Case Study On Ethical Issues In The Australian Retail Industry
Abstract
The case describes ethical issues, strategies used by company to bargain, misuse of power, changes in business model and remuneration systems in the Australian Retail Industry. Real life examples from retail industries are explained with their outcomes for future rectification. It describes the role of accountants in challenging circumstances. The case was analysed thoroughly, and main issues were highlighted after much discussion with peers and consulting the Unit Convenor. Ample research had to be done to prepare the report. Various methods were used to analyse the issues and provide solutions for problems faced by the retail industry. Information was gathered from accounting frameworks, accounting books, peer-reviewed articles, financial reports. The links are available through the reference list at the end of the report. An accounting professional’s role does not just involve entering data into a computer. Few skills were developed whilst analysing and responding to the issues. In formulating responses from a professional’s point of view, problem-solving and critical thinking skills had improved. Information needed to respond to question was collected from various sources and therefore, the research skills had to be used and developed over time. Key issues relating to the questions have been written and it involved a great deal of thinking. Whilst responding to the questions, it was found that senior management tends to act unethically to increase the profits of the company.
Introduction
The case describes ethical issues present in the Australian Retail Industry while earning profits. The retail industry marker in Australia is an Oligopoly, with major players being Coles and Woolworths. Aldi, who is growing at a significant rate id primarily due to lower prices goods. This is affecting the performances of the two strong retailers. According to Australian Bureau of Statistics, the retail industry has witnessed a decreasing trend in the last five years with a lowest being 1. 9% in October 2017, but is forecasted to be 3. 70% in 12 months’ time. Online sales have been a key factor in diminishing sales. Implementation of new business models has increased their cost of operating and decreased their profit margin. In addition, there have been cases of unethical business conduct by retailers for the benefit of the company. Such behaviours can lead to very hefty fines.
On one side of the market are the retail powerhouses in Australia struggling to maintain profit levels, and on the other side are the suppliers who cater to the demands of retailers but do not earn adequate remuneration from their service. Inflation in prices of goods has not been popular among consumers, and have rightly opted to shop online. This change in consumer’s behaviour has forced retailers to develop strategies to avoid the possibilities of losing profits and even going out of business. The major players who are responsible for making such decisions are the Chief Executive Officers (CEO’s) and Chief Financial Officers (CFO’s). The retail industry is very big and it is hard to manage and control employee’s actions. Every employee must act honestly and in good faith. Government authorities and independent auditors ensure that all the decisions made by them are ethical in nature and is under legislation. Accountants play a major role in the preparation of financial reports and audit statements. It is expected of them to follow the APES110 Professional Code of Ethics, in making decisions. There are a few key issues highlighted in the case which affects the industry on the whole. Misuse of power by the retailers plays an important role throughout the case. To increase the profit margins, the cost of operations is reduced by ordering products from underdeveloped countries with low labour costs. In addition to these actions, negotiations with suppliers are well structured with high volume purchases and promotional rebates, yet their payments are often delayed to show favourable financial positions in the books. From the case, it can be found that there is a lack of transparency in the supply chain. The case places emphases on the issue of audit fraud, where the workers are forced to provide misleading information to independent auditors.
Good Faith
The Food and Grocery Code of Conduct states that retailers and wholesalers must commit to acting in “good faith” with their current as well as their potential suppliers. The code applies at all stages – placing an order, making payments and while settling disputes. Although it does not provide a specific definition on the term ‘good faith’, it does mention that the obligations reflect the ‘common law’. The retailers and wholesalers should practice their powers with care and within the agreed upon terms between the parties with complete transparency of transactions. There should not be any ulterior motives and must not act in a way that makes the suppliers feel pressurised or threatened or weakened in the professional relationship. The needs and risks of suppliers such as trading costs and payments must be understood, this however does not mean that retailers must always act in supplier’s interest. It is also expected that suppliers act with honesty and good faith towards their retailers and wholesalers.
