Auditing Case Study 2 2000words

Appendix 2 –

Appendix 6 –

Jacqueline Brown s3487979

WESFARMERS CASE STUD

Y

REPORT

Accounting, Behaviour and Organisations

Lecturer:

Executive Summary

This report discusses Wesfarmers management accounting systems (“MAS”) currently in place. Wesfarmers’ strategy, organisational structure, environmental responsibilities and performance measurement systems is examined to gain understanding of the procedures in place that Wesfarmers uses to collect and communicate information to support the successful implementation of The Wesfarmers Way strategy. The research found that through Wesfarmers decentralised organisational structure it enables the company and each subsidiary to operate with a high level of autonomy and responsibility, which allows the successful implementation of their strategy and ultimately achieve their goal of delivering a satisfactory return to shareholders. It is recommended that the executives’ performance measurement system include environmental responsibility targets to ensure the social responsibility attribute of Wesfarmers strategy is consistent with other strategies and performance measures in place.

Tables of Contents

Executive Summary …………………………………………………………………………………………………………………… 1

Introduction …………………………………………………………………………………………………………………………….. 2 Comment by Author: Subheadings required. For each subtopic there shall be one subsection. For example, competitive advantage and business mission shall all be seen under strategy section.

Background ……………………………………………………………………………………………………………………………… 2

Industry …………………………………………………………………………………………………………………………………… 2

Competitors …………………………………………………………………………………………………………………………….. 2

Strategy …………………………………………………………………………………………………………………………………… 2

Management Accounting Systems …………………………………………………………………………………………… 3

Organisational Structure ……………………………………………………………………………………………………………. 3

Responsibility centres …………………………………………………………………………………………………………….. 4

Environmental Responsibility ……………………………………………………………………………………………………… 4

Performance Measurement System and Rewards …………………………………………………………………………. 5

Recommendations ……………………………………………………………………………………………………………………. 6

Conclusion ……………………………………………………………………………………………………………………………….. 6

References ………………………………………………………………………………………………………………………………. 7

Appendices ………………………………………………………………………………………………………………………………. 9

Appendix 1 – The Wesfarmers Way …………………………………………………………………………………………. 9

Appendix 2 – Wesfarmers Organisational Structure …………………………………………………………………. 10

Appendix 3 – Bunnings Organisational Structure ……………………………………………………………………… 11

Appendix 4 – Business success factors of having an environmental focus ……………………………………. 12

Appendix 5 – Remuneration policy principles ………………………………………………………………………….. 12

Appendix 6 – Executive Performances & awards ……………………………………………………………………… 13

Introduction

The purpose of this report is to discuss Wesfarmers’ MAS currently in place. This report provides an understanding of Wesfarmers’ strategy known as The Wesfarmers Way and how their decentralised organisational structure enables Wesfarmers’ subsidiaries to operate autonomously, whilst ensuring they are all aligned to the overarching objective of delivering a satisfactory return to all shareholders (Wesfarmers Annual report 2016). In conjunction with Wesfarmers decentralised approach, their profit centres and performance management system and rewards enable the company to support the implementation of The Wesfarmers Way strategic framework. An in-depth analysis of Wesfarmers’ environmental responsibilities and the issues associated that impact the company’s business is also discussed.

Background

Wesfarmers is one of the largest listed companies in Australia, commencing in 1914 as a ‘Western Australian farmers’ cooperative’ (Wesfarmers 2016). Wesfarmers operates predominantly in Australian and New Zealand retail, coal mining, fertilisers, chemicals and industrial and safety products (Wesfarmers 2016). Wesfarmers is also one of Australia’s largest private sector employers with approximately 220,000 employees and has achieved a $66 billion revenue in the 2016 financial year (Wesfarmers Annual Report 2016).

Industry

Wesfarmers’ operates in multiple industries including home improvement, office supplies, supermarkets, liquor, department stores, convenience stores, hotels and businesses in the industrial division including energy, chemicals, fertilisers, coal and industrial and safety products (Wesfarmers 2017). Major Australian companies owned by Wesfarmers include Bunnings Warehouse, Coles, Officeworks, Kmart, Target, Liquorland and many more (Appendix 2).

