ANSWERS TO THE CASE STUDY FINANCIAL REPORT ANALYSIS

Q 1. Pifco-Zen Chen Cos managers have involved themselves with window dressing the companys financial statements for their own gains (e.g. extra payment on the net profit of the company, that is , besides their basic salary). The managers have behaved in a very dishonest manner to give a false impression on the companys financial performance. The Chairman did not have proper controls set in the accounting system that would prevent such happenings taking place. Q.2 Certainly, when all the financial adjustments have been made to correct the sate of affairs, the company ends up in a very poor financial standing. The companys accumulated profit of US$ 46 million has been turned into a Net Loss of US$ 18 million. It means that the total manipulation of the transactions amount to US$ 64 million. Q. 3 The major problem of this companys management is that the Chairman had relied too much on the professional judgment and honesty of the three managers. The company risk of loosing more money and perhaps of a take-over bid, when the news filters in the market. The New Star Company Limited also runs the risk of its own demise that customers would not trust the three owners, when they will get to know the financial manipulation of Pifco-Zen Chen Company Ltd. Q. 4 Please find attached a copy of the revised financial statement of Pifco-Zen Chen Company Ltd after the necessary adjustments have been made with the exclusion of the US$15 million, which should appear as a capital commitment (off-balance sheet financing). The companys Net Worth position has been reduced quite considerable from US$136 million to US$ 72 million.

Q. 5 Normally, when such a development takes place, the entire responsibility should be attributable to the Chairman as the Head of the Company and all the other directors. It is the Board of Directors responsibility to ensure that the company, which they are managing from a strategic level, must perform in the best interest of all the stakeholders (e.g. shareholders,. employees, customers, suppliers, Government, media, Taxation, Competitor, Bankers, Financial Analysts, Community). Q. 6 The External Auditors have a prime duty to ensure that a thorough job is performed on its clients books of accounts and records so that the financial statement reflect the true position of the client at a particular point in time. They also have a responsibility to perform their professional audits in the best interest of all the stakeholders and to report any abnormal findings in its audit report with fear or favour. They should act as the watch dog in preventing an fraud or manipulation of accounts by any agent of the company that they audit. In the event that they are prevented or constrained to perform their audits with the full and uncompromising professional ethics, they should resign and make known their reasons. Q. 7 The responsibilities of the Internal Auditors defer from that of the External Auditors that they report their audit findings to the Board of Directors for necessary actions. They should ensure that there is a sound internal control system and that the employees must abide by the internal rules and regulations. Monitor and verify the authenticity of the transactions that they reflect their stated value in accordance with International Accounting & Auditing Standards. Be in constant touch with the Board of Directors through regularly reports and highlight the necessary administrative adjustments that will allow a business to function in accordance with its stated objectives and mission. Q. 8 The Board of Directors of Pifco-Zen Chen Company Ltd reserves the following rights of actions against the three managers:

(1) Request that they return all the extra benefits being paid as a result of the manipulation of the figures. (2) Bring a court case against them for professional negligence and theft. (3) Request for an in-depth report as to when the actions to window dress the financial statement started. Q. 9 Chairman Wans lesson from this scenario can take different dimension. (a) Learn from his past mistake not to trust the figures only (b) Pay much attention to his/her Internal Auditors comments (c) Be more pro-active in the management of the business (d) Request for regular financial statement and deep analyses of the market and the companys cost structure (e) Watch for the physical movement of trade (f) If unable to rectify those actions, then he should resign from his position and allow another person to carry on with the business.
Corrected

Net Fixed Assets Investment in Subsidiaries Current Assets Stocks Debtors Prepaid Expenses Bank Deposits (7 Day Call Account) Cash at Banks Petty Cash Less: Current Liabilities Creditors Accurals Short-Term Debt Overdraft Balance Net Current Assets/(Liabilities) Total Net Assets

US$ (million) 45 30 US$ (million) 125 90 40 60 30 1 346 45 30 55 75 205 141 216

Figure 45 30 100 81 33 60 27 1 302 45 30 65 85 225 77 152

Financed by: Long-term Debts Capital Accumulated Profit/(loss) until 1975 90 46 136

80

80 90 -18 72

216

224