Corporate Governance Principles and Compliance Implications

Discuss about the Auditing of Woolworths Group Limited.

Woolworths Group Limited is a major retailer company operating its business in Australia. It is ranked second largest in Australia in terms of revenue, after Wesfarmers. The company servers in the areas include Australia, India and New Zealand. It reported a loss of $1.235 billion in  2016.  Woolworths is publicly listed on the ASX and has ticker symbol WOW.AX. The company totally compliance with the Corporate Governance Principles laid down Australian Securities Exchange (Woolworthsgroup.com.au. 2017).

Corporate Governance set down the rules, regulations, processes and systems through which authorities are controlled and exercised within a corporation. It lay down some principles which are required to be complied by every ASX listed company. However, there are several impacts also, if the principles are not complied with and are not followed (Shinewing.com.au. 2015). They are as follows:

• Woolworth is obliged to show its director’s and management’s roles and responsibilities in its statement.
• The company has to amend the structure of its board which includes its size, composition, skills and commitment to fulfill the duties.
• Woolworth must act ethically and responsibly. Its operations must be ethical in nature.
• Safeguarding the integrity in corporate reporting is the responsibility of the company which is to be fulfilled as per the principle.
• It is compulsory for Woolworths to disclose each and every matter timely with a view that it may impact company’s securities’ prices and values.
• Woolworth is obliged to give appropriate information to its shareholders in order to respect their rights and allow them to exercise the same effectively.
• A risk management framework is required to be established and timely review of the same is needed.
• Woolworth is liable to pay fair remuneration to its directors and must retain high quality executives in the business according to the CGC principles (Asx.com.au. 2014).

Apart from the above implications, Woolworth’s Corporate governance statement clearly reflects that the company’s key corporate governance policies and practices during the year 2017. It is said in the report that, Woolworth has followed each of the recommendations of the ASX Principles and Recommendations. The eight ASX principles applied by Woolworth are as follows:

The role of board of directors is been clearly represented in the governance statement of Woolworths Group Limited. The role includes serving the shareholders in their interest, accountable to them for the strategic direction taken to increase their value and implementing the approved strategy and delegating it to the management through CEO. Along with the role, responsibilities of Woolworth’s board of directors is also clearly mentioned in the statement. The statement represents the following responsibilities of company’s board of directors. It includes:

• Reviewing and approving the strategic policies.
• Monitoring the annual budgets, activities and measuring the financial performance.
• Company’s financial statements approval; review the process of integrated reporting followed by the management.
• Performance evaluation of board and individual directors on annual basis.
• Performance evaluation and selection of CEO.
• Planning for the succession and remuneration for CEO, executive and non-executive directors.
• Considering the social responsibility and ethical behavior of the company towards the environment and society.
• Monitoring Woolworth’s activities and approving major capital initiatives and expenditures.
• Reviewing and monitoring the Company’s governance policies and practices.

All the above listed duties are duly followed by Woolworths’ board of directors and are clearly mentioned in firm’s  corporate governance statement (Woolworthsgroup.com.au. 2018).

Board structure

There are majority of non-executive directors in Woolworth’s board, who pursue competent skills to fulfill all their responsibilities with due knowledge and experience.

Skills and composition of Board

Woolworth’s directors has wide range of different skills, backgrounds and experiences which are important for taking crucial decisions for the company and making the governance effective. The board is capable of regularly reviewing the current and desired skills and capability of the directors along with their experience. The key skills and experience include:

• Retail market knowledge and experience of customers need in merchandise sectors.
• Experience in defining strategic objectives, assessing business plans and commitment to corporate governance standards.
• Commitment to CSR, sustainability initiatives and proactive management approach towards workplace safety, mental health and physical care.
• Expertise in adopting new technology, understanding financial drivers, identifying the legal and corporate issues or affairs and anticipating the key risk to the organization.
• Capable of making effective risk management frameworks (Woolworthsgroup.com.au. 2018).