Competitors

Wesfarmers has various competitors competing with their subsidiary companies for example ALDI is competing against Coles and Big W is competing against Target. Two major competitors, Metcash and Woolworths Group are similar to Wesfarmers, who own a variety of different business that compete against Wesfarmers’ subsidiaries, these include Mitre 10, Home Timbre and Hardware, Bottle-O, Woolworths and IGA franchises (Metcash 2017) (Woolworths Group 2017).

Strategy

Wesfarmers aims to ‘deliver satisfactory returns to shareholders’, which is driven by four value-creating strategies (Wesfarmers Shareholder Review 2016, p. 9). These strategies include strengthening current businesses through satisfying customer needs and operational excellence, using entrepreneurial initiative to secure growth opportunities, maintaining sustainability through long-term management and renewing the portfolio through value-adding transactions (Appendix 1). These strategies are underpinned by Wesfarmers’ strategic planning framework, known as ‘The Wesfarmers Way’ (Appendix 1). The Wesfarmers Way is a framework for the Wesfarmers’ business model which comprises of their core values, growth enablers and value-creating strategies which are directed at achieving Wesfarmers’ primary goal of delivering a satisfactory return to shareholders (Appendix 1). Detailed strategies are then developed at a divisional level which are specific to the growth opportunities for each of the subsidiaries (Wesfarmers Shareholder Review 2016). Comment by Author: Did not conclude whether the company is differentiator or cost leader

An essential attribute of this framework is that each business operates with a high level of autonomy Comment by Author: Business mission sub section is missing. Build, hold, harvest or divest. Shall specify.

(Wesfarmers Shareholder Review 2016). Wesfarmers also requires a long-term focus and to act sustainably in the building of businesses and value creation to ensure success in this framework (Wesfarmers Shareholder Review 2016).

Management Accounting Systems

MAS are the established procedures in place that an organisation uses to collect and communicate information to support the successful implementation of business strategies (Topic 1 Lecture slides 2017). The information collected is used for effective planning, monitoring, management control and decisionmaking (Topic 1 Lecture slides 2017). The MAS utilised depends on the industry the organisation operates in and as Wesfarmers is in various industries, each subsidiary requires a different MAS (Shanker 2017). Therefore, it is important that each subsidiary can operate with high levels of independence to achieve division specific goals. Comment by Author: According to the report requirement, this section is not required, so it could be deleted. Make sure you only include relevant information.

Wesfarmers overarching core values and strategies are important in keeping all subsidiaries aligned to the main objective. For example, Bunnings being in the retail industry would ensure their MAS was focussed on achieving high sales through exceptional customer service, which management would track through internal budgeting and variance reports. These reports assist management to make quality decisions about staff expertise, customer needs, and associated costs. These internal reports also ensures Bunnings is strengthening through satisfying customer needs and operational excellence as per The Wesfarmers Way (Appendix 1).

Organisational Structure

Organisational structure is the hierarchical arrangement within an organisation, which outlines how authority, responsibilities and roles are co-ordinated and controlled and how information in the organisation flows in this arrangement (Business Dictionary 2017). The organisational structure of Wesfarmers supports The Wesfarmers Way framework, which cultivates an environment of autonomy, accountability and innovation (Wesfarmers Shareholder Review 2016). Wesfarmers utilises a decentralised structure, whereby the decision-making power is distributed across the subsidiaries in their various industries, rather than at the top with the Board of Directors (Appendix 2) (Topic 4 Lecture slides 2017). Wesfarmers also uses a market-based work units approach where the focus of the work unit is on the specific market (Topic 4 Lecture slides 2017). For example Coles has its own Managing Director (“MD”) who is responsible for the retail supermarket industry and Bunnings has its own MD who is only responsible for the Bunnings Group (Appendix 2). This market-based structure is appropriate for Wesfarmers as it owns companies in various industries which provide diverse products and services, each division has capable management and market responsiveness to customers is a key success factor (Topic 4 Lecture slides 2017). Comment by Author: Good! Clearly describe your conclusion and support them with evidence.

