Leslie Fay Case Study - Essay Example

04 October 2006 Leslie Fay Case Study Section In order to gain a deeper understanding at what happened at the Leslie Fay Companies, I have been tasked to analyze the business organization by answering ten key questions. The first four are geared in the strategic aspect of the firm. As with any company analysis, it is crucial to know and understand the mission of Leslie Fay as this statement defines what the company is, its inherent values and culture, as well as its future prospects. Next, I have been tasked to examine the company’s business model. After this, I will look at how Leslie Fay intends to achieve its mission by analyzing its strategies. Since technological development has become the major driver of changes and trends in the business arena, I will also look at the role of technology in Leslie Fay. In the next section, I am assigned to study the matters which are more relevant to the audit failure. First, I will examine the complexity of Leslie Fay’s operation and accounting and its corporate governance. It should be noted that in most accounting fiascos, these matters surface as the most significant causes and motivation for financial reporting fraud. By looking these, I will be able to determine the inherent risk in the company’s system. Lastly, I am also assigned to render a financial analysis of Leslie Fay two years prior to the audit failure. In order to examine its financial health, I am also tasked to compare the business organization by benchmarking it to two other firms. Based from all the analyses laid out from the previous section, I am asked to offer an explanation of what went wrong with Leslie Fay. Lastly I will render my own recommendations on how the audit failure might have been prevented. Section 2. These are my conclusions and answers to the questions posted above: Prior to the audit failure, Leslie Fay’s mission is to design, manufacture, and sell moderately priced and stylishly conservative women’s dresses. The company’s product lines are targeted to women aged 30-55 years old. Even though indirectly stated, the company has no plan of changing its products in order to cope with the emerging trends. The company opts to stick with its current fashion statement. Leslie Fay has been employing a brick and mortar business model. Prior to the fiasco, it can be recalled that this business model has been prominent due to the absence of the level of technology to sell and design online. In this business model, Leslie Fay offers high value clothing at a moderate price aided by its wide network of distributors. Leslie Fay gains shelf-space by capitalizing on its prominence and size in the clothing industry. In order to pursue its vision of staying on top on the industry, Leslie Fay utilizes a strategy of designing and manufacturing products by trusting the instincts of the designers. It should be noted that as opposed to other industry players which rely to customer preference, the business organization opted to create what is fashionable for the customer. The whole marketing mix of Leslie Fay can be stated as offering fashionable clothing at moderate price in department stores and enhancing customer experience by offering seasonal discounts. Armed with this strategy, Leslie Fay captures its market niche and creates strong brand equity. In terms of financing, the firm relies both on liabilities and equities. It can be recalled that Leslie Fay banked on its prominence and profitability and went public in as early as 1952. I have reached the conclusion that technology is seen as insignificant in the operation of Leslie Fay. It can be seen that Pomerantz preferred to maintain the traditional culture in the business organization. This includes being aversive to technological advancement. Because of this, Leslie Fay has been slow in integrating computers in its internal functions. For example, Leslie Fay sticks with the practice of monitoring the level of its merchandise in department stores by calling its distributors in a weekly basis. As the company’s leader insist on doing things the “old-fashioned” way, Leslie Fay lags behind its major competitors who have began upgrading their technology. While data processing and other internal functions are being efficiently conducted through the use of modern technology, it can be recalled that Leslie Fay’s data processing was done manually. I conclude that there are complexities in Leslie Fay’s accounting and operations. First of all, the company needs to account for its manufacturing process, its finished product, and its merchandise which are in the distributors’ warehouses or shelf-space. Much of the complexity can be directly traced to the company’s aversion in utilizing modern technology in order to boost the efficiency of its accounting processes. It is hard to imagine how a large firm like Leslie Fay prepares its financial reports by looking at various receipts from the company’s operation department and its customers. With this backdrop, Leslie Fay’s accounting must be very tedious and prone to errors. This also increases the possibility of entering erroneous figures. The location of the company’s corporate headquarters and its accounting office poses difficulties in monitoring the activities of the accounting office. Consequently, the accounting office cannot easily access the records of the operations department because the receipts still need to be transported to them. The distance and the lack of technology significantly hinder Leslie Fay in making its accounting processes more efficient. Leslie Fay records a lot of lapses in terms of corporate governance. Before the audit failure, it can be seen that the board of director and the president of Leslie Fay Pomerantz maintains a very tight relationship with Polishan. It can be seen that since the board has been biased in choosing Polishan as the Chief Finance Officer (CFO)and senior vice president for finance. As a mere human being, the decisions of Pomerantz in any issue which regards to Polishan will be significantly biased. Pomerantz is more inclined to favor every decision of Polishan than to reprimand. It can also be seen that basic corporate governance rules out the integration of the offices of the CFO and senior vice president for finance. As Polishan is imbued with both positions, he has a significant control on the company’s financial reporting. This situation indicates the lack of control to monitor the reporting in Leslie Fay’s accounting department. Being the CFO and senior vice president for finance in the business organization, Polishan can easily influence the financial reporting. As evidenced by the Leslie Fay case study, Polishan has created his own territory (the Poliworld) where his every command is followed by his subordinates. This is worsened by the large distance between the corporate and accounting offices as well as the tight relationship of Pomerantz and Polishan. In terms of ethics, Polishan falls short of what is required for a corporate leader namely, the ability and charisma to motivate the employees to do their best and the ability to win the employees’ respect. The CFO has been very strict in the implementation of the rules he exclusively crafted for the Poliworld. Polishan only becomes effective through the use of intimidation. The employees become disrespectful of him, obeying only because of the fear of losing their jobs. It should be noted that good corporate governance principles should comprise integrity and mutual respect. Leslie Fay is not able to come up with a code of conduct which should be strictly adhered to by its executives and directors. This results to the deterioration of ethics in Leslie Fay which also lowers employee morale and respect to the organization. The financial report of a business organization should always be made public in order to inform and update shareholders about its financial well being. In the part of managers, financial statements are necessary for them as a means to monitor the performance of a company. It should be noted that financial statements often reveal if the financial goals of Leslie Fay are being met or not. The reports are also needed in order to project the income of the company for the succeeding period. If the company is eyeing to invest in a project, financial reports provide an insight to the managers of its likely position should it chose to pursue the project. From the above discussion, it becomes apparent that financial reports are essential for top management. On the other hand, this highlights the responsibility of the finance department to provide the reports anytime the headquarters needed them. The habit of Polishan of interrogating why and were financial records will be utilized whenever senior managers request for them is out of the line. As his department oversees the preparation of these documents, he should always be ready to provide one when needed without further questions. I also conclude that the Leslie Fay’s longtime auditor BDO Seidman falls in terms of corporate governance. It is irrefutable that the auditing firm fails to render an objective and accurate opinion of the company’s accounting procedures. As an auditing firm, BDO Siedman must have realized that Leslie Fay has all the motivation to overstate its income and understate its expenses in order to create a strong financial performance. The auditing firm also shows its being nearsighted—focusing only on the reported financial statements of Leslie Fay without accounting the industry trends in its analysis. A good audit firm will not only look at the individual performance of the business organization but look at the reports of other industry players as a benchmark. This will enable the audit firm to verify the correctness of the financial reports. As Leslie Fay’s earnings do not seem to be in line with the current industry trend, BDO Siedman should have investigated to explain the discrepancy. I conclude that the complexity of accounting procedures and operations of Leslie Fay as well as its poor corporate governance post inherent risks on its financial reporting. First, the scope of Polishan’s responsibility gives him significant power to solely influence financial reporting. The distance between the corporate office and accounting office of Leslie Fay leaves Polishan and the whole accounting procedures unsupervised by other senior managers giving the CFO the chance to manipulate the records. Polishan’s tight relationship with Leslie Fay’s president further makes it conducive for him to defraud the company’s records. It can be seen that Polishan’s attitude and relationship with the employees in the Poliworld and Leslie Fay’s headquarters are unethical. Lastly, the audit credibility of BDO Siedman is tarnished because of its inability to render an objective opinion on the financial situation of Leslie Fay. Putting all these factors all together, there is a high risk of fraud and audit failure in the business organization. I conclude that the financial ratios of Leslie Fay show large discrepancy from the aggregated ratio of other industry players. In terms of liquidity, Leslie Fay appears to be performing far better than the industry. However, it appears that the current assets of the company are tied up in inventory and accounts receivable. In terms of asset structure, it can be seen that most of the company’s resources are financed by equity in 1991. In 1992, creditors hold a higher stake in the business organization. In terms of activity, Leslie Fay outperforms the industry in asset turnover but lags behind in inventory turnover and age inventory. This is due to the company’s bloated inventory account. Leslie Fay shows superior profitability, registering gross profit margin o f 31%, return on assets of 6.60% and return on equity of 15.50%. I conclude that the audit failure is significantly due to the organizational structure of the business organization, corporate governance, and weak controls. As explained above, the company falls short of creating an environment which does not tolerate fraudulent accounting procedures. For one, entrusting only one individual with all the accounting responsibilities unsupervised will really make it relatively easy to defraud financial records. It can also be seen that Polishan has a very high motivation in reporting higher income as he directly benefits from it. There is also a huge problem with the management of the company’s human resource. Leslie Fay fails to cultivate an atmosphere which encourages employees to voice out their concerns. This is especially true in the case of the separate accounting office where Polishan controls even the policies which should be instituted by the human resource department. Leslie Fay’s accounting department was not able to instill and cultivate integrity and honesty as its leader is rude and domineering. I also conclude that there has been a huge problem due to the tight relationship between the CEO and CFO. Pomerantz entrusted almost everything to Polishan that he trusts Leslie Fay’s performance as reflected by the financial statements submitted by the former even if it is strongly against what he sees in the industry. This is also the problem with BDO Siedman. Everybody has put his trust in the CFO that they fail to see the real performance of the company. I believe that the audit failure must have been prevented if Leslie Fay considered its company structure, corporate governance, and establish high controls. First, there should have been a division of responsibility between the CFO and senior vice president for finance. This will facilitate the distribution of power and control on financial reporting. The senior vice president for finance should have been someone who has more courage to go against the desire of the CFO. Second, the accounting department should have been subjected to the top management. Financial procedures should have been clearly shown to the executives. In order to facilitate a more efficient and credible financial data processing, modern technology should be put in place. I believe that erroneous data will be checked more accurately when using computers than manual computations. This will also make the top management easily monitor the figures released by the accounting department. Knowing that Leslie Fay and the whole industry is in a downturn, the top management as well as the auditor shouldn’t just relied on the numbers cooked up by Polishan knowing that he can easily manipulate the statements. Leslie Fay should have also considered asking the opinion of other auditing firms to verify the correctness of the financial report. The conclusions put forward in this paper are mostly derived from the analysis of the case study entitled “Leslie Fay Companies.” This material together with my knowledge derived from other business courses enabled me to come up with the analysis of the company’s implied mission statement, business model, claimed strategy, and the role of technology. It should be noted that the first three mentioned are an application of the basic concepts of strategic management. Meanwhile, the role of technology is essentially taken up from the lessons in operation management. The last five questions are answered using concepts on auditing and accounting. The basic procedure that I have utilized in coming up with my conclusions is the analysis of the data presented in the case and my won knowledge and experience. Using the basic concepts in business management, I have gained a good grasp of what is being asked and looked for in its question. In analyzing the financial position of Leslie Fay, I have chosen to employ a financial ratio analysis which uses the basic accounts and formula in accounting. References The Leslie Fay Companies Case Study Thompson, A. Jr. & Strickland, A.J. 2002, Strategic Management. 3rd ed. New York Mc Graw-Hill. Read More