The core values and code of conduct followed by Woolworth defines the standards of behavior expected by the people. The group’s core values include:

• People of the group care deeply
• They listen and learn
• They always do the right thing.

Corporate Governance Statement of Woolworths Group Limited

The code of conduct of the company is applied to all directors, employees and management of Woolworths in order to act and work ethically and responsibly. The code of conduct ensures that honesty, integrity and fair dealing is prevailing in the company by its people. Woolworth also complies with its corporate responsibility by following the related strategy.

An audit and risk management committee is framed, whose chairman is Michael Ullmer. The committee comprises of minimum three directors and majorly independent. It is responsible for safeguarding the integrity of financial reporting. The committee overview and review the quality and effectiveness of the external audit. It also checks the issues related to financial reporting and assess the appropriateness of accounting policies (Woolworthsgroup.com.au. 2018).

Woolworth has made a process which allows the company to provide shareholders with timely and balance disclosures. It enable them to give the relevant information as and when required. Woolworth has continuous disclosure policy which aims at complying with the disclosure regulatory requirements, clarifying the accountability of senior executives and promoting the investors’ confidence.

The shareholders and security holders are given all the information through the official website of the group. The website displays the ASX announcement, financial and CSR reports, dividend and share price history and other data important to shareholders. The Company’s ASX announcements and related reports can also be seen on its official website.

Woolworth also has investor relations program that focuses on effective communication with investors, analysts, media and proxy advisors.

Being complex group of business, Woolworth is exposed to various financial, strategic, operational and compliance risk. It has a risk committee which recognizes and manages all the types of risk associated with the company. It has a framework for the same which deals with managing material risks of conducting business.

Woolworth Group has a committee named as people performance, which is responsible for the issues related to Company’s remuneration policies. It review them to ensure that it is competitive and designed to attract, and retain employees (Woolworthsgroup.com.au. 2018).

Woolworth Limited is a major Australian retailer, originated in 1924 in Sydney. The company mainly focuses on the minimization of prices and increasing the quality of the products. The group has employed many strategies to achieve its set targets and is now putting more efforts to maintain customer satisfaction, in order to achieve growth and revenue in future. Woolworth has a variety of products and also its position helps the business to gain future growth. Along with this, their supply chain management is also really good (Reuters.com. 2018).

Board of Directors and Responsibilities

As per the Deloitte report, Australian retail market has experienced new entries in the market such as American retailer, The TJX Companies Inc., UK department stores John Lewis and Debenhams and French leisure good retailer Décathlon. This is due to the strong economic conditions of Australia and higher demand for international brands. The report also said that the only two retailers in Australia that appeared in top 250 global retailers list are Wesfarmers and Woolworths. However, the Australian retailer are fighting back with the investments in concept, store design and flagship stores. Therefore, Woolworth is trying to attract customers by providing them in store services and also enhancing their online shopping experience. This will help the company to compete with the new competitors (Deloitte Australia. 2017).

The business strategy of the group is pretty simple. The company is focused on satisfying its customers to a great extent. In order to achieve this goal, the group has establish a BIG W team that will execute the new business strategy. The team is focused on upgrading the trust of the consumer on price and delivering right and good quality products. BIG W follows a simple strategy to achieve the predetermined goals. It deals with reduction of cost, improvement of the process, development of single team which will work in an integrated manner and update of product offerings. In addition to this, development of cohesive brand and refreshing the stores are the strategies followed by Woolworths.

Income statement ratios

Gross Profit margin	Gross profit /Net sales	29%
Net profit margin	Net profit / net sales	3%
Operating profit margin	Operating profit / Net sales	-16%
Earnings per share	Net income / Number of outstanding shares	1.19
Return on Equity	Net income / shareholders’ equity	16%

(Financials.morningstar.com. 2018).