This market-based approach is also utilised within a division level, whereby the subsidiaries have their own organisational structure (Appendix 3). Each division has their own internal board of directors which includes senior executives and senior division members (Wesfarmers Sustainability Report 2016) (Appendix 3). Each department within the subsidiary is segmented where a manager has authority and accountability. For example, Bunnings is segmented into the different home improvement needs such as hardware, nursery and plumbing and within each department a co-ordinator is responsible for targets and team management, where the supporting team members range from G1 to G4 in responsibility. This demonstrates the high level of independence and responsibility Wesfarmers’ subsidiaries are provided, where lower levels of management (eg. Co-ordinators) are given decision-making authority and responsibility within Wesfarmers. Comment by Author: Well justified

Wesfarmers utilises a decentralised approach due to the size and complexity of the company. Under this structure, it ensures information flows efficiently and effectively throughout and co-ordinates people, activities and resources allowing for timely decisions to be made (Topic 4 Lecture slide 2017). It also provides employees opportunities to gain knowledge and skills which empowers people leading to organisational success (Topic 4 Lecture slide 2017). Wesfarmers’ high degree of decentralisation is successful as there is clear communication and outline of roles and responsibilities between managers and work units, Wesfarmers can accurately measure individual performance of work units and there is limited interference of central management in local decisions (Topic 4 Lecture slides 2017).

Responsibility centres

MAS support the development of a successful decentralised approach through the creation of responsibility centres (Topic 4 Lecture slides 2017). Responsibility centres are decentralised work units where management are accountable and responsible for specific operating activities (Topic 4 Lecture slides 2017).

Within Wesfarmers’ organisational structure, profit centres are used as management are given responsibility for both the costs and revenues of their work units. For example Bunnings MD is responsible for the costs and revenues associated with Bunnings, whereas Officeworks MD is responsible only for the costs and revenues associated with Officeworks (Appendix 2). Further, department managers of subsidiaries are also responsible for the profits associated to their department (Appendix 2). Under this profit centre, management is evaluated based on their ability to control revenue and cost and their performance is measured quantitatively (Topic 4 Lecture slides 2017). Comment by Author: Good

Environmental Responsibility

Schaper (2002) states that an environmentally friendly company is one that aims to prevent or limit their damage or to improve the current natural environment. Ballantyne & Gerber (1994) supports this and refers to environmental responsibility as a collective responsibility involving support among communities, companies and the government.

Environmental responsibility emerged in the 1980’s where companies were encouraged to improve on their environmental performance (Das 2006). In recent years, the adoption of environmental responsibility within the global business community has increasingly grown (Schaper 2002). This is because there are significant pressures from community groups, unions, governments and environmentalists to ensure that businesses are being seen to behave in an environmentally responsible manner (Ballantyne & Gerber 1994). Those companies who choose to ignore these pressures do so at their own peril and the monetary impacts are becoming so large it cannot be ignored (Ballantyne & Gerber 1994). This is supported by Mazurkiewicz (2004) who demonstrates the business success factors of a company having an environmental focus (Appendix 4). Comment by Author: Start this section by general discuss the concept of chosen theme.

According to Schaper (2002) some managers only accept the legitimacy of environmental concerns as stakeholder influence, while others accept that being a green business could be source of competitive edge, innovation and new business generation. Mazurkiewicz (2004) supports this concept where companies are noticing community cooperation, revenue growth, cost savings and productivity from becoming ‘green’.

Das (2006) argues that the implementation of environmental responsible initiatives differs depending on the size, culture and industry of the company. Retail and service sector companies face a wide range of environmental challenges but to a lesser extent than manufacturing companies (Das 2006). This is because manufacturing companies are encouraged to have greener operations at each stage of the product lifecycle while retail and service companies are generally expected to have green products (Das 2006). Das (2006) further contends that companies are increasingly integrating environmental responsibility into all operation aspects rather than one operation at a time. Comment by Author: Now we are bringing the broad concept down to the industry where chosen company is in.

Schaper (2002) contends that environmental impacts are only noticeable in larger firms as their impacts are easy to measure and evaluate. Larger firms also have more experience and knowledge in dealing with various stakeholder pressures and are skilled at ‘handling the need for a “greener” business perspective’ (Schaper 2002 p. 526).

