ASX has developed a set of principle and recommendations regarding the development of corporate governance framework in the Australian business entities to promote trust and interest in the business operations. Wesfarmers develops and publishes the corporate governance statement in accordance with the ASX principles that is examined as follows:
ASX Council has stated the business entities to establish and define the roles ad responsibilities of the Board and management properly. Wesfarmers Corporate Governance Statement ahs adequately defined the roles and responsibilities of the Board and management. The role of Board is to provide a strategic direction to the Group and develop the consecutive business plans for achieving the long-term goals and objectives. As such, the board aims to create value for the shareholders by aligning their aims and objective with the overall business interests. The responsibilities of the Board include monitoring and reviewing the performance of key management personnel (KMP), identifying the growth opportunities and development of actions plans for overcoming the gaps in performance. On the other hand, the management role and responsibility is to manage the daily operational activities of the business adequately and is directly accountable to the Board. The performance of the board is evaluated by the Nomination Committee with the assistance of an external consultant on an annual basis. The performance evaluation of the KMP’s is carried out by the Board at the time of determining the variable component of their remuneration package on a yearly basis (2017 Corporate Governance Statement, 2017).
Wesfarmers also complies with ASX principle of developing an adequate board structure comprising of necessary skills, competencies and size to meet the strategic goals of the company. The corporate governance statement of the company has provided detailed information about the Board structure and composition. The company places strong focus on appointment of directors within the Board who can bring an appropriate mix of skills, experience and expertise for facilitating quick and accurate decision-making. The Board currently comprises of nine directors out of which eight are non-executive directors having different qualification and expertise. The presence of varied skills and competencies in the board ensures that it is able to carry out its roles and duties adequately.
As per ASX principle, a business entity should carry out its business activities in an ethical and responsible manner for promoting its sustainable growth and development. Wesfarmers have developed and implemented governance policies based on the principle of ethics such as honesty and integrity to ensure that all the operational activities are carried out in an ethical manner. The corporate governance policies are also adequately disclosed in the online website of the company. The Code of Conduct of the company also ensures that all the business procedures are carried out in a responsible way. The board regularly reviews the governance and code of conduct framework of the company to ensure that all business operations are carried out as per the stated standard behavior (2017 Corporate Governance Statement, 2017).
ASX listed entities should have a rigorous process for verifying and safeguarding the integrity in the corporate reporting. Wesfarmers have developed an Audit and Risk Committee for reviewing the internal control policies and practices that are developed for protection of integrity in the financial reporting. The committee conducts regular review of the business process to ensure the integrity of the financial information disclosed as per the nature of the business activities (2017 Corporate Governance Statement, 2017).
Wesfarmers in accordance with this ASX listed principle makes timely and relevant disclosure of information to its stakeholders that can have a material effect on the price of its securities. The company prepares and published its financial reports on an annual basis to provide relevant information to the end-users to assess its current and future financial growth. Also, it develops and publishes its sustainability reports on an annual basis to provide the required non-financial information to the end users about the nature of its operational activities. This is essential to promote the trust and confidence of investors that assists them in taking various types of decisions. Therefore, Wesfarmers makes timely and balanced disclosure of information to the end-users to assist them in their decision-making process (Fleckner and Hopt, 2013).
The business entities are required to develop proper policies and facilities for granting rights to the security holders as per the ASX principles and recommendations. Wesfarmers have identified the importance of protecting the rights of its shareholders as analyzed from its corporate governance statement. For this, the company ensures that the shareholders have the right to access high quality information trough the development of its program on investor engagement. The program aims to provide all the updated information about the share prices to the investors through the use of electronic communication (Plessis, McConvill and Bagaric, 2005).
There should be a presence of an effective risk management framework within the business entities to effectively identify, control and mitigate the risks. Wesfarmers have developed and implemented a risk management framework to identify, monitor and manage the material risks associated with its business activities. The management carries out the regular compliance of the daily operations as per the risk management system. The framework developed for mitigation of the risks is continually reviewed by the Board annually (Bazley, Hancock and Robinson, 2014).
ASX listed entities should develop an effective remuneration structure for retaining talented and competent directors and aligning their interest with the value for shareholders. The Board has developed remuneration committee for monitoring and evaluation of the remuneration structure of the senior executives. The remuneration structure is reviewed on an annual basis for monitoring the performance of the KMP’s adequately (ASX Corporate Governance Council, 2014).
Risk assessment is carried out in order to ensure that there is no material misrepresentation in the financial statement. Risk assessment is the important part of audit process and it is carried by the auditor before performing the audit work. The financial statement that are handed over to the auditor by the client must be free from any error and material misstatement as any material misstatement can lead to the audit risk and there will be impact upon the audit opinion (Auditing and Assurance Standards Board, 2009).
Risk assessment is the process taken by the auditors to identify and assess any material risk that can remain in the financial statement and other assertion level. The risk assessment procedure was processed by the auditor themselves that means this process will not provide any appropriate evidence through which the audit opinion can be modified. This procedure only helps to ensure that financial statement are free from errors and there remain no analytical errors in the financial statement that lead to incorrect auditor judgment (O’Donnell & Perkins, 2011)..
