Internal Controls

2. List and describe the two most alarming issues that you see after reviewing your company and identify possible improvements in the internal control system to correct the issues.

No internal Audit Team:
The most significant problem that became apparent in this exercise is the fact that AME does not have an internal audit team. The lack of this significant resource leaves many gaps that may be exploited for fraudulent activities or prevent expedient discovery of issues.
This problem has a simple solution, that may be difficult to carry out. Building an internal audit team is the correct solution. Gaining the resources both in knowledgeable people and financial/time allotment required from top management will be a challenge. The company owner places low value on the accounting department in general and has many times stated that “it would be better if they were not around to drain resources”.
If AME were able to allocate the required resources, the next step would be to define the procedures and schedule meetings to be conducted. Some of the required policies would include:
1)Improved follow-up processes for improvement suggestions/requirements
2)Communication process for reporting suspected internal problems
3)Risk assessment for financial misstatements
4)A clear statement of responsibilities for each person on the team

Management Financial Philosophy:
The second area that should be addressed is the importance of having a strong respect for the finances of the business. Business decisions should actively involve the current and future impacts on the company financial position. This part of the decision process is missing on the planning end. It is only taken into account after a plan has been made to move in a specific direction. It is then up to the accounting department to find a way to “make it happen”.
Employee performance is judged on how well a manager (or employee) is able to accomplish the goal. This can be problematic for accounting employees, because anyone who asks too many questions is labeled as a “cancer spreader”, and once that happens it is only a matter of time before they are no longer employed. Talk about incentives!











Resources:

aicpa.org (2005). Internal control: A tool for the audit committee. Retrieved February 10th, 2010 from : http://www.aicpa.org/audcommctr/toolkitsnpo/internal_control.htm

Burman & Knight (2006). Financial intelligence: A Managers guide to knowing what the numbers really mean. Boston, Mass: Harvard Business School Press.

Statement of Cash Flows- Sears

Week Four – Sears Holding Corporation:
Statements of Cash Flows

Based on your analysis of the statement of cash flows, articles you read and industry reports write a brief analysis (1-3 pages) identifying
1. Strengths of the company you see in their financial statements.
The most positive performance indicator was the $1.003 billion that was converted from inventory to cash. Having money sitting on the shelf is not positive for any business unless it is preventing a stock-out situation. There is a fine balance to how much inventory to hold. According to some analysts, there is concern that this inventory situation was required to be prepared for the 2010 debt situation in which Sears is loosing half it's $5 billion in short term financing (bnet.com).
2. Weaknesses of the company you see in their financial statements.
The most significant weakness of SHLD is the fact that they cannot generate income. The net income decreased by 93.6%. That means the income for 2008 was only 6.4% of what it was the previous year and 3.5% of two years prior. That is not a good trend. What does that mean? Well most of the positive cash generated was not from selling product. When a business does not make money at its core competency, there is trouble.
There are people however that believe Sears is undervalued from a shareholder perspective. One such investor shared his opinion about the cash value of the company if it were to be sold off (myvalueidea.blogspot.com). Although this person has no credibility (that I know of) his examples make sense.
3. Possible emerging issues with the company and/or industry.
It is possible that Sears is more valuable as parts an pieces sold to the highest bidder. I think it would be difficult to say that a rebound for Sears is likely. There are several actions that lead me to believe that SHLD is prepping for an exit from retail. Their board continues to authorize stock buy-backs which keep stock prices high. They continue to acquire other businesses that have high valued assets (Sears 10k). They are spending little to invest in the operations of their company by compared to stock buy-backs (chicagotribune.com).
4. Questions you might ask the company if you were interviewing them to write an article about their future.
1)Why are you re-purchasing stock?
2)What is the vehicle that caused the nearly 500% increase in cash from 'credit issuances'?
3)Please explain how you had positive 'merchandise payables' in 2007. Why are they at nearly $400 million now?
4)What steps are you taking to avoid such a large impact from exchange rate differences?
5)Do you project similar improvements in cash improvement this year?







Resources:

Burman & Knight (2006). Financial intelligence: A Managers guide to knowing what the numbers really mean. Boston, Mass: Harvard Business School Press.
http://www.chicagotribune.com/business/chi-fri-notebook-sears-1218dec18,0,7721969.story
http://industry.bnet.com/retail/10005255/perspectives-may-obscure-sears-real-needs/

http://myvalueidea.blogspot.com/2008/03/i-have-wrote-about-shld-being-value.html

Balence Sheet Analysis

Financial Statement Analysis: Sears Holdings Corporation (SHLD)

Based on your analysis of the balance sheet, articles you read and industry reports write a brief analysis (1-3 pages) identifying:

1.Strengths of the company you see in their Balance Sheet.
Sears has done an excellent job of reducing their Liabilities by nearly 5%. Most categories have been dramatically trimmed except for 'short term liabilities' and 'current portion of long term debt'. This short term debt is not great because it may be indicating the lack of cash available to operate the business.
The second strength may be the increased accounts receivable. This may indicate weakness in that Sears may be having difficulty collecting monies or that it is trying to boost 2008 profits by selling product in advance, recording the sale but waiting for payment sometime in the future.
2.Weaknesses of the company you see in their Balance Sheet.
As we saw in the Income Statement Analysis last week, a majority of items are trending down year over year. It appears by the trend in the vertical analysis that Sears has increased the depreciation of assets. I was unable to find any disclosures about this, but it may be a way of reducing assets to be in better condition for taxes (??? I'm out on a twig here???).
Probably the most significant finding here was that the 'interest coverage' ratio was well below one. This indicates that all of the companies profits (plus some additional monies) are going to pay for interest on debt. This paired with the exponential increase on short term debt spells nothing but trouble. Short term debt is typically borrowed at a higher interest rate than long-term secured debts.
3.Possible emerging issues with the company and/or industry.
Although it was not one of the ratios calculated I noticed the 'profit per employee” for Sears was -$10. The industry average was well over $15,000 per employee. Talk about a scary ratio. All the signs are pointing to failure, unless there is a miracle turnaround.
4. Questions you might ask the company if you were interviewing them to write an article about their future.
a) What are your plans to reduce short-term debt?
b) When will you deal with the reality that your 'goodwill' values are overstated?
c) What steps are you taking to improve your profit margin?
d) How do you plan to consolidate (or differentiate) your marketing strategies between Kmart and Sears?
e) If you had the opportunity to Merge with Sears today, would you take it?


Note: My calculated ratios were well off of the published numbers, so I don't know what happened there. The only thing I can think is that the published numbers were from 2009 not 2008 as I calculated them... I suppose their fiscal year just ended so it is possible.

Resources:
http://www.searsholdings.com/invest/
http://moneycentral.msn.com/investor/invsub/results/compare.asp?Symbol=JCP
http://moneycentral.msn.com/investor/invsub/results/compare.asp?Symbol=WMT
http://moneycentral.msn.com/investor/invsub/results/compare.asp?Symbol=SHLD