Wesfarmers supports Ballantyne & Gerber’s (1994) notion and believes that everyone must play a role in protecting the environment for the long-term (Wesfarmers Annual Report 2016). Wesfarmers is one of Australia’s largest companies, which operates in various industries and as a result its environmental impacts are more noticeable to society (Wesfarmers 2017). This is supported by the Dow Jones Sustainability Index (“DJSI”) which records the sustainability performance of leading companies (Investopedia 2017). DJSI ranked Wesfarmers in the top four companies in the food and staples retail sector (Wesfarmers 2016). This demonstrates the importance of large companies turning green and understanding the various pressures from society in relation to the environment, as according to Mazurkiewicz (2004) it can lead to further success. Comment by Author: Lastly, we explain “how this theme impacts your organization”.

Wesfarmers subsidiaries are all engaged in environmental responsibility for example, Coles opened a new store which is Australia’s first supermarket to use ‘100% natural refrigerants in a combined refrigeration and air conditioning system’ which resulted in an extra 17% energy saving (Wesfarmers Annual Report 2016, p. 23). Bunnings is committed to waste reduction through reusing timber pallets and recycling cardboard boxes instead of using plastic bags for customers (Bunnings 2016). As a result of these initiatives, Bunnings achieved a 67% waste diversion rate, which is increasing each year (Bunnings 2016). Officeworks has introduced a Restoring Australia initiative which involves planting two trees for every one tree used on their office supplies products, and has recycled over 7 million printer cartridges to date through their work with Planet Ark (Officeworks 2017). From these examples, it demonstrates Wesfarmers commitment and dedication to environmental responsibility and the value creation it has had on Wesfarmers in terms of their innovation, cost savings and competitive edge (Mazurkiewicz 2004).

Performance Measurement System and Rewards

Wesfarmers Remuneration Committee is responsible for the overall remuneration policy of Wesfarmers and specifically for non-executive director, executive director and senior executive remunerations (Wesfarmers Remuneration Committee Charter 2014). The Remuneration Committee regularly assesses the policy’s effectiveness and has implemented four guiding principles when considering remuneration plans and policies (Wesfarmers Remuneration Committee Charter 2014) (Wesfarmers Shareholder Review 2016). These principles include ownership aligned, performance focused, consistency and market competitiveness and open and fit for purpose (Wesfarmers Shareholder Review 2016) (Appendix 5).

Wesfarmers remuneration framework comprises of fixed annual remuneration (“FAR”), an annual incentive (“STI”) and a long-term incentive (“LTI”) (Wesfarmers Shareholder Review 2016). This remuneration framework is focussed on connecting executive remuneration to Wesfarmers strategy and business objective achievements and also motivating a performance culture (Wesfarmers Shareholder Review 2016).

The FAR is set at a competitive level with other executives in a comparable roles and companies to ensure Wesfarmers attracts and retains the best people, and also reflects each executive’s contribution and capabilities (Wesfarmers Shareholder Review 2016).

The STI is a cash or restricted share incentive for meeting target performance against measures developed for each senior executive based on their roles, responsibilities and execution of strategic objectives (Wesfarmers Annual Report 2016). Executives are measured based on the Wesfarmers Groups’ Net Profit After Tax (“NPAT”) and Return on Equity (“ROE”) (specifically for the Group MD and Finance Comment by Author: Good. In your report, it is essential to mention some actual financial and non-financial measures. Only describing the big picture of company’s PMS would not be considered as sufficient justification for this section. This also means when you choose a company, you shall make sure you are able to collect the information you need.

Director) and their divisions’ Earnings Before Interest and Tax (“EBIT”), Return on Capital (“ROC”) and where applicable, store sales growth and transaction growth (Wesfarmers Annual Report 2016). Executives are also measured non-financially through diversity, safety, talent management and agreed key goals (Wesfarmers Annual Report 2016).

The LTI is measured by Total Shareholder Return (“TSR”) and Wesfarmers’ Compound Annual Growth Rate (“CAGR”) in ROE over a four-year performance period (Wesfarmers Annual Report 2016). TSR is used to measure performance as it provides a comparative, external market performance measure and CAGR is used because it holds a clear relationship to shareholder value creation useful for Wesfarmers’ longterm success and it also measures the return on its portfolio of businesses (Wesfarmers Annual Report 2016).

