The analyzed case study refers to the Hollate Manufacturing company, which belonged to the home construction industry since 1950s. The company operated in the United States and Canada with 14 divisions spread throughout the countries. Hollate’s performance was significantly better than its peers, resulting in $1 billion sales. The company maintained its growth over the years due to growth-through-acquisition strategy. However, the home construction industry suffered downturn in recent years. Hollate manufacturing faced a problem with audit as far as with personnel.
Four suggestions are given along with answer to the question how to avoid alike situations. Problem statement After initial public offering Jack Brennahan took the position of the chief executive officer in the company. It resulted in hiring an experienced and well-educated William Blackburt, who took Brennahan’s former position as chief financial officer. Subsequently the board was reorganized and the board committees were created. The rapid growth of the company was not followed by hiring more auditors and had only four at that time, moreover, internal audit did not test financial reporting.
Jonas Durand, the chief audit executive met often with the CFO instead of with audit committee. The CEO seemed too optimistic about the downturn ending soon. Additionally, new external auditor took Hollate as its client. Data analysis: Members of the audit committee, apart from chair of the audit committee, were not well-versed in accounting rules, even the basic ones. The suggestion of providing them with instructions in basic accounting matters was rejected. This was a serious case, as audit committees should be aware how Hollate’s books were constructed, so they could justify its correctness.
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Furthermore, the CAE failed to hire more internal audit personnel and had difficulties in fulfilling his tasks in time, which was a serious issue because Duran could not cope with amount of tasks he was given. He met regularly with the CFO asking him questions, when he did not understand something. That caused Durand to have little communication with audit committee to which Blackburt reported on Durand’s behalf. What is more the CEO did not want to make huge cuts due to downturn, as he believed it would end soon and wanted to be prepared for quick return to full capacity production, therefore, personnel as worried of losing their jobs due to tough competitive climate. Due to continuous downturn in the industry Hollate’s performance started to slip. Previously taken $150 million credit line to finance acquisitions was violated as the company failed to meet covenants. As fourth quarter earnings were to be announced the new external audit company LPS LLC started to ask questions about unexplained accounting transactions to which they did not receive answers nor from controller nor from Blackburt, who was believed to know everything about Hollate’s financials.
This was a serious situation as figures in the journals turned out to be significant and Blackburt acted with anger and frustration, which was not common for him. Solutions to the problems: The CEO should organize the accounting course for all those in the board, who are unfamiliar with accountancy rules and make sure the audit committees are fully capable of understanding it and it sources. Additionally, more personnel in the internal audit should be hired to assure its tasks being completed correctly and in the full extent.
Share-based compensation are avenues used to give employees equity rights into a company. There are two types: stock options and restricted stock. The reasoning for employees to have share-based benefits, according to Basu (2014), “is that if they all have a stake in the value of the company's shares, they may try harder to drive sales, profits and other financial metrics that investors and ...
Moreover, it has to be assured that controllers always respond to external auditors questions, so a situation like mentioned above never occurs again. The CEO should take a precise insight into William Blackburt’s actions. It is highly recommended that the CFO does not interfere with the CAE’s job to provide feedback directly to the audit committee. Moreover, the company’s strategy should be discussed to assure that COO, marketing and sales VP and general counsel do not take passive roles.
Additionally, the CFO should not focus so greatly on opposite strategy as presented by the CEO, as now the CEO wanted to maintain secure growth via acquisitions, securing gap in production and more geographic coverage, and on the other had the CFO wanted only more and more new acquisitions, which was not the right approach because his subordinates may have been confused about company’s strategy.
Most importantly, the external audit should be given straight answers to their question to be fully aware of Hollate’s situation, as far as the company is quoted on the stock exchange and there is no place for uncertainty in the books or even a small suspicion of a fraud. Actions mentioned above should be implemented quickly to secure Hollate’s market position.
Q1. First move of Jack Brennahan should be to investigate the reasons why did William Blackburt and the controller refuse to answer the questions asked by external auditors, followed by clearing out the uncertainties in the books which were a subject of concern to them. Q2. Hollate ended in situation like that due to