Risk assessment procedure consist of three main steps that are carried by the auditor themselves and these steps are inquires from the management, analytical procedures and observations and inspection. Risk assessment is the lengthy process as involves series of steps that auditor have to perform in detail in order to ensure that all the information provided to the auditor from the client is free from any material misrepresentation. Particularly in this report the risk assessment procedure has been carried out by the auditor of Wesfarmers but here only some steps have been incorporated, such nature of the company, market overview, business strategy, financial performance and audit risk. All these steps will be discussed in more detail in below section of the report (Auditing and Assurance Standards Board, 2009).
Wesfarmers is the popular retail company in Australia and it ranks among the top 5 in retail industry of Australia. It has major competition with the Woolworth as both companies operate at large level and has same segment of product and services that are delivered to the customers. The major goods that are sold at the retail stores of Wesfarmers are consumer goods, groceries, daily consumables, liquor, other retail items, apparels and goods of public needs. In addition to retail goods Wesfarmers is also engaged in providing additional services that are essential to keep the retail store running and it also provides some other services such as financial services, office supplies, home improvement and other similar services (Wesfarmers : Our Businesses, 2018).
Wesfarmers operates in highly competitive market as there are multiple players in the retail industry that operates in same segment as Wesfarmers do. On the basis of annual report it has been found that Wesfarmers hold more than half of market share in Australia itself and provides very huge competition to their competitors such as Woolworth etc. Wesfarmers is the multinational company that has retail store both in Australia and outside Australia. Due to presence of business outside home country there arise audit risks such as market risk due t high fluctuations in the exchange rate of countries (Wesfarmers : Our Businesses, 2018).
Business strategy refers to the action plan that is adopted by the company to achieve the success in the business through applying principles of integrity. The correct application of business strategies help to achieve the customer satisfaction and also increase the shareholders’ value. The Business strategies that are developed are by the Wesfarmers are helps to achieve the shareholders value and also all the business strategies are in line with the mission and vision of the company (Wesfarmers : Our Businesses, 2018).
In order to evaluate the financial performance of the Wesfarmers it has been decided to calculate the income and balance sheet ratios. The ratios are given as under:
Income statement ratio:
|
Gross profit margin: Gross profit /Net Sales |
Net profit margin = Net Profit/Net Sales |
|
Gross Profit (2017) = 21,656 AUD million |
Net Profit (2017) = 2,873 AUD million |
|
Net Sales (2017) = 68,015 AUD million |
Net Sales (2017) = 68,015 AUD million |
|
Gross profit margin Ratio = =31.84% |
Net profit margin Ratio = 4.22% |
|
Current Ratio: Current Assets/Current Liabilities |
Debt Equity Ratio = Debt/Equity |
|
Current Assets (2017) = 9,667 AUD million |
Debt (2017) = 4,066 AUD million |
|
Current liabilities (2017) = 10,417 AUD million |
Equity (2017) = 23,941 AUD million |
|
Current Ratio (2017) = 0.93 times |
Debt Equity Ratio (2017) = 0.17 times |
|
(Wesfarmers: Annual Report, 2017). |
On the basis of analysis of the financial statement and notes to accounts of the Wesfarmers the two main audit risks have been found they are market risk and credit risk. Market risk arises due to fluctuations in the exchange rate of currency in countries where Wesfarmers operate. It can be controlled through applying various financial control techniques like interest rate swaps and hedging techniques. Second audit risk that can be raised due to the credit risk which arises due to shortage of liquidity in the company. It can be overcome by maintaining proper liquid assets that is required to pay the short term liabilities (Putra, 2010).
Conclusion
Thus, it can be stated from the overall discussion in the report that Wesfarmers have effectively complies with ASX CGC principles and have developed an effective corporate governance framework. Also, it has subsequently developed risk assessment procedures for mitigating the audit risk that have a materialistic impact on its financial performance.
References
2017 Corporate Governance Statement. 2017. Wesfarmers. Retrieved 24 April, 2018, from https://www.wesfarmers.com.au/docs/default-source/corporate-governance/2017-corporate-governance-statement.pdf?sfvrsn=2
Auditing and Assurance Standards Board. (2009). Auditing Standard ASA 520 Analytical Procedures. Retrieved 24 April, 2018, from https://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf
Bazley, M., Hancock, P. and Robinson, P. (2014). Contemporary Accounting PDF. Cengage Learning Australia.
Fleckner, A. and Hopt, K. (2013). Comparative Corporate Governance: A Functional and International Analysis. Cambridge University Press.
O’Donnell, Ed & Perkins, D. (2011). Assessing Risk with Analytical Procedures: Do Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns? Auditing; Sarasota 30 (4), pp. 273-283.
Plessis, J., McConvill, J. and Bagaric, M. (2005). Principles of Contemporary Corporate Governance. Cambridge University Press.
Putra, L. (2010). The Use Of Analytical Procedures In Auditing. Retrieved 24 April, 2018, from https://accounting-financial-tax.com/2010/04/the-use-of-analytical-procedures-in-auditing/
ASX Corporate Governance Council. (2014). Retrieved 24 April, 2018, from https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf
Wesfarmers. 2018. Our Businesses. Retrieved 24 April, 2018, from https://www.wesfarmers.com.au/our-businesses/our-businesses [Accessed on: 24 April 2018].
Wesfarmers: Annual Report. 2017. Retrieved 24 April, 2018, from https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4 [Accessed on: 24 April 2018].
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