Current ratio	Current Assets / Current liabilities	0.79
Quick ratio	Quick Assets / Current liabilities	0.29
Debt-equity ratio	Debt / Equity	32%
Days Sales Outstanding	(Receivables / Revenue) x 365	3 days
Days Inventory Outstanding	(Inventory / COGS) x 365	37 days
Days Payable Outstanding	(Accounts Payable / COGS) x 365	47 days
Cash Conversion Cycle	DIO + DSO – DPO	-6.38627
Receivables Turnover	Revenue / Average Accounts Receivables	32.98
Inventory Turnover	COGS / Average of Inventory	2.30

(Financials.morningstar.com. 2018).

Inherent risk, detection risk and control risk are the three basic audit risk that prevails in an organization. Woolworth is mainly exposed to inherent risk due to the less cash balance and reduced profit. This situation mainly arises due to the error or omission in a financial statement because of some factors. Woolworth has a negative cash conversion cycle and has a NPR of 3% only. Also the company has negative operating profit and high payable and inventory days in the year ending 2017. Overall. The position of the company has degraded in last year due to the inherent audit risk associated with it. Also being a multinational company, the various environmental and external factors increases the group’s inherent risk (Loughran, 2010). 

There are several ways to reduce these risk. One of the way to reduce it is to bring harmonization in the auditing and accounting standards followed by the company. Another is that Woolworth can improve and enhance its internal control system by critically reviewing the roles of its Audit and Risk Management committee. Inherent risk is basically founded in the financial statements, so it is necessary for the company to hire qualified accountant in order to avoid such risk.

Disclosing the proper notes to statements is another way by which a company can minimize such risk. If the notes are properly disclosed, auditor can easily review the transactions made in different accounts. Woolworth can also recheck its double entry system to make sure that no omission or error is there (Knechel and Salterio, 2016). 

Conclusion

The above report concludes that Woolworth Group Limited completely complies with the ASX Corporate Governance principles. Its statement on corporate governance listed the details of its board of directors and its compilation with the ASX eight CGC principles. The report also find out that having such a complex structure, Woolworth is exposed to the inherent risk, which is a type of audit risk. The risk is been assessed by calculating the relevant ratios and common size statements. Ways of minimizing or reducing it are also explained in the later part of the report.

References

Asx.com.au. (2014). Corporate Governance Principles and Recommendations. [Online] Available at: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf [Accessed 29 April 2018].

Deloitte Australia. (2017). 2017 set to be ‘fascinating’ year for Australian retail | Deloitte Australia | Global Powers of Retailing 2017. [Online] Available at: https://www2.deloitte.com/au/en/pages/media-releases/articles/2017-set-to-be-fascinating-year-for-australian-retail-240117.html# [Accessed 29 April 2018].

Financials.morningstar.com. (2018). Balance Sheet for Woolworths Group Ltd (WOLWF) [Online] Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=WOLWF&region=usa&culture=en-US [Accessed 29 April 2018].

Financials.morningstar.com. (2018). Income Statement for Woolworths Group Ltd (WOLWF) [Online] Available at: https://financials.morningstar.com/income-statement/is.html?t=WOLWF&region=usa&culture=en-US [Accessed 29 April 2018].

Knechel, W.R. and Salterio, S.E. (2016). Auditing: Assurance and risk. 4^th ed. Routledge.

Loughran, M. (2010). Auditing for dummies. Indiana: John Wiley & Sons.

Reuters.com. (2018). Woolworths Group Ltd (WOW.AX). [Online] Available at: https://www.reuters.com/finance/stocks/overview/WOW.AX [Accessed 29 April 2018].

Shinewing.com.au. (2015). ASX Corporate Governance Principles and Recommendations. [Online] Available at: https://www.shinewing.com.au/thinkbig/read/asx-corporate-governance-principles-and-recommendations/ [Accessed 29 April 2018].

Woolworthsgroup.com.au. (2017). Annual Report. [Online] Available at: https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed 29 April 2018].

Woolworthsgroup.com.au. (2018). CORPORATE GOVERNANCE. [Online] Available at: https://www.woolworthsgroup.com.au/content/Document/Woolworths%20Group%202017%20-%20Corporate%20Governance%20Statement.pdf [Accessed 29 April 2018].