These performance measures in the remuneration framework align to Wesfarmers primary objective of delivering a satisfactory return to shareholders (Wesfarmers Annual Report 2016). This is demonstrated where Wesfarmers executives performed on or above target leading to a $66 billion revenue in the 2016 financial year, with a fully-franked final ordinary dividend of 95 cents per share resulting in dividends of $1,070 million to be declared (Wesfarmers Annual Report 2016) (Appendix 6). All divisional targets were met or exceeded by executives in 2016, however Wesfarmers Group NPAT threshold wasn’t met, but the Group MD and Finance Director still received an STI due to other factors such as meeting non-financial targets (Appendix 6) (Wesfarmers Annual Report 2016). Comment by Author: This paragraph sort of evaluated the appropriateness of their PMS. However, it could be improved by considering 3 things-“ consistent with the strategies, key success factors and organisational structure”. Many students could not provide a good quality critical analysis for company’s PMS because they did not follow our requirement to justify their claim from above mentioned 3 perspectivies.

Furthermore all non-financial measures were met by current executives, however none of these nonfinancial measures relate to environmental responsibility (Appendix 6). Considering Wesfarmers highlights the importance of environmental responsibility and that everyone must contribute for the future of society, it would deem the remuneration framework inconsistent as it doesn’t consider environmental factors as part of their performance targets. This is supported in The Wesfarmers Way framework, where the social responsibility attribute highlights Wesfarmers commitment to maintaining high standards of environmental responsibility (Appendix 1) (Wesfarmers Annual Report 2016). This demonstrates that the performance measurement system at Wesfarmers doesn’t capture all of the strategies implemented. Further as Schaper (2006) argues environmental responsibility can lead to a competitive edge, revenue growth and cost savings, it would further aid executives in their financial target requirements. As both environmental and sustainability targets aren’t considered in executives performance measurements it could therefore be suggested that Wesfarmers is only caring about the environment on a surface level in order to meet the pressures of their stakeholders. Comment by Author: Sub heading required for this paragraph as we are evaluating the “appropriateness of these performance measures in light of literature theme”

Recommendations

Wesfarmers Board of Director’s performance measurement system includes target achievement of financial and non-financial activities, but should be updated to include environmental responsibility targets. This is because Wesfarmers has acknowledged the importance of sustaining the world and that everyone must contribute for its future. Further as environmental responsibility can lead to cost savings and a competitive edge, having targets for senior executives to meet could improve Wesfarmers performance whilst preventing any damage to the environment.

Conclusion Comment by Author: Although there are sections that could be improved, this report shows the student understands course contents and how to apply them to real life company.

Overall, Wesfarmers’ MAS enables the company to collect and communicate necessary information which supports the implementation of The Wesfarmers Way strategic framework to ultimately achieve their goal of delivering a satisfactory return to shareholders. Through Wesfarmers decentralised and market-based organisational structure it enables the company and each subsidiary to operate with a high level of autonomy and responsibility, which also enables the successful implementation of their strategy.

References

· Ballantyne, R & Gerber, R 1994, Managerial Conceptions of Environmental Responsibility, The Environmentalist, March, vol 14, no. 1, Issue 1, p. 47-48

· Bunnings 2016, Our Actions, Bunnings, Australia, viewed on 15 September 2017, https://www.bunnings.com.au/about  us/our actions

· Business Dictionary 2017, Organizational structure, Business Dictionary, viewed on 11

September 2017, http://www.businessdictionary.com/definition/organizational  structure.html

· Das, T 2006, Corporate Environmental Responsibility, Google Scholar, viewed on 14 September

2017,

https://s3.amazonaws.com/academia.edu.documents/8362457/1185849956_corporate_enviro nmental_responsibility.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1505383830

&Signature=M0qYbJtO4stL9iyDjXqR4ooAYPI%3D&response  content 

disposition=inline%3B%20filename%3DCorporate_Environmental_Responsibility.pdf

· Investopedia 2017, Dow Jones Sustainability World Index, Investopedia, viewed on 15

September 2017, http://www.investopedia.com/terms/d/djones  sustainability  world.asp

· Mazurkiewicz, P 2004, Corporate Environmental Responsibility – Is a common CSR framework possible?, World Bank Group, US, viewed on 14 September 2017,

https://siteresources.worldbank.org/EXTDEVCOMSUSDEVT/Resources/csrframework.pdf

· Metcash 2017, Our Brands, Metcash, Australia, viewed on 5 September 2017, http://www.metcash.com/our  brands /

