Sample Papers

PROFESSIONAL ETHICS

Introduction

            The first step to creating a successful business is having a clear business goal and purpose, one must be focused and have a well defined mission and vision which constitute the road map to business success. The entrepreneur should also come up with a business strategy which includes action plans aimed at achieving predetermined goals and objectives (Brott, 2009). Having a business goal and purpose is however not sufficient, one should also have certain essential traits and qualities to be a successful entrepreneur which include desire to achieve, commitment and perseverance, risk taking, initiative, responsibility, independence, optimism and confidence. To create a successful business one must therefore have a mission, vision and objectives, the right qualities to be a successful entrepreneur and a good business plan.

Mission, Vision and Objectives

            Before venturing into any business one should have a mission and a vision. The mission defines the specific purpose and basic principles of the business enterprise. It is specified in the mission statement which should be visionary and long-term in nature. The mission statement should also clarify and describe the intentions, aspirations and main activities of a business enterprise (Kew & Stredwick, 2005). It acts a guide and provides an articulate strategy for the achievement of business goals and objectives. The vision on the other hand illustrates what the business expects to achieve. It defines where the business wants to be in future (Simpson, 1994).

There are several reasons why an entrepreneur could venture into a business and these reasons constitute the objectives of the business. Although business objectives are usually unique to a particular enterprise most enterprises share a number of common objectives which include maximizing profitability, customer service, retention of employees, attaining efficiency in operations and growth. Objectives are aimed at fulfilling the mission and vision of the business.

Successful Entrepreneurs

An entrepreneur has to have certain essential qualities to enable them to start and run a successful business. Entrepreneurs should focus on achievement and have a strong desire for personal success. They should also be moderate risk takers, opportunity explorers, responsible, independent, optimistic, confident and effective in communicating with others (Kuratko, 2009). Collectively these traits ensure that a business owner is well equipped to face several challenges that might threaten then success of the business.

Most successful entrepreneurs are committed and have a strong desire to achieve. This strong commitment enables them to overcome obstacles and succeed against all odds. They are persistent in their endeavors regardless of failure. Before risking their resources in a business venture, investors will measure the commitment an entrepreneur has and his desire for success. Therefore, to create a successful business one has to be a self starter, result oriented and internally driven by strong desire to excel.

To create a business that will thrive one also has to take moderate and calculated risks. Moreover, one has to be a good risk manager. The outcome of any business venture can not be determined with certainty. One should therefore come up with a risk evaluation criterion to asses the risk associated with different business venture s to determine the best opportunity that will minimize risk and maximize returns.

Good business owners have to be opportunity oriented. They should be aware of the opportunities around by constantly monitoring their environment. They should have access to a wide range of sources of information like newspapers, journals, textbooks and periodicals which could give valuable insights on available business ideas. Opportunity oriented business owners set high realizable goals and direct all their attention towards achieving them by selectively sorting out viable opportunities and matching them with their goals.

Initiative and responsibility are also common among many successful entrepreneurs. They take the initiative to start a business venture and are accountable for the outcome of the venture. They are willing to take full responsibility for the projects they initiate and see them to completion. They don not shift the blame to others for their failure, instead they learn from their mistakes and make sound judgments in future.

Another quality that an entrepreneur should posses is the desire to be independent. This is the driving force behind most successful entrepreneurs. They avoid rigid bureaucratic systems and try to accomplish tasks their own way. Because they want to have authority to make important decisions, most of them will often quit mainstream jobs which offer job security and retirement benefits and venture into risky businesses where they can exercise autonomy and independence.

Last but not least, successful entrepreneurs are self confident and optimistic. They believe that their abilities and competencies are sufficient to achieve their goals. They always hope for the best outcome and this often rubs off on the people around them. Their optimism makes them good team players. The qualities that successful entrepreneurs should have cannot be exhausted, different scholars have come up with different sets of traits that an entrepreneur should have. Most of them however relate to the ones mentioned in this essay and are often closely linked to one another. Some of these other traits include, flexibility, diligence, resourcefulness, creativity, positive response to challenges, ability to influence others, egotism, courage, perceptiveness, efficacy, honesty and integrity.

Business Plan

A good business plan is vital for a successful business. It contains a brief statement of the business objectives, an assessment of how the entrepreneur plans to enter into the market and the skill, experience and finance that the entrepreneur will bring into the business. It also outlines the particular benefits of the products or services produced by the business to consumers (Blackwell, 2011). The business plan is particularly important to convince investors to fund the business idea and should therefore be presentable and persuasive. Without a good plan the business risks failure and no investor in their right mind will engage their resources in such a venture.

Conclusion

For an entrepreneur to create a successful business, they must have a mission, vision and well defined objectives. Moreover, they should have the essential traits and a good business plan. The mission and vision and vision describe the purpose of the business and where it intends to be in future. Objectives which are aimed at achieving the mