CASE STUDY – JULY 2011 EXAMINERS’ COMMENTS AND MARK PLAN Contents Page Part 1: Executive summary Introduction Overview of performance Part 2: The Case Study examination Scenario for the paper (Advance Information) Analysis of Advance Information (AI) Information provided in the Exam Paper (EP) Examination requirements Analysis of Exam Paper information Summary of grades available 10 Part 3: Commentary on candidates‟ performance Professional skills 11 Executive summary 13 Requirement 1: Review of Watchwell‟s financial performance 13 Requirement 2: Assessment of proposal for Mustang acquisition 14 Requirement 3: Evaluation of PQR / Funtimes tender 16 Ethics and professional scepticism 18 Overall paper 18 Part 4: Appendices Appendix 1: Financial statement analysis: Review of Watchwell‟s financial performance 19 Appendix 2: Financial data analysis: Calculation of price for Mustang 21 Part 5: Marking key © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 PART 1: EXECUTIVE SUMMARY Introduction This report covers the July 2011 Case Study (CS) exam It is issued in conjunction with two other documents, comprising two illustrative scripts and related Examiners‟ commentaries The first script was well within the top 25% of all assessed scripts; the second failed the exam In reviewing these documents, it is important to be aware that it is rare for a script to be uniformly „bad‟ or uniformly „good‟: a successful script will often present detailed coverage of all requirements but include errors of calculation, spelling or logic, and an unsuccessful script may contain one or two strong sections or several excellent points but be let down by poor or incomplete text elsewhere Unsuccessful candidates will also find helpful guidance in the July and November 2010 Examiners‟ Reports, as well as the Case Study Manual, which forms part of the ICAEW Learning Materials and includes specific chapters on Introductory Financial Analysis and Ethics Attached to the report are two appendices with examples of financial analysis work that candidates did, or might have done, for Requirements and The two illustrative scripts offer further insights into financial analysis Overview of performance 75.2% of all candidates sitting the paper passed, compared with 76.0% in November 2010 and 78.7% in July 2010 Successful candidates demonstrated their higher skills effectively They approached the tasks methodically and produced well-balanced, relevant answers to the three main requirements, clear appendices and succinct, focused executive summaries Many had an even spread of good competency grades, revealing an ability to assimilate the case material into a report together with commercial knowhow and appropriate professional scepticism They had clearly prepared well for the exam, making the necessary effort to master the Advance Information and to refine their exam technique The subject of the case is Watchwell Ltd (WW), a privately-owned medium-sized manned security company WW was formed in 1995 and is based in the South of England, having its head office at Weymouth in Dorset – the county in which the majority of its clients are based The main business is providing guards to these clients and then billing on an hourly basis In an industry governed by regulation and employment law, WW prides itself on its ethics, compliance standards and reputation for quality It has achieved steady growth, largely through a series of acquisitions as well as successful tenders and re-tenders It is looking to expand further in order to penetrate the industry elite, the Infologue.com Top 20 The candidate is in the role of Ossie Fordham, a final-year trainee Chartered Accountant working for Rosslyn Chartered Accountants, providers of business advisory and corporate finance services to WW The exam requirements followed on from the Advance Information (AI) They comprised: (i) analysis of the 30 June 2011 accounts against actual results for the prior year; (ii) calculation of the price that WW should offer for acquiring a target company, Mustang, together with a discussion of that company‟s business profile; and (iii) an evaluation of the advantages and disadvantages for WW in tendering for the enlarged manned guarding contract of an existing client, PQR, after its merger with another company, Funtimes In the rubric, candidates were specifically told to provide an executive summary and that the report should be balanced between the three elements As always, each requirement contained several parts Candidates had to identify these and then tackle them in an orderly manner In particular: At Requirement 1, the captions to be analysed by candidates (including six KPIs) were clearly set out At Requirement 2, they had to perform calculations and then discuss their underlying assumptions and the business profile of the target company At Requirement 3, they had to integrate a range of areas (benefits and risks, ethics and „matters for consideration‟) into a cohesive narrative In broad terms, all three requirements necessitated skilful integration of AI and Exam Paper (EP) material Also, as indicated by (i) the instruction to candidates to balance their report and (ii) the marking key, the three main elements of the report were broadly equal in importance: any candidate spending too much time on any one section was likely to have missed the opportunity to gain competent grades in others A feature of this case was the range of topics that were relevant to more than one requirement but in subtly different ways (e.g Minimum Wage; female guards; public sector cuts; police collaboration), with scope to make good connections between the requirements © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 With reference to the four skills areas, candidates generally made good use of the case material (both AI and EP) but were not as effective in describing the wider context Better ones ensured that their scripts followed a clear progression from Assimilating and Using Information to the other three skills areas and thus achieved uniformly high grades across a requirement They were able to demonstrate both „range‟ and „depth‟ in certain critical areas of the marking key Application of professional scepticism and the coverage of ethical issues were also good Candidates who failed did so for a variety of reasons, notably a lack of time management This resulted in unbalanced answers (incomplete Requirement or rushed executive summary – these have become common characteristics of failing scripts) For others, the reasons for failure rested within each requirement Requirement tested financial statement analysis skills, and candidates should have expected this Most tackled it methodically, using the headings given (revenue, gross profit, profit from operations, six Manned Guarding KPIs) to ensure coverage of all the main elements The overall performance was pleasing, with better candidates developing their analysis of the income statement by performing additional calculations such as revenue per hour on individual clients or average wages and salaries per staff member Weaker candidates often did not cover all six KPIs or wasted time on irrelevant areas of the accounts (especially cash and debtor days) Requirement involved financial data analysis and the ability to challenge assumptions The information on Mustang closely followed the template in the AI but candidates needed to take account of unfamiliar factual information in relation to each of Mustang‟s three divisions The best ones set out their calculations clearly and then used appropriate professional scepticism to discuss the key issues in a structured, considered way, culminating in lucid conclusions and recommendations at the end of the requirement Those towards the bottom of the cohort were characterised by poor calculations and/or a thin coverage of the related business issues They could not articulate clearly their concerns over the figures with which they had been presented, and failed to provide a rounded business appraisal of all three divisions (there was often too much emphasis on Manned Guarding and insufficient understanding of the issues affecting Mobile Security) Requirement assessed strategic and ethical skills, and was the weakest requirement For those who had familiarised themselves with the AI in overall terms and specifically who had considered the issues involved in tendering, it should have been straightforward – tendering had clearly been identified as a factor in WW‟s past and planned growth Stronger candidates kept focused on the „big picture‟ of the tender Those who dealt methodically with all the main aspects (strategic and commercial benefits and risks, matters for „consideration‟, ethics) generally obtained a good number of competent grades However, weaker candidates tended to offer a „scattergun‟ approach – perhaps a sign that they were unable to relate their prior work on WW‟s strategy to the specifics of this tender – and so produced unstructured answers; less organised candidates had overrun on the rest of the exam, resulting in sparse sections on Requirement In summary, as tutor firms have remarked, the subject matter of the Case Study was topical and relevant, and the exam was a very reasonable paper allowing candidates to demonstrate the range of professional skills required to be successful in the modern accounting environment Those who managed their time well, covered all aspects of the requirements and effectively applied the processes learnt during their studies should have been able to score highly © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case relates to Watchwell Ltd, a medium-sized manned security company with annual revenue approaching £15 million You, the candidate, are Ossie Fordham, a final-year trainee Chartered Accountant working for Rosslyn Chartered Accountants, a firm based in Weymouth, a town on the south coast of England You work closely with, and report to, the senior partner, Alfred Vesey Four weeks prior to the examination, candidates were provided with a 40-page package of information, containing a series of exhibits relating to Watchwell and the industry in which it operates, comprising: 10 11 12 About you (Ossie Fordham), your employer (Rosslyn Chartered Accountants) and your client (Watchwell Limited) The UK security industry: Background Manned guarding: The business model (Industry briefing document) All about Watchwell Limited (WW) Watchwell Limited board briefing: Business review Watchwell Limited: Management accounts for the year ended 30 June 2010 Watchwell Limited: Business plan Briefing note: Employment issues in manned security (Rosslyn Chartered Accountants – HR Advisory Department) Regulation: The Security Industry Authority (SIA) Watchwell Limited: Tenders Watchwell Limited: Example acquisition appraisal – Tyro Guards Press articles Analysis of Advance Information (AI) By carefully studying and analysing the AI, candidates should have formed a comprehensive picture of WW and the industry, using facts and figures from across the AI They were not required to carry out any major research of their own: the AI was, as always, intended to be self-contained However, as usual, close monitoring of the media would have been beneficial Specifically, with the exam date being exactly one year before the opening ceremony, coverage of the 2012 Olympics – which featured prominently in the AI – was high in the lead-up to the exam Key findings from the AI are summarised below Additional commentary by the examiners is provided in bracketed italics While the AI was shorter than it has often been in the past, it still contained a wealth of information with which candidates needed to familiarise themselves if they were to be able to tackle all aspects of the case requirements In particular, there were lots of connections between exhibits: it required good organisational skills by candidates to identify these and then use them effectively in their answers As always, Exhibit sets out the background to the candidate‟s role and areas of work, stressing the need to keep up-to-date with industry issues Exhibits 2-3 give an overview of the manned security industry, explaining the typical business model The key messages that candidates should have extracted from these exhibits are as follows: Manned security (mainly manned guarding, mobile security) constitutes half of the UK security market Manned security has been relatively stable during the recession It is forecast to grow between now and 2015 by 2-4% per year, partly reflecting expected demand for security staff during the 2012 Olympics Margins will continue to be squeezed, exacerbated by rising costs from compliance and legislation Successful companies have generally been those offering more integrated solutions Electronic security (CCTV etc) is forecast to be the fastest-growing market segment in the next five years The main opportunities overseas are also likely to be in electronic rather than manned security For manned security, staffing is key: o Guards must be licensed by the Security Industry Authority (SIA) o Companies must ensure that their workforce achieves high standards of reliability through effective vetting, recruitment, retention, training and compliance with legislation o It is also a labour-intensive business: wages (including on-costs, such as employer taxes) can exceed 80% of revenue Guards are often low-paid, and staff turnover can be high © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 Clients used to choose security suppliers according to price, but they are now more influenced by quality Success is built on reputation A small local business (many companies operate solely within one UK region) may have a competitive advantage over a larger national or international one In terms of finances: o Companies earn revenue by charging clients for hours worked by their staff at client sites o Amounts invoiced represent an agreed hourly rate x man hours worked over the contract period o The key in determining contract price is a sufficient mark-up on average hourly pay costs per guard (these include „on-costs‟, which can add around 20% to the wage) o Gross and operating margins are critical: if cash collection is slow, the business is at risk o Many companies aim for a gross margin of 15% Larger ones can more easily charge an artificially low price to secure a major new contract o Aside from normal revenue / profit measures and accounting ratios, most KPIs relate to personnel e.g revenue per man hour, utilisation, staff turnover, training and sickness days (Industry exhibits are intended to „set the scene‟, to provide an important context for the case and exam requirements and to create a „level playing-field‟ so that candidates not have to carry out extensive research of their own One key to a full appreciation of the AI is an ability to relate these general industry issues to the company‟s circumstances, for example: KPIs (Exhibit 4); CCTV (Exhibits / 7); staffing (Exhibit 4) While candidates are not expected to commit every sentence of these exhibits to memory, they should aim to be aware of the main contents so that they can easily locate key topics in the exam hall Thus mention of market growth rates (p8), the Minimum Wage (p11) and contract pricing (p12) would in turn have enhanced candidates‟ answers to each of the three requirements.) Exhibit is a pivotal exhibit, documenting the history and current position of WW: WW was incorporated in July 1995 by Tom and Anita Mitchell, who each own 20% A further 20% is owned by Edward Allison, the remaining 40% externally WW has Approved Contractor status Tom (Director of Operations), Anita (Director of Finance) and Edward (Director of Sales) all take an active role, joined by Derek Young (Head of Control) and Gregory Driscoll (Head of Human Resources) Most clients are in Dorset, though WW avoids the crime-ridden „Alpha, Bravo, Charlie‟ areas The main type of work is Manned Guarding (95% of total revenue); Mobile Security contributes the rest o Manned Guarding earns a 20% gross margin Revenue comprises amounts invoiced fortnightly to clients (man hours worked in the period x contractually agreed hourly rate per guard) o Mobile Security earns a 60% gross margin Contracts entail routine visits by car / van to client sites Along with wages, the running costs of these vehicles are the only major direct expense With regard to staff: o WW has lower turnover than the industry average of 25% o It has a reputation for employing reliable personnel o Guards joining WW must hold an SIA licence o WW„s workforce is 20% female – important for some clients (e.g retail) o The typical working week is 40 hours Guards log on/off at the start/end of shifts; their hours are then used to calculate pay and amounts invoiced to clients o Derek Young wants to upgrade this time system in 2011 to accommodate WW‟s growth plans o Larger sites require a team of staff from across the range of grades (guards, supervisors etc) o WW is looking to introduce a pension scheme in 2013 WW has a history of revenue and profits growth, partly organic and partly via a series of acquisitions The largest expense is payroll WW pays guards‟ wages weekly in arrears With revenue invoiced fortnightly and wages paid weekly, cash must be closely managed / monitored Cash flow depends heavily on invoices being settled promptly: o A re-tendering client might ask for a change in payment terms (e.g from 30 to 45 days) o WW makes a full impairment charge against all balances 90 days overdue Other expenses include training; uniforms; advertising; recruitment; legal / professional; tendering Contracts are usually signed for years, after which they may be automatically renewed or put up for retender They specify a minimum number of man hours per year but variations can later be made Manned Guarding clients span a wide range of sectors (e.g retail, construction, leisure) They include: o Ardwicke Stores (£3.7m): forecast to grow to £6.3m in 2011 after opening new stores o PQR Leisure Parks (£1.3m): a client since 2010; looking to buy sports grounds or form mergers o Jonas Construction (£0.8m): building work for Olympics sailing site at Weymouth and Portland o Granville University (£1.4m), Soton College (£1.0m), Dorset Hospital (£0.9m): under pressure from recent UK public expenditure cuts o Contracts inherited on the 2010 acquisition of Quinto, expected to earn £1.2m revenue in 2011 WW has grown mainly by buying portfolios of security contracts from other companies („acquisitions‟) with the associated transfer of staff It does not buy physical assets or shares as part of this process © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 o o o WW treats the purchased contracts as intangibles, and amortises them over four years Acquisitions range from £15k to £450k; the most recent (Tyro, Quinto) cost £93k and £223k The target supplies contract details on which a financial, strategic and risk (FS&R) appraisal can then be carried out The data can be subject to adjustment and/or debate if contract terms alter o The FS&R appraisal also covers business „fit‟ (e.g, client profile) and potential efficiencies o The acquired company and staff must meet SIA and ACS requirements o For Manned Guarding, the acquisition price is 1.5 x next year‟s expected gross profit o For other sectors, the price is 2.0 x next year‟s expected gross profit o For a target in several sectors, the relevant multiple is applied to each and the price is the total o Staff transfer to WW under TUPE; directors of the acquired company are not usually taken on o WW now uses Rosslyn to conduct FS&R appraisals after poor experiences on Tyro and Quinto WW is constantly tendering or re-tendering, looking to win contracts at acceptable gross margins Among other reasons, it can lose tenders when rival bidders offer artificially low prices (Some of these points link back to the earlier industry information – see notes to Exhibits 2-3 They also provide an obvious connection to the next two exhibits – 2010 business review and management accounts.) In Exhibit 5, Anita briefs the board on the June 2010 management accounts and current developments: WW continued to achieve strong growth in 2010, helped by 2009 acquisitions, but this year‟s acquisition, Tyro, has not generated the expected level of revenue WW has continued to make good progress in 2011, following the major acquisition of Quinto, though this too has fallen below expectations Further acquisitions – and tenders – are in the pipeline The new Ardwicke work is generating extra revenue, and there is a new site on the PQR contract Other initiatives include new uniforms, increased training, Olympics-related advertising and a project to identify a potential CCTV partner These comments are reinforced by Exhibit – the June 2010 management accounts themselves, which showed that both revenue and profitability had risen in tough trading conditions Specifically for 2010: Revenue was up from £13,136k to £14,264k (8.6%), with both business streams showing increases Gross profit was up from £3,019k to £3,195k (5.8%), again reflecting growth in both business streams Profit from operations was up from £1,469k to £1,720k (17.1%) Dividends were up from £575k to £600k Wages were up from £9,732k to £10,664k (9.6%), with the number of guards up from 582 to 622 Head office salaries fell 13.0% from £884k to £769k, with the number of staff down from 27 to 24 There were no significant changes in other cost captions Cash rose from £1,391k to £2,086k, and trade receivables net of impairment from £1,722k to £1,975k Among Manned Guarding KPIs: Revenue per man hour improved from £11.53 to £11.73; wages as a proportion of revenue up from 77% to 78%; staff turnover from 19% to 21%; utilisation down from 90% to 89%; training days per employee from 5.0 to 4.3; sickness days per employee up from 6.6 to 7.1 (As always, time spent on the financial information would have been invaluable The management accounts and board briefing – plus client table at Exhibit – gave students ample material on which to carry out indepth financial and operational analysis on WW prior to the exam The method of accounting for acquisitions may have been unfamiliar, but it was clearly set out and should have been easy to follow Exhibit also had summarised income statement and KPI figures for 2008, enabling candidates to carry out a more extensive trend analysis on these items The industry background and KPIs – plus Exhibits / 10, with their references to WW‟s rivals – should have helped develop candidates‟ wider sector knowledge, enabling them to produce value-added analysis of the company‟s performance They should have recognised the need to understand trends in the big clients; the importance of, and interaction between, the six KPIs; and the relationship between revenue and hours They had to appreciate the major elements of all three primary statements and links between them e.g impairment charge vis-à-vis receivables) Exhibit is the WW business plan (prepared in February 2011) This sets out six strategic objectives and six key risks The objectives include penetration of the Infologue.com Top 20 (for which WW would need to increase annual revenue to around £25 million); an improved tendering record; more acquisitions; and diversification into new business streams and new geographical areas The risks include price competition; poor client service; major regulatory or other developments in the industry; and inappropriate recruitment (All these points link to issues discussed in more depth in Exhibit and elsewhere in the AI.) © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 Exhibit deals with employment issues in manned security It lists the tasks typically carried out by guards and goes on to set out „snapshots‟ of four pieces of UK law that affect the employment terms and conditions for guards, also important when a company is tendering for a new client or seeking an acquisition: UK Minimum Wage, set to rise from £5.93 to £6.08 on October 2011 EU Working Time Directive: a 48-hour maximum working week, from which the UK has „opted out‟ Equality Act 2010, which protect the rights of individuals and advances equality of opportunity for all TUPE, whereby employees inherit the same pay and terms when their business changes ownership Exhibit sets out the regulatory framework for the industry, led by the Security Industry Authority (SIA), which has two main duties: compulsory licensing of individuals undertaking designated activities within the industry; and managing the voluntary Approved Contractor Scheme (ACS) For companies applying for ACS accreditation, 85% of staff must hold an SIA licence and the other 15% must have applications in progress (As always with more „technical‟ content, these exhibits were provided as a synopsis of the legal issues with which candidates needed to be familiar for their understanding of some of the other case material.) Exhibit 10 provides an overview of five tenders in which WW has recently participated, some successful and some not – in both cases for a variety of reasons, primarily related to pricing or quality We learn that, as well as price, contracts with Manned Guarding clients cover terms such as invoicing, payment, service quality standards and a penalty in the event of early termination by the client Among successes have been: Packryte, for which WW had to demonstrate its credentials by undertaking a security consultancy project PQR, where proactivity enabled WW to win although its contract price was the highest of five bidders Hyacinth, for which it has more recently had to collaborate effectively with the police Among the failures have been: Bild, where WW was unable to persuade the client on flexibility and refused to commit an unethical act Tower, a long-established client that it lost to its close rival Logos, which had put in a very low bid – consistent with Logos‟ reputation for using such techniques to expand its market share (These examples serve as illustrations for some of the general WW information given earlier at Exhibit 4.) Exhibit 11 sets out an example acquisition appraisal, for Tyro Guards (Tyro), acquired in 2010: Tyro‟s two divisions, Manned Guarding (MG) and Mobile Security (MS), respectively generated revenue of £409k and £37k and gross profit of £49k and £8k in the year to 30 September 2009 MG utilisation was 90% and staff turnover, 22% For MG, WW asks targets such as Tyro to provide details of existing contracts: start date, weekly hours, guards per shift, charge rate, pay rate, „other costs‟ (22% of annual pay) Information about actual or potential changes to these contracts is then obtained Adjusting for such changes, Tyro‟s gross profit would fall from £49k (12.1%) to £38k (10.7%) MS gross profit was distorted by two factors On adjustment for these, it would rise to £18k Based on these figures, WW paid £93k: £57k (£38k x 1.5 multiple) for MG and £36k (£18k x 2.0) for MS Actual results to 30 June 2010 were worse than expected as some data given to WW had been wrong (Candidates needed to familiarise themselves with the methodology set out here, particularly the factors that gave rise to changes in the figures initially provided by the target company A „proforma‟ exhibit of this nature should carry a strong expectation that something similar will appear in the exam.) Exhibit 12a-c are a series of press cuttings: In Exhibit 12a we are told that: o random SIA checks have found 20% of all guards in Dorset and Hampshire to be unlicensed; o an event like the Olympics could not be staged without a joint police / private security operation; o clients prefer a supplier who can advise on developing the role of security within their business; o the level of sickness days at a company can reveal underlying problems of staff discontent Exhibit 12b explains the security for the Olympics sailing events, being held at Weymouth and Portland In Exhibit 12c we learn that manned guarding companies are continuing to experience financial difficulty, with many seeking revenue growth at the expense of margins (These articles shed further light on issues mentioned elsewhere e.g licensing, Olympics, pricing pressure.) © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 Information provided in the Exam Paper (EP) The Exam Paper contained five new exhibits: 13 Email dated 27 July 2011 from Alfred Vesey to you: Watchwell Limited (WW) 14 Watchwell Limited: Management accounts for the year ended 30 June 2011 15 Email dated 25 July 2011 from Tom Mitchell to Alfred Vesey: Acquisition target – Mustang 16 Letter dated 21 July 2011 from Corey Thwaites (PQR) to Tom Mitchell (WW): Tender to become sole security provider to combined Funtimes / PQR business 17 Funtimes – where has it come from? („Music For Today‟ magazine, July 2011) These covered ten pages of new information, three of which comprised the management accounts Examination requirements Candidates were required to prepare a draft report to the board of WW, to include: A review of WW's performance for the year to 30 June 2011 An assessment of the proposal for the acquisition by WW of Mustang An evaluation of the advantages and disadvantages for WW in tendering for PQR‟s enlarged manned guarding contract with effect from September 2011 after its merger with Funtimes Additional guidance drew candidates‟ attention to the expected approach for each requirement: Their review at Requirement was to comprise a commentary on the revenue, gross profit, profit from operations and the six Manned Guarding KPIs, by comparison with the previous year At Requirement 2, they were to calculate the price that WW should offer for Mustang and explain any assumptions made in that calculation They should also advise WW on the factors to consider in appraising Mustang‟s client contracts and profile of business activities, with reference to Tom Mitchell‟s email dated 25 July 2011 At Requirement 3, they should address the commercial and strategic benefits and risks for WW‟s business in tendering for this larger contract, dealing with Corey Thwaites‟ „matters for consideration‟ as well as any ethical issues arising Candidates were also told to include an executive summary and to balance their report across the three detailed requirements They were given a suggested time allocation, unchanged from recent Case Study exams, as well as other guidance that should now be familiar in relation to executive summaries, the discussion of ethical issues within their answer to the requirements, the need to attempt all requirements and, for each of these, to address all four skills areas: Assimilating and Using Information (A&UI), Structuring Problems and Solutions (SP&S), Applying Judgement (AJ) and Conclusions & Recommendations (C&R) The time allocation suggested to candidates was: Reading and planning Performing calculations and financial analysis Drafting the report hour hour hours Candidates should have spent time studying Exhibit 13 carefully so as to understand the requirements and to identify the key elements of each; digesting the other new exhibits (management accounts, proposals in relation to Mustang and PQR / Funtimes, press article); and identifying the related AI exhibits to integrate into their answers For Requirement 1, candidates should then have begun a more detailed review of Exhibit 14, enabling them to assess the 2011 accounts in the light of their analysis of past results and forecasts for the large clients carried out in preparation for the exam For Requirement 2, it was essential to recognise that the data for Mustang at Exhibit 15 followed the methodology set out at Exhibit 11 in the AI Finally, for Requirement 3, candidates had to read Exhibits 16 and 17 and relate these to relevant material within the AI referring to PQR and tenders – as well as other topics such as policing and the Olympics With proper time allocation, candidates should have been able to complete these tasks within the four hours available to write a well-balanced report A danger may have been to spend too long on Requirements and so that Requirement (and the executive summary) was rushed and thus unstructured or short of content Not for the first time, there was much evidence of such time pressure, particularly for the weaker candidates © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 Analysis of Exam Paper information From an initial reading of the new exhibits, candidates should have established the following: WW has grown sharply in 2011 via expansion in the Ardwicke contract and clients inherited from Quinto A corporate agent has approached WW on the possible acquisition of Mustang, a small local company WW‟s client, PQR, is merging with Funtimes, a local leisure group (not mentioned in the AI) WW has been invited to tender to become sole security provider for the merged business As part of the tender, among other ethical issues, PQR is offering WW inside information from a rival bid A more detailed review of the EP should then have elicited the key facts to be addressed in the exam From the management accounts at Exhibit 14 (in similar format to Exhibit 6), we learn that WW has done well in 2011, with strong revenue growth, but with pressure on margins and working capital Specifically: Revenue has risen to £18.9m, up 32.7% on the prior year, with growth across both business streams Revenue and hours from the two largest private sector clients have risen, though not as much as forecast; but revenue and hours from the three key public sector ones have declined or stayed constant Quinto clients have contributed revenue of £1.1m and 94,000 hours, both slightly below forecast Cost of sales and administrative expenses are respectively up 35.1% and 37.2%, to £15.0m and £2.0m Most components of costs have risen, with wages and salaries broadly up in line with staff numbers As a result, gross profit and profit from operations are up 24.2% / 13.1%, to £3.9m / £1.9m respectively KPIs have been variable: in particular, revenue per hour is up from £11.73 to £11.91 but sickness days and staff turnover have both deteriorated (Candidates will have expected to be presented with 2011 management accounts Detailed analysis of the AI figures – 2010 accounts, 2011 forecasts for key clients and KPIs – was essential preparation for understanding key relationships within the accounts and the main drivers of WW‟s performance They should not have been surprised to see the impact of Ardwicke and Quinto on the results or a decline in WW‟s public sector clients.) Exhibit 15 presents the Mustang proposal, providing key financial information to be adjusted in line with the equivalent data previously provided for Tyro Guards at Exhibit 11 This shows in particular that: Mustang has three divisions: Manned Guarding (MG), Mobile Security (MS), Security Consultancy (SC) In the year to 30 June 2011, these generated total revenue of £0.7m and gross profit of £0.2m, with £0.5m of revenue in MG but gross profit much more evenly distributed MG comprises three contracts, one of which is having its terms changed, another is being renewed and the third (which generates minimal profit) is in doubt Utilisation is 93%; staff turnover, 17% Guards are fully licensed and receive six days of annual training MS is experiencing problems, partly at client sites in the Alpha, Bravo, Charlie districts The future of SC (professional advice to public sector bodies) is unclear: there are no signed contracts and Peter Ross (director responsible) is leaving to set up a new company in the north of England (This new information was in a very similar format to Exhibit 11, and the vast majority of candidates recognised that the contents were directly comparable However, they had to identify and analyse the facts and figures relating to Mustang, which were subtly different from those for Tyro.) From Exhibits 16 (letter by Corey Thwaites, PQR purchasing director) and 17 (press article), we learn that: PQR is merging with Funtimes, a local leisure group around the same size as PQR WW is being asked to tender for the enlarged security contract, ten months before the existing PQR contract expires The only other bidder is Logos – Funtimes‟ incumbent security provider and a close rival of WW The enlarged contract will cover security for the 2012 London Olympics sailing venues at Weymouth and Portland, but Funtimes (using Logos) is solely responsible for the test events in summer 2011 If its bid were unsuccessful, WW would have to be compensated for early termination Corey sets out eight „matters for consideration‟ for WW in preparing its tender These include: the need to work closely with the police; the „TUPE‟ transfer of staff from the losing bidder to the winning bidder; thresholds for SIA-accredited staff and female staff; a change in the invoice payment period from 30 to 45 days; the need to provide security outside Dorset from 2013; additional specialised staff training Corey is offering to provide WW with inside information on the Logos bid Logos is rumoured to be planning visits to WW client sites to tempt guards with cash bribes Funtimes has been reducing costs (including security at all venues) in a quest to become more efficient; this has proved a false economy, with savings dwarfed by the cost of a recent riot at its flagship site © The Institute of Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 (Candidates may have predicted a tender but are unlikely to have expected one arising in precisely these circumstances For a proper appreciation, they had to have fully familiarised themselves with the AI.) The EP develops a number of features of WW‟s business from the AI, each needing a different technique for advising the board: The management accounts require a clear focus on financial statement analysis; the Mustang proposal involves financial data analysis together with a broader business perspective and a strong element of professional scepticism; while the PQR / Funtimes tender entails an understanding of WW‟s strategic objectives and financial goals Exhibit 13 sets out the route to be followed in writing the report The analysis of WW‟s accounts at Requirement had to cover the items specified at Exhibit 13 It should have been apparent that this involved not just the company as a whole but also key clients; not just revenue but also hours; not just the income statement but also KPIs (but not the statement of financial position, working capital ratios or the cashflow statement) Data for all of these was given, just as it had been in the AI With a logical approach, the numerical analysis (mainly calculations of absolute changes and percentage variances) could have been carried out quickly, leaving time for a sensible commentary on this analysis For Requirement 2, candidates had to perform a series of calculations on the acquisition target Mustang, and then apply a healthy degree of professional scepticism in order to reach a conclusion that took account of both quantitative and qualitative considerations A logical approach would again have paid dividends Finally, Requirement involved a structured assessment of a different sort of business activity – re-tender for an existing client following its merger with another company in the same sector Candidates had to produce an integrated piece of writing that addressed the key elements of the requirement („benefits and risks‟, „matters for consideration‟ and „ethical issues‟) In relation to ethics, candidates had to read carefully the note appended to Corey‟s letter so as to gauge the potential impact of the issues raised Summary of grades available The Examiners identified five topics for which grades would be awarded, corresponding to the requirements: Executive summary Review of WW‟s financial performance Assessment of proposal for Mustang acquisition Evaluation of PQR / Funtimes tender Overall paper Candidates were rewarded according to how well they demonstrated, under each of these topics, their application of four skills: A&UI SP&S AJ C&R Assimilating and Using Information Structuring Problems and Solutions Applying Judgement Conclusions & Recommendations For each topic, there were a number of „boxes‟ under each of the four skills, representing specific areas in which the skill was to be demonstrated Within each, candidates were awarded one of five available grades: CC SC IC ID NA Clearly Competent Sufficiently Competent Insufficiently Competent Insufficiently Demonstrated Not Addressed The total number of boxes per topic and skill was as below This reflects (i) an even balance between the three main requirements and (ii) higher weighting towards SP&S and AJ, as indicated in the Exam Paper rubric Executive summary Review of WW‟s financial performance Assessment of proposal for Mustang acquisition Evaluation of PQR / Funtimes tender Overall paper © The Institute of Chartered Accountants in England and Wales 2011 A&UI 2 SP&S 4 13 AJ 3 12 C&R 2 10 Total 11 12 11 42 Page 10 of 21 CASE STUDY – JULY 2011 Commercial and strategic benefits Candidates generally managed to identify these but, as in other requirements, they struggled to develop their thinking into the application of judgement Weaker ones became engrossed in one or two benefits and did not stop to think if there might be others They understood the wider strategic consequences (entry into the Top 20, impact on reputation) but did not adequately assess the factors that might affect WW‟s pricing decision For example, they did not discuss the fact that there might be room for manoeuvre as the PQR contract was generating high revenue per hour and so probably earning a higher-thanaverage margin However, only those candidates who had calculated revenue per hour at Requirement would have been in a position to make the link It was similar with cash Almost all candidates discussed the proposed increase in credit terms, but only a few reflected back on the cash balance, working capital cycle and debtor days that had often been mentioned (inappropriately) at Requirement to show that there was ample headroom and that a 45-day period would not drastically affect WW cashflow Among risks, the one most commonly identified was that Logos – with its history of „lowballing‟ – might undercut WW: “There is no point in offering a lower price than Logos and then facing the consequences of a small profit or even loss for three years If price is to be a major factor, WW is unlikely to win, so it must ensure that the key decision-makers are fully aware of its reputation for service.” Only stronger candidates recalled that WW had won the original PQR tender despite having the highest quote (Exhibit 10) Few mentioned the compensation that would be due in the event of WW losing the re-tender, or the likely additional costs involved in tendering and in training new staff Very few too mentioned that Funtimes was the dominant partner and that this would favour Logos, which had the existing Funtimes relationship and which had exclusivity on the security for the imminent Olympics test events Similarly, only a minority estimated the true size of the contract by reference to all the variables involved (PQR expansion plans; Funtimes entrepreneurialism versus apparent problems; activity during and after Olympics peaks) Corey Thwaites’ “matters for consideration” A major differentiator in this section was the „matters for consideration‟ Candidates often treated them as extra information to be used or not; only a small minority actually covered all eight Many good candidates managed five or six well-explained items here, compared with two or three for weaker candidates The TUPE issue – to which they had been introduced in Exhibit – was often discussed, though candidates rarely recognised that it could have wider consequences, given the evident differentials in pay and licensing status between the two sets of staff Many discussed the 30% female quota but in the wrong way e.g worrying that WW could not meet this figure as it only had 20% female staff currently; they did not realise that, with the small number of staff needed for this contract compared with the large pool of available staff, there would not be a problem According to one candidate, mindful of the legal issue arising in Exhibit 5, “Currently WW has 20% female staff, so having a higher percentage may lead to more discrimination claims or complaints.” Most candidates wove the matters for consideration into their broader narrative rather than presenting them as a separate, unconnected list As noted above, those who related these issues to earlier exhibits from the AI were able to enhance their answers (“The relationship with police could help win future tenders with the public spending cuts, meaning more police work will be outsourced”); as were those who had done some extra research (“Dorset police reportedly received £19m from the Home Office to help fund security during the 2012 Olympics Collaborating with PQR on this project may allow WW to tap into the stream of funding whilst enhancing its reputation.”) In fact, despite the numerous references to police in the AI, only a minority of candidates discussed joint working Ethical issues Ethical issues were assessed mainly at the „double box‟ under AJ, but also at A&UI and C&R Candidates generally did well here in analysing the facts and making a recommendation, especially in relation to the two specific issues introduced in Tom Mitchell‟s note at the foot of Exhibit 16 Most realised that both the insider dealing and bribery were unethical, advising WW not to accept the information and to warn staff about the bribe, sometimes by reference to the newly-implemented 2010 Bribery Act Others took a more naive view: “This may seem unethical because tenders should be confidential, but given Logos‟ history of „lowballing‟, WW can gain an advantage in that they can assess whether an actual tender is worth being made The practice is not illegal on WW‟s part but Corey‟s position in PQR may be compromised if found out.” © The Institute of Chartered Accountants in England and Wales 2011 Page 17 of 21 CASE STUDY – JULY 2011 Candidates did less well with the less signposted issue of SIA compliance: hardly any recognised that Logos might be in breach of the regulations Among the better comments here was “ Without criticising Logos, WW must provide evidence and guidance in the tender process that highlights this requirement and WW‟s ability to achieve it.” Ethics and professional scepticism In line with previous sittings and with the regular AI rubric, four of the 42 skills assessment boxes in the WW marking key related to ethics and professional scepticism: Requirement 2: Demonstrates professional scepticism on assumptions (two boxes: range and depth) Requirement 3: Uses professional experience to assess ethical issues (two boxes: range and depth) Thus ethical issues were a core part of Requirement 3; likewise, professional scepticism at Requirement Grades were also available in the executive summary for summarising the key findings on ethical issues and from candidates‟ professional scepticism, as well as under „Overall Paper‟ In general, the professional scepticism at Requirement was well done, with the vast majority of candidates challenging the assumptions underlying Mustang‟s figures It is a sign of good professional awareness that candidates are prepared to express their concerns about questionable data that is presented to them However, some still insist on doing this for figures about which there is not meant to be any uncertainty, notably in requesting audited accounts for the subject company as they not accept the reliability of management accounts The examiners once again stress that they use management accounts as the vehicle for a company‟s financial history because they offer greater flexibility and not to raise doubts about their rigour Some candidates too still insist on inserting a self-conscious heading „Scepticism‟ to let the examiners know that they what they are doing On the ethical issues at Requirement 3, as noted above candidates focused on the two problems highlighted in Tom Mitchell‟s footnote but did not always identify the wider areas of SIA licensing At the lower end of the cohort, precedence was given to e.g gender discrimination or some other ethical issue not really prompted by the requirement, but perhaps pre-prepared Weaker candidates often give advice that reveals a lack of grounding in commercial reality e.g “Refuse to any further business with PQR” Overall paper The majority of candidates met all the requirements (including executive summary) though – as indicated above – there were signs of time pressure Appendices were in the main better focused than has often been the case Style was good in the top half of the cohort Poorer scripts tended to have a stream of badly-linked onesentence ideas Language was mostly professional, though there were some tactless comments about the abilities of the directors (the former prison governor at Mustang attracted particular contempt) Illegibility remains a problem In its worst form, it manifests itself in executive summaries hurriedly written in the last few minutes of the exam © The Institute of Chartered Accountants in England and Wales 2011 Page 18 of 21 CASE STUDY – JULY 2011 PART 4: APPENDICES APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: Review of WW’s financial performance Income statement – summary 2011 2010 Change £000 18,924 £000 14,264 £000 4,660 32.7 (14,954) (11,069) (3,885) 35.1 % margin 21.0% 22.4% Gross profit 3,970 3,195 775 24.2 Administrative expenses (2,024) (1,475) (549) 37.2 % margin 10.3% 12.1% Profit from operations 1,946 1,720 226 13.1 17,998 13,391 4,607 34.4 Cost of sales (14,575) (10,718) (3,857) 36.0 Gross profit 3,423 2,673 19.0% 20.0% 926 Cost of sales Gross profit Revenue Cost of sales Change % (6.4) (14.7) Revenue and gross profit – by activity Manned Guarding Revenue 750 28.1 873 53 6.1 (379) (351) (28) 8.0 547 522 25 4.8 59.1% 59.8% Mobile Security Revenue Revenue and revenue per hour – by client (Manned Guarding) Revenue Revenue versus versus prior year prior year Revenue versus forecast Revenue Revenue Revenue versus per hour per hour forecast forecast actual Revenue per hour prior year £000 % £000 % £ £ £ 2,304 62.7 (272) (4.4) 12.09 12.11 11.90 PQR Leisure Parks 509 39.8 (68) (3.7) 12.22 12.25 11.96 Granville University (30) (2.1) (18) (1.3) 11.73 11.58 11.83 Soton College (119) (11.5) (110) (10.8) 11.75 11.54 11.85 Dorset Hospital (24) (2.6) (16) (1.7) 11.65 11.44 11.75 Jonas Construction 660 83.3 - 11.80 11.71 11.82 1,077 - (123) (10.3) 12.37 11.46 - Ardwicke Stores Other – Quinto clients Other – exc Quinto clients - 230 5.4 (455) (9.2) 11.78 11.99 11.43 4,607 34.4 (1,062) (5.6) 11.95 11.91 11.73 Total hours (1,511k) are down 5.3% on forecast (1,595k) and up 32.3% on prior year (1,142k) © The Institute of Chartered Accountants in England and Wales 2011 Page 19 of 21 CASE STUDY – JULY 2011 Cost of sales Wages 2011 2010 Change Change £000 £000 £000 % 14,423 10,664 3,759 35.2 Vehicles 178 165 13 7.9 Tendering and business development costs 149 100 49 49.0 Recruitment and training 103 73 30 41.1 Uniforms 72 59 13 22.0 Depreciation 29 21 262.5 14,954 11,069 3,885 35.1 1,082 769 313 40.7 Advertising 174 102 72 70.6 Legal and professional charges 155 87 68 78.2 Telephones, printing, postage and stationery Administrative expenses Running costs: Salaries – directors and managers 121 89 32 36.0 Insurance 79 56 23 41.1 Rent and rates, heat and light 87 77 10 13.0 Repairs Other items: 65 85 (20) (23.5) Goodwill amortisation 110 121 (11) (9.1) Impairment of receivables 152 89 63 70.8 (1) n/a (Profit)/loss on sale of tangible assets (1) 2,024 1,475 549 33 24 37.5 822 622 200 32.2 855 646 209 32.4 32.79 17.55 32.04 17.14 0.75 0.41 2.3 2.4 37.2 Staff numbers and costs Administration Security guards Average cost – administration staff (£000) Average cost – security guards (£000) KPIs KPI 1: Revenue per man hour worked £11.91 £11.73 KPI 2: Wages as proportion of revenue (Note) 79% 78% KPI 3: Utilisation 90% 89% KPI 4: Staff turnover 24% 21% KPI 5: Training days per employee per year 6.9 4.3 KPI 6: Sickness days per employee per year 8.2 7.1 Note: All the above figures for 2011 are given in the EP except KPI 1, calculated as Manned Guarding revenue / Manned Guarding hours (17,998 / 1,511 per EP, p9); and KPI 2, calculated, as follows: Mobile Security wage costs = £192k Thus Manned Guarding wage costs = 14,423 – 192 = 14,231 So KPI = 14,231 / 17,998 = 79.1% © The Institute of Chartered Accountants in England and Wales 2011 Page 20 of 21 CASE STUDY – JULY 2011 APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculation of purchase price for Mustang A number of approaches and were possible The examples below illustrate two permutations Example Stage 1: Reworking of table – Manned Guarding (MG) Contract (start date) Weekly hours Guards per shift (1 Oct 09) (1 Jul 10) (1 Oct 08) Total 168 48 108 Charge rate £ 9.50 8.85 8.45 Pay rate £ 5.95 6.10 6.80 Annual charge £ 248,976 176,717 189,821 615,514 Annual pay £ 155,938 121,805 152,755 430,498 Other costs £ 34,306 26,797 33,606 94,709 Gross margin £ 58,732 28,115 3,460 90,307 Contract Adjusted for new rates; other costs @ 22% of pay rate Contract Unchanged Contract Unchanged Stage 2: Purchase price calculation Gross margin MG £000 MS £000 SC £000 TOTAL £000 (Stage 1) 90 (Exh 15) 96 (Exh 15) 34 220 MS: Adjustment of margin to 50% (96 – 80) - (16) - (16) MS: Additional revenue @ 50% margin (30 x 0.5) - 15 - 15 Adjusted gross margin 90 95 34 219 Multiple (per AI) 1.5 2.0 2.0 Purchase price 135 190 68 393 Other costs £ 35,056 26,797 61,853 Gross margin £ 54,575 28,115 82,690 Example (variations from Example are highlighted in bold) Stage 1: Reworking of table – Manned Guarding (MG) Contract (start date) Weekly hours Guards per shift (1 Oct 09) (1 Jul 10) Total 168 48 Charge rate £ 9.50 8.85 Pay rate £ 6.08 6.10 Annual charge £ 248,976 176,717 425,693 Annual pay £ 159,345 121,805 281,150 Contract Adjusted for new rates; pay rate raised to new Minimum Wage; other costs @ 22% of pay rate Contract Unchanged Contract Excluded – no value attributed Stage 2: Purchase price calculation MG £000 Adjusted gross margin SC: No value attributed MS £000 SC £000 TOTAL £000 (Stage 1) 83 (as before) 95 (as before) 34 212 - - (34) 83 95 - Multiple (per AI) 1.5 2.0 - Purchase price 124 190 - © The Institute of Chartered Accountants in England and Wales 2011 (34) 178 314 Page 21 of 21 JULY 2011 - WATCHWELL LTD Published Key DATE CANDIDATE NO TIME MARKER NUMBER ES Req Req Req Overall TOTAL 11 12 11 42 CC SC IC ID NA Total SUPERVISOR SIGNATURE CHECKER SIGNATURE Framework ID = Insufficiently Demonstrated IC = Insufficiently Competent SC = Sufficiently Competent CC = Clearly Competent 1 or or - Range Executive summary ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Overview of Executive Summary Use of appropriate numbers Suitable document for the board - appropriate brief context of the report - sufficient but not excessive text Total revenue Individual client / business stream revenues - Review of WW 2011 results v 2010 - revenue - GP and OP - KPIs Gross / operating profit KPIs - Discussion of Mustang acquisition - proposed price - appraisal by business streams Proposed price Advice on PQR / Funtimes tender - benefits and risks - ethical issues NA (CC) (SC) (IC) (ID) NA (CC) (SC) (IC) (ID) ID Min over Min over Min over Anything else IC SC ID IC SC CC Min Min Min Anything else CC Summarises key findings (quality of discussion) Commentary on financial performance - total figures (revenue, GP and OP) - revenue streams / client - KPIs Commentary on Mustang acquisition - scepticism on assumptions - benefits and risks - covers all three business streams Commentary on PQR / Funtimes tender - benefits and risks - key matters for consideration - ethical issues NA ID (CC) Min (SC) Min (IC) Min (ID) Anything else IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates key points Draws conclusions Good progress towards Top 20 target KPIs may suggest deteriorating staff morale On financial analysis of 2011 figures - good results overall v 2010 - better than industry / lower than forecast Key benefit is Mustang's fit with WW strategy On Mustang acquisition - proposes price (acceptable range £250k - £450k) - easily affordable given cash balance Key risk is doubt over Mustang's numbers On PQR / Funtimes tender - must tender - becomes more significant client with merger Key benefit is successful tender advances strategy (F) NA Key risk is loss of major client ID IC SC CC Makes key recommendations Consider not renewing unprofitable public sector contracts (R) NA Corroborate information on Mustang ID IC SC CC Tender document should focus on quality not price Do not accept insider information Make staff aware of bribery risk Contingent / staged consideration (R) NA ID IC SC CC Explain why the grades profile reflects how well the candidate has produced an executive summary CC SC IC ID NA Total REQUIREMENT - Review of WW's 2011 financial performance ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI & EP information Financial analysis on revenue 2011 & 2010 actuals (Exh 4, 6, 14) - revenue £18,924k and £14,264k - GP £3,970k and £3,195k - OP £1,946k and £1,720k Total revenue - up £4,660k (32.7%) / like-for-like up £3,583k (25.1%) Revenue stream / mix - MG up £4,607k (34%) / share = 95% v 94% - MS up £53k (6%) / share = 5% v 6% KPIs for 2011 & 2010 (Exh 4, 6, 14) - KPI - 90% and 89% - KPI - 24% and 21% - KPI - 6.9 and 4.3 days - KPI - 8.2 and 7.1 days Revenue by client - Ardwicke / PQR / Jonas - up - public sector - down - Ardwicke 33% of total (calculation) Business stream 2011 figures (Exh 14) - revenue MG £17,998k / MS £926k - gross profit MG £3,423k / MS £547k Analysis by hours - overall hours up 32.3% on 2010 / down 5.3% on forecast - calculation of revenue per hour by client (R) NA Need dash to get Detailed breakdown of WW figures - individual expenses breakdown (Exh 6,14) - staff numbers (Exh 6,14) - chargeable hours (Exh 4,14) Financial analysis on gross profit Other relevant figures - industry forecast (2-4% growth) (Exh 2) - industry target 15% gross margin (Exh 3) - WW revenue forecasts (Exh 4) - industry standard KPIs (85% / 25%) (Exh 5) Total GP up £775k (24.3%) / GP% down (21.0% v 22.4%) MG margin declined (19% v 20%) MS margin declined (59% v 60%) Wages increased £3,759k (35%) / 96% of COS Calculation of average wage rates >40% increase in tendering / recruitment & training (R) NA (R) NA Need dashes to get ID IC SC CC ID ID IC IC SC SC CC CC Financial analysis / commentary on operating profit Identifies business issues Total OP up £226k (13.1%) / OP% down (10.3% v 12.1%) Calculates change in individual expenses Calculation of average salary Advertising increase explained eg Olympics L&P increase explained eg outsourcing / employee claim Bad debt provision/impairment increase explained (recession) Understanding of business entity - growth by acquisition - growth by winning tenders - Infologue Top 20 Political / economic issues - Government cuts affecting public sector - recession / recovery (Exh 12c) - UK security threat level - Olympics (R) NA ID IC SC CC Financial analysis / commentary on KPIs Own research (valid context) - - ave revenue per hour = £11.91 - wages/revenue = 79% - utilisation improved 1% (90% v 89%) - staff turnover deteriorated 3% points (24% v 21%) - training days improved 2.6 days (6.9 v 4.3 days) - sick days deteriorated 1.1 days (8.2 v 7.1 days) (F) NA (R) NA ID IC SC CC ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Implications of financial analysis on revenue Draws conclusions and makes recommendations High reliance on Ardwicke Quinto revenue just below expectations (£1.2m) PQR highest revenue per hour / imminent re-tender Jonas may have peaked (Olympic contract completion) Public sector lowest revenue per hour Overall conclusion on revenue - good progress towards Top 20 target - growth better than industry forecast - revenue up but below forecast (R) NA ID IC SC CC Overall conclusion on GP / OP - overall profit up but margin % down - main revenue from low-margin activity - future margin squeezed by Minimum Wage / pension Implications of financial analysis on costs Wage / salary increase due to staff numbers Wage / salary increase due to pay rises Staff increase (32%) impacts recruitment/training (41%) Increase in impairment may imply contract problems (R) NA Overall conclusion on KPIs - average revenue per hour up despite current economy - wages rising faster than revenue - staff turnover / sick days may impact client service Recommendations - consider not renewing unprofitable public sector contracts - need to monitor costs carefully - investigate poor staff morale - improve debt collection - ID IC SC CC Implications of financial analysis on KPIs KPI has improved over 2010 but below forecast KPI has deteriorated KPI > industry standard (85%) / < target (92%) KPI > target (20%) / < industry standard (25%) KPI 5: company continues to invest in training / quality KPI 4/6 may mean deteriorating staff morale (R) NA ID IC SC (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC CC Explain why the grades profile reflects how well the candidate has reviewed WW's 2011 financial performance CC SC IC ID NA Total 11 REQUIREMENT - Proposal to acquire Mustang ASSIMILATING AND USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI & EP information Calculation of MG price MG figures (Exh 11,15) - hours and number of guards - charge rates and pay rates - other costs at 22% - contract gross profit £28k / contract £3k Contract annual charge £249k (168 x 52 x x £9.50) Contract annual pay £156k (£5.95) / £159k (£6.08) Adjusted other costs 1.5 x MG contracts' gross margins (1 & or & & 3) (R) NA MS / SC figures (Exh 15) - MS revenue - MS projected gross margin 50% - SC gross profit ID IC SC CC Calculation of MS/SC price MS adjusted revenue £160k and £30k MS gross margin reduced to 50% Multiples (Exh 4) - MG x 1.5 - Other sectors x 2.0 SC unadjusted gross profit £34k MS multiple of 2.0 and SC multiple (0.0 - 2.0) Other (Exh 8,15) - KPIs (utilisation 93%, staff turnover 17%) - contract dates - Minimum Wage increasing to £6.08 - 56-hour working week (R) NA ID IC SC CC Uses professional scepticism to comment on assumptions (R) NA Need dashes to get ID IC SC CC MG assumptions - contract - consider timing / remaining life < years - contract - no adjustments required - contract - low margin / 50% chance of losing - discusses validity of 1.5 multiple Identifies business issues Strategy - history of acquisitions - problems with last acquisitions (Tyro / Quinto) - previous SC work (Packryte) Legal and regulatory issues - SIA / ACS / CRB requirements - EU Working Time Directive SC assumptions - revenue may be non-recurring - new contracts not yet signed - dependent on Peter Ross - justifies multiple used Other - cash rich (£2.5m) - recessionary impact / government spending cuts (F) NA ID IC SC MS assumptions - new contract may not generate £30k revenue - service level (£20k) issues may result in reduced future revenue - considers accuracy of projected 50% margin CC KPIs assumptions - may be calculated differently from WW - comment on specific KPIs (utilisation 93% / turnover 17%) (R) NA (F) NA Range of relevant areas ID IC SC CC IC SC CC Depth of discussion ID APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Business appraisal - general and MG Draws conclusions Agent who approached WW may have own agenda Concludes on price based on given methodology - proposes price (acceptable range £250k - £450k) - easily affordable given cash balance - price will be subject to negotiation - no value applied to MG contract Mustang is a relatively new company - increases risk Mustang reliant on MG contracts - increases risk MG has good gross margin within the 10-15% range Lower charge-out rates than WW may threaten margins Lower wage rates may imply quality issues (R) NA ID IC SC Concludes on strategic fit - develops MS / SC in line with strategy - but includes work in ABC areas contrary to policy Impact on current business - significant growth of business towards Top 20 - considerable management time needed - Mustang would be biggest acquisition since 2000 CC Concludes on assumptions - many doubts over figures provided Business appraisal - MS (R) NA (F) NA Potential synergies on security rounds Old fleet of vehicles costly to replace Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC Dissatisfied customers may impact on reputation WW management may be reluctant to work in ABC areas Makes practical commercial recommendations Work in ABC areas may incur extra costs Corroborate information on MG contracts (R) NA Clarify MS issues (£30k, 50%, unhappy client, poor fleet) ID IC SC CC Clarify future of SC Business appraisal - SC Corroborate KPIs / staff data Public sector work likely to reduce due to government cuts Check Mustang's compliance with SIA / ACS / CRB Discuss retaining Peter Ross Assess creditworthiness of Mustang's customers Potential to build on Packryte experience Contingent / staged consideration Potential to expand geographically SC potentially high-margin (R) NA ID IC SC CC (R) NA ID IC SC CC Explain why the grades profile reflects how well the candidate has analysed the Mustang acquisition CC SC IC ID NA Total 12 REQUIREMENT - Advice on PQR / Funtimes tender ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses AI & EP effectively Commercial and strategic benefits Only WW and Logos asked to tender (Exh 16) Expansion of business Contract terminated year early / cancellation fee Efficiency savings / evens out seasonality Corey's matters for consideration (Exh 16) Access to more Olympic work Funtimes - riot / cost cutting (Exh 17) Consistent with strategy to increase CCTV work Insider information / bribes (Exh 16) Progress towards Infologue Top 20 (R) NA (R) NA ID IC SC ID IC SC CC CC Commercial and strategic risks Describes wider context Logos has advantage of existing relationship with Funtimes Olympics non-recurring / prestigious event Logos may undercut WW (history of "lowballing") Tendering part of normal business process Funtimes may only consider price not quality WW has seasonal contracts (football/universities) WW will incur costs of tendering Funtimes is dominant partner / will make decision Greater costs of not tendering (eg redundancy) Limited experience of Funtimes venue types Risk losing £1.8m PQR contract / 10% revenue Own research (valid context) (R) NA (R) NA ID IC SC CC Corey Thwaites' matters for consideration ID IC SC CC - Generally enhanced security needs will increase market size - Capitalise on previous assignments with police (Hyacinth) - TUPE transfers may cause pay rate issues - WW already meet SIA accreditation - WW can meet 30% female quota - Guarding hours may mean extra recruiting for peak - 45-day payment period will impact cashflow - Consistent with strategy to expand outside Dorset - Cost of additional training (water activities / CCTV) (R) NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates commercial and strategic benefits and risks Draws conclusions and makes recommendations Revenue - effective tender value is for £3.6m - PQR rapid expansion - £3.6m may be conservative Concludes on whether to tender - must tender (no point in not tendering) Margins - margin may be threatened by competitive tender - scope to reduce price as PQR margin appears high - PQR contract currently has highest revenue per hour Concludes on commercial and strategic issues - becomes more significant client with merger - potential strain on management time as Mustang coincides - consistent with strategy Cash - calculates cashflow lag / compares 45 v 50+ debtor days - increased payment period not an issue (£2.5m cash held) Commercial recommendations for tender document - focus on quality not price - highlight SIA compliance - highlight police experience - Other - increased market share - impact on reputation (R) NA (F) NA Range of relevant areas ID IC SC CC Depth of discussion ID IC SC CC Recommendations on ethical issues - must not accept insider information - make staff aware of bribery risk - Uses professional experience to assess ethical issues Insider information - questionable business practice - tender documents are supposed to be confidential Bribery to 'test' WW staff - questionable business practice - only a rumour / may not happen - potential to embarrass WW if staff accept (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC Low level (80%) of SIA accreditation required - minimum is 85% approved - Logos is in breach Logos history of aggressive tendering (Tower) - may be paying low wages / unlicensed staff - WW staff / service likely to be better quality than Logos (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC Explain why the grades profile reflects how well the candidate has advised on the PQR/Funtimes tender CC SC IC ID NA Total 11 Overall paper APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Structure and style Meeting the requirements Suitable style Requirement - logical flow - revenue, GP and OP - not repetitive - analysis by client - clear structure / appropriate headings within sections - KPIs (at least 4) Suitable language for audience Requirement - formal language / appropriate jargon - proposes a price - recognises external report / TOR / disclaimer - appropriate professional scepticism - legibility / spelling - business appraisal of MG, MS and SC Appropriate appendices Requirement - calculations clear and easy to follow - commercial and strategic benefits and risks - assumptions clearly set out - Corey Thwaites' matters (at least 5) - appropriate transfer of calculations to Report - appropriate response to insider information NA (CC) (SC) (IC) (ID) ID Min over Min over Min Anything else IC SC CC NA (CC) (SC) (IC) (ID) ID IC SC CC Min over Min over Min Anything else CC SC IC ID NA Total .. .CASE STUDY – JULY 2011 PART 1: EXECUTIVE SUMMARY Introduction This report covers the July 2011 Case Study (CS) exam It is issued in conjunction with... Chartered Accountants in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case relates to Watchwell Ltd, a medium-sized... in England and Wales 2011 Page of 21 CASE STUDY – JULY 2011 Information provided in the Exam Paper (EP) The Exam Paper contained five new exhibits: 13 Email dated 27 July 2011 from Alfred Vesey