· Officeworks 2017, Environment, Officeworks, Australia, viewed on 15 September 2017, https://www.officeworks.com.au/information/about  us/social  responsibility/environment

· Schaper, M 2002, The challenge of environmental responsibility and sustainable development:

Implications for SME and entrepreneurship academics, Research Gate, viewed on 19 September

2017,

https://www.researchgate.net/publication/260387357_The_challenge_of_environmental_resp onsibility_and_sustainable_development_Implications_for_SME_and_entrepreneurship_acade mics?enrichId=rgreq 66886339254bafb3d41b047094021184 

XXX&enrichSource=Y292ZXJQYWdlOzI2MDM4NzM1NztBUzoyMDA0OTUzMjM5Nzk3NzhAMTQy NDgxMzIxODQ0Mg%3D%3D&el=1_x_2&_esc=publicationCoverPdf

· Shanker, S 2017, Objectives of Internal Managerial Accounting Systems, Chron, viewed on 11 September 2017, http://smallbusiness.chron.com/objectives  internal  managerial  accounting systems  20945.html

· Topic 1 Lecture slides 2017, ACCT1014 Accounting Behaviours and Organisation, Introduction to Management Accounting Systems (MAS) and the Importance of Business Strategy to MAS Design, RMIT University, Melbourne, Australia

· Topic 4 Lecture slides 2017, ACCT1014 Accounting Behaviours and Organisation, Organisational

Structure and Responsibility Accounting, RMIT University, Melbourne, Australia

· Wesfarmers 2016, 2016 Annual Report, Wesfarmers, Australia, viewed on 29 August 2017, http://www.wesfarmers.com.au/docs/default  source/reports/2016  annual  report.pdf?sfvrsn=8

· Wesfarmers 2016, 2016 Corporate Governance Statement, Wesfarmers, Australia, viewed on 12 September 2017 http://www.wesfarmers.com.au/docs/default  source/corporate governance/2016  corporate  governance  statement.pdf?sfvrsn=2

· Wesfarmers 2016, 2016 Shareholder Review, Wesfarmers, Australia, viewed on 29 August 2017, http://www.wesfarmers.com.au/docs/default  source/reports/2016  shareholder review.pdf?sfvrsn=6

· Wesfarmers 2016, 2016 Sustainability Report, Wesfarmers, Australia, viewed on 29 August 2017, http://sustainability.wesfarmers.com.au/media/1835/edited  extract  of  wesfarmers 2016  sustainability  report.pdf

· Wesfarmers 2016, Governance and corporate culture, Wesfarmers, Australia, viewed on 29 August 2017, http://sustainability.wesfarmers.com.au/case  studies/governance/governance and  corporate  culture/

· Wesfarmers 2016, Wesfarmers achieves its highest score in DJSI, Wesfarmers, Australia, viewed on 15 September 2017, http://www.wesfarmers.com.au/util/news 

media/article/2016/09/12/wesfarmers  achieves  its  highest  score  in  the  dow  jones sustainability  index

· Wesfarmers 2017, Who we are, Wesfarmers, Australia, viewed on 31 August 2017, http://www.wesfarmers.com.au/who  we  are/who we  are

· Woolworths Group 2017, Our Brands, Woolworths Limited, Australia, viewed on 5 September 2017, https://www.woolworthsgroup.com.au/page/about  us/our  brands

Appendices

Appendix 1 – The Wesfarmers Way

Source: Wesfarmers Shareholder Review 2016

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Wesfarmers

Organisational Structure

Source: Wesfarmers Annual Report 2016

,

Wesfarmers 2016

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Bunnings Organisational Structure

Source: Wesfarmers Sustainability Report 2016, Bunnings 2017

Appendix 2 –

Appendix 4 –

Appendix 5 –

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Business success factors of having an environmental focus

Source: Mazurkiewicz 2004

Appendix 5 – Remuneration policy principles

Source: Wesfarmers Shareholder Review 2016

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Appendix 6 Executive Performances & awards

Source: Wesfarmers Annual Report 2016