Voluntary Code
Prescribed under the Competition and Consumers Act 2010, the Food and Grocery Code is a “voluntary” code. It has been signed by and submitted to the ACCC by only four companies to date. The code was written to increase consumer protection and reduce regulatory problems of a business. Competition in the market, control and sanctions for non-compliance must be considered prior to implementation of the code. The Australian retail industry is an oligopoly market, there is far too much power amongst them. There are numerous suppliers who lack support and power over them. Since there a limited number of top retailers and wholesalers, this code cannot be enforced industry-wide, unless there is another legislation which provides equal strength and opportunity for all and in dealing with each other.
Misuse of Power
It is vital for the high-level hierarchy to understand the dynamics of the power they possess. Strategies on dealing with the after-effects of executing certain decisions must be formulated. There exists a lot of power over suppliers and consumers in the Australian retail industry. There is always a right way of utilising power without undermining other parties involved. The situations of other parties must be considered while dealing with transactions. Unethical decision making should be avoided at all costs as it can be reported to a higher body and there could be serious repercussion. It would not be a good role model if management is involved in misuse of power to make decisions that solely benefits their company.
Delaying payment
There is always pressure from senior level management of the company on matters that might help the company but not necessarily all the other parties involved. There is a clear misuse of power to gain an advantage for the company and show better results. An accountant in Australia must adhere to the APES110 Code of Ethics whilst providing professional services. In this situation, there are two possible options which provide contrasting results while choosing to delay the payment and be unethical or go against the CEO and risk the job security. The approach taken would vary from person to person depending on their perspective of the situation. However, it cannot be stressed enough to act in good faith and not allow undue influence of others to affect professional judgement. It would be a wise decision to pay the supplier on time to continue to have a healthy relationship in the future.
Employment conditions
The culture, society, and political situation around the world is not the same and it is very challenging to apply specific developed country standards of employment conditions to less developed countries. In addition, there is always a fear of implementing something new and companies are not ready to take on such a risk. Nevertheless, some of the frameworks can be tested out to see if it fits the nations working culture. Certain Human Resource frameworks, disaster management, and workplace safety training can be adapted to treat employees in a better manner. The International Organisation for Standardization (ISO) has formed a general framework and is committed to help developing countries. They help to strengthen the infrastructure through specific strategic assets. Additionally, ISO aims to provide International Standards projects that portray sustainable development issues of particular importance and provide support through active participation. For accountants, Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), can be used a guide to create an appropriate framework for the developing countries and less developed countries. It is also important that accountants code of ethics be applied and followed almost worldwide for honest and professional reporting.
Cost leadership modelIt is tricky to make profits when the prices charged are low. As mentioned earlier, retailers and wholesalers must consider and understand the risks of their suppliers that might potentially affect the company. If the suppliers go on strike due to low wages, it will affect the retailer’s and wholesaler’s inventory, which in turn affects their profit-making ability. According to OxFam, consumers are willing to pay more for better wellbeing of the workers. Having this in mind, a cost leadership strategy can be utilised by a company and can create awareness of helping the under developed countries’ workers. If there is complete transparency about the cost of producing, consumers would be aware of how their money is being used by companies, this could help increase the goodwill value of the company. If there is an increase in goodwill, there would be an increase in the number of sales (at low cost, due to cost leadership) and this would increase the overall profit of the company. It also creates awareness and helps to stand out from competitors and would give them greater marketing power to demand price concessions from suppliers as more products would be purchased.
Audit fraudAn auditor must follow the code of ethics and make sure that any information and make sure information provided by the company is accurate and supporting evidences are provided to back up the statements. There exists “audit frauds” where workers are trained to provide false information. If an auditor recognises that false information has been provided, it is a difficult task to convince the workers to provide honest information. The workers fear their job security; therefore, a soft talk approach must be used while conversing with them. Advising them on the consequences of their actions in private without any of any supervisors’ presence can help to sway the workers to act in an honest manner. If there is evidence of any wrongdoings, there is a chance of the company to be liquidated. This would result in bad reputation and workers would risk losing their jobs. Prior cases of such wrongdoings can also be used to make the workers realise the consequences of behaving in a fraudulent manner.
