounting
Misty Mark, an infamous archer, decided to open an archery and fitness business called Bows and Biceps. The following is a list of transactions for Bows and Biceps for the first month. Put the transactions in a T account ledger and then create a trial balance, Income Statement, Statement of Owner’s Equity, and Balance Sheet on 5/31/20.
In: Accounting