Corporate Governance Practices And Risk Management Approach Of Woolworths Limited

Overview of Woolworths Limited

Discuss about the Implications of ASX Corporate Governance Principles.

There has been a massive change in the supermarket of Australia in the past five years. The pioneer in the field remains Wesfarmers and Woolworths (Beaton-Wells, 2015).  Woolworths is an Australian based company is engaged in the retail operations. Its segment comprises of Food and petrol that procurement of the products of food and petrol and reselling to New Zealand. The company has made great strides in the year 2017 owing to its strong operations. The net profits were in the positive zone and assets were utilized to the optimum. The analysis will shed light on the corporate governance practices of the company followed by the risk management approach (Woolworths limited, 2017). The food market is a highly profitable venture and Woolworths has ensured that it remains a giant owing to its formidable policies.

The company Woolworths Group Limited follows the Corporate Governance Principles that can be clearly seen after a thorough study of the Annual Report and Corporate Governance Statement for the year 2017. The company has followed the following principles as can be seen from the Corporate Governance Statement:

Laying down a solid foundation for management and oversight:

The company board is accountable to its shareholders and other stakeholders. The board has its own set of responsibilities that have been disclosed by the company in its corporate governance report. Its responsibilities include analyzing the strategies made and ensuring their implementation, adopting the financial statements and reports and monitoring the management processes for checking the integrity of such reports (Woolworths limited, 2017). Further, the selection of CEO and other top-level executives, considering and monitoring the social, environmental and ethical impacts of company’s activities, monitoring the relationship of the company with its stakeholder and key regulators & making sure that the company is following the corporate governance policies through proper review and monitoring (Roach, 2010).

Appropriate structure of the board

As per the Corporate Governance Principles, a company should have a board that is appropriate in size, skills, composition, etc so that the duties of the company can be discharges effectively (Kaplan, 2011). The company Woolworths Group Limited has accordingly set up a self-sufficient structure of board which comprises of CEO and other independent non- executive directors who have ample knowledge and experience which helps them in meeting out the Board’s responsibilities and its objectives which are the main goal for every company (Geoffrey et. al, 2016). In addition, the Board reviews the existing skills and the skills required of the directors and the board so that the company does not miss any beneficial opportunities in present and future. Moreover, there are four board committees for assisting the board in exercising its responsibilities including Nomination Committee, Audit Risk Management & Compliance Committee, People Performance Committee, and Sustainability Committee (Woolworths limited, 2017).

Acting ethically and responsibly:

The company has set up its code of conduct so that it can work ethically and responsibly. The company has defined the expected standards of behavior of the people working in the company. The core values defined by the company are applicable to all the employees of the company, the directors, consultants and even the contractors of the company (Matthew, 2015). The company has set up various compliance programs which are specially designed to encourage the individuals so that they report any unethical practices that come to their knowledge.

Safeguarding of integrity in corporate reporting.

Corporate Governance Principles of Woolworths Limited

The following point of safeguarding integrity in the corporate reporting is established through the fact that all the directors are required to have specific skills set like knowledge of social, political, and economic scenarios of the concerned company. The director has to have good knowledge of digital environment so that he can utilize that knowledge in reporting. He should also possess financial experience and on hand experience of internal controls which shall help him in identifying the loopholes and rectifying them. He should also be aware of regulatory requirements and finally, he should be able to assess the risk in reference to administration, financial and risks of material misstatement in corporate reporting (Woolworths limited, 2017). Therefore, the company has incorporated this safeguard at the initial point itself with regard to the appointment of its directors and key executives so that only qualified and experienced personnel are taken on board.

Make timely and balanced disclosure:

The company has appointed two company secretaries which are answerable to the board of directors regarding the functioning of the company. The board of directors in order to make timely and balanced disclosure has formed 4 board committee to assist them in exercising their work and also for advisory purposes. Every committee makes their recommendations to the board as early as possible so that the board can take necessary actions regarding the disclosures on a timely basis. The board has also appointed independent internal and external auditors for an audit of the books of accounts. Out of them, the internal audit team is appointed within the company to provide an internal reporting as per the internal rules and regulations and budgets allotted to each department (Woolworths limited, 2017). The external auditor report is the key report that is made public along with the financial statements that reveal that the company has a timely and balanced disclosure approach in corporate reporting.

Respecting the rights of security holders:

The company as per the provisions of ASX and its compliances has an inclusive shareholders information program in which they periodically communicate all the plans, policies, and material matters through print and digital media. The shareholders can get a wide range of data on the company’s website like share prices, dividend declarations, annual meeting dates and various matters affecting shareholders’ interests. The company hosts various investor friendly programs to educate them about the company’s operations (Livne, 2015). The company has a process to provide every information on a timely basis to its shareholders so that they can take timely decisions and make investment opportunities with the company. The Woolworths Company hence follows the principle of respecting the rights of stakeholders.

Recognizing and managing risk:

The company through its regular efforts in managing the risk in regard to the operation, finances and the management of the company has taken steps like hiring of Company Secretaries in the company, appointment of Statutory Auditors, establishing an internal control and audit team and forming a committee of board of directors for recommendation and advisory purposes. Every step taken has its own relevance and it regularly assesses the risk associated with the company and the remedial measures to tackle them (Woolworths limited, 2017). The risk committee about the risks advises the board of directors and vulnerabilities present in the system. The internal control and audit team checks each transaction and its relevance. The external auditor who audits the financial statements in the light of applicable regulatory requirements then also checks the audit report prepared by the internal control team. The investors and the stakeholders are then provided the audit report and director’s report that clearly states the risks and rewards attained and managed by the company throughout the year (Hoffelder, 2012). Therefore, the company in this way recognizes the risks and the rewards at different hierarchy levels in the company. 

Remunerating fairly and responsibly:

Board Structure and Committees

In the year 2017, the Woolworths Group received a Gold Tier Employer status in Australian Workplace equality index because of the inclusion and creating opportunities for all like a lesbian, gay, bisexual and transgender. The company believes in achieving gender equality in the company. The company has appointed at least 40% of Senior Executives as women. There is also no gap between males and females at equivalent levels. Any gaps in the salaries are expected to be closed by the year 2020 (Woolworths limited, 2017). The Directors and the Senior Executives are also suitably rewarded and remunerated as per the performances and the targets achieved. A committee called People Performance committee reviews the performances of CEOs and its counterparts about their performances and achievements and makes suitable recommendations for pay hikes (Rezaee & Kedia, 2012).

The company Woolworths Group Limited has various businesses that are exposed to a wide range of risks including financial risks, strategic risks, operational risks, and compliance-related risks. So the group has maintained a risk management system framework for the management of such material risks.

The group comprises of various companies that deal in foods and beverages, hotel segments etc. The group as a whole is one of the leading enterprises of Australia. It also operates various supermarkets in Australia and exports its products overseas.

1. Strategies of the company to focus on main areas of the group that is Australian Supermarkets. Although there have been many risks attached to this sector including competitors, discounters, and digital entrants (Woolworths limited, 2017).
2. Culture- the company focuses on the customers first and to create an ethical environment for the employees of the organization. The group takes care of the health and welfare of the whole team. Further, the company is transparent in business and with its investors (Lapsley, 2012).
3. Capital management – the company focuses on capital management. It aims at maintaining a strong credit rating.

ASA-570 deals with requirements and explains the use of analytical procedures by the auditors. The standard also explains how the analytical procedures help the auditor in forming an opinion and overall conclusion of the financial statements. It also requires the auditors to investigate the fluctuations or differences from the expected values (Gay & Simnet, 2015). As per this standard, the main objectives of the auditor should be to obtain reliable and accurate audit evidence with the help of substantive analytical procedures and further design and perform the analytical procedures to check the consistency and accuracy of financial statements (Niemi & Sundgren, 2012).

1. Comparison of the account balances of the unadjusted trial balance amounts with previous year trial balances.
2. Calculation of significant ratios and comparison of current year ratios with prior year ratios and the industry ratios.
3. Ratio computation and comparison with the figures of the previous year
4. Regression analysis can be even put to use

Particulars	2017	2016	Industry average
Return on assets	7%	-10%	6.53%
Return on assets before significant items	6%	3%
Return on equity	17%	-27%	12.90%
Return on equity before significant items	17%	14%
Net profit margin	3%	-4%	3.77%
Net profit margin before significant items	3%	1%
Gross profit margin	29%	28%	26.28%
Expense ratio	88%	94%	n/a
Cash return on sales	6%	4.50%	n/a
Earnings per share	$1.19 per share	-$0.97 per share	n/a
Earnings per share before significant items	$1.10 per share	$1.16 per share
Price earnings ratio	21.3 times	-21.2 times	20.82 times
Earnings yield	5%	-5%	n/a
Dividends per share	$0.84	$0.77	n/a

Examples of Ratios of Income Statement from the Annual Report and Financial Statements for the year 2016:

Audit risk can be assessed with audit procedures and analytical procedures. In the first case, the auditor uses his audit procedures outlined in audit program to understand the risk attached to the business. Some risks may be inherent in nature while other risks may be arising due to business operations (Fazal, 2013). Analytical ratios also help in understanding the risk its percentage in the business. For example- GP Ratio and NP Ratio explain the earning capacity that shall be helpful in finding out the return on investment by the business.

Potential steps to reduce or mitigate risk can be hiring and appointing of independent statutory and internal auditors, Hiring of experts in case of valuation, merger or starting of new ventures etc, Implementation of High-end digital technology and use of digital media to store and recover data in case of any data loss (Manoharan, 2011).

Conclusion

As per the total assessment of Woolworths, it can be said that the success of the company is highly attributable to the presence of strong corporate governance. It has ensured proper disclosure and compliance that has led to the effective framework. The ratio computation is an indication that the company has performed reasonably well in the year 2017 and it is one of the vital reasons for a strong framework.  Further, the risk management and practices of the business is effectively constructed that helps the company to flourish. Hence, keeping into consideration the scale of operations, it can be said that the business should have an internal and external auditor who can manage the complex activities.

References

Beaton-Wells, C. (2015) Harper Review: a mixed basket for Coles and Woolworths. [online] Available from https://theconversation.com/harper-review-a-mixed-basket-for-coles-and-woolworths-39640 [Accessed 20 April 2018]

Fazal, H. (2013) What is Intimidation threat in auditing?.[online]. Available from: https://pakaccountants.com/what-is-intimidation-threat-in-auditing/ [Accessed 21 April 2018]

Gay, G. and Simnet, R. (2015)  Auditing and Assurance Services. McGraw Hill

Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons. [online] 30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309  [Accessed 9 April 2018]

Hoffelder, K. (2012)  New Audit Standard Encourages More Talking. Harvard Press.

Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and practice. The Accounting Review [online]. 86(2), pp. 367–383. Available from https://doi.org/10.2308/accr.00000031

Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management. [online]. 9(3), pp. 291-292. Available from https://doi.org/10.1111/1468-0408.00081

Livne, G. (2015)  Threats to Auditor Independence and Possible Remedies. [online] Available from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full [Accessed 9 April 2018]

Manoharan, T.N. (2011)  Financial Statement Fraud and Corporate Governance. The George Washington University.

Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct? The Accounting Review. [online]. 90(2), pp. 495-527. Available from https://doi.org/10.2308/accr-50871 [Accessed 21 April 2018]

Niemi, L., and Sundgren, S. (2012) Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs. European Accounting Review. [online]. 21(4), p. 767-796. Available from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 21 April 2018]

Rezaee, Z & Kedia, B. L. (2012) Role of Corporate Governance Participants in Preventing and Detecting Financial Statement Fraud.  Journal of Forensic & Investigative Accounting. [online]. 4(2), pp. 176-205. Available from: doi: 10.1016/j.sbspro.2014.06.041 [Accessed 20 April 2018]

Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.

Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online] Available from: https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports/Annual_Reports [Accessed 20 April 2018]