Integrated reportingIntegrated Reporting elevates consistency while providing an efficient approach to reporting. It operated to increase the quality of information available to financial capital to enable a more efficient and productive allocation of resources and relationships within the organisation. IR helps stakeholders by providing information about the organisation’s capital and explains how it can create value over a period of time. Integrated thinking creates accountability on a range of activities like use of capital, remuneration policy, impact on stakeholders and past, present and future performance. It helps to improve integration of information systems for both internal and external communication and reporting. If details about the organisation’s performance and remuneration system is disclosed to the stakeholders, they would have the possibility of better interpreting the organisation’s future and make a well-informed decision about the company.
Remuneration at risk
The “at risk” component refers to the gap between their short- and long-term remunerations and the fixed salary of key management personnel’s, the former being comparatively higher. There is a conflict of interest between the shareholders and managers of the company because the managers do not act in the interest of the shareholders. Agency theory can be applied here to resolve such issues. If the fixed base salary is a management personnel or remuneration, then they only act in in the interest of themselves and aim to earn more money. Whereas, if the majority of the remuneration is paid through short and long-term incentive payments, then they would understand the shareholders aims and will work towards maximising shareholders wealth. However, the equity component of CEO’s must be calculated carefully, making sure they do not possess majority of the interest in the company, which will grant them more power in making decisions for their own interest.
Stakeholders
A person or group of people who are interested, concerned and affected by the company’s functioning are the stakeholders of a company. In the large supermarket industry, stakeholders comprise of shareholders, management, employees, customers, suppliers, government authorities involved in regulating processes, financial institutions which provides loans and deal their transaction, traders from international market. There is a Corporate Social Responsibility (CSR) present amongst each stakeholder to provide a positive impact on society. CSR is a voluntary approach by business to showcase their ethical values and compliance with legal requirements, and respect for communities and people, and the environment. Decisions mad by the management of the company will affect each stakeholder in a specific way according to their relation with the company. There is comparatively less risk of breaching laws and portraying poor performance if a company basis decision on available ethical guidelines. In today’s times, reputations must be maintained to retain and appeal to stakeholders to keep the business running successfully. This can be done through ethical behaviour.
Conclusion
Although there have been many cases against the retail industry, they continue to make unethical decisions. To control the cost of the products and reduce the selling price, the only approach taken by them is to negotiate costs using creativity from the suppliers. High volume purchases and promotional rebates are two main ways used to delay supplier payments. The case of Dick Smith group serves as a strong example in which their resilience on supplier rebates led to liquidation. Being an oligopoly market in Australia, the retailers show little to no mercy in using their high level of power against suppliers. There have been various instances of poor decision making leading to decline in their performances. The food and Grocery Code od Conduct administered by the ACCC is signed and followed by the major organisations. This provides as guideline to the retailers, but there are other possible methods that can be implemented to push boundaries to achieve cost advantages. Coles recently were brought into legal actions due to their misuse of bargaining power with suppliers.
The retailers seem to be ignoring consumers and are focusing primarily on reducing costs, by ignoring consumers they run the risk of impairing their goodwill. There a few frauds specific to audits in some companies, which makes it hard for independent auditors to provide accurate reports. Therefore, additional controls need to be considered for financial business practices and uncertain management. Control of remuneration part of the key management personnel plays an important role in decision making of the organisation. It was found that senior management act in the best interest of the company and its shareholders if their short-term and long-term incentive plan comprise majority percentage of their remuneration compared to their fixed salary. This helps them to understand the market situation and make decisions accordingly. The problem of agency can be reduced by using this method. Retail industry is a very competitive market, this is one of the reasons employees are forced to make unethical decisions. Profit-driven decisions are found to be nearly worthless. Accountants play a major and challenging role in making ethical decisions. Integrated Reporting and APES110 Code of Ethics are a couple of frameworks that provide requirements to make ethical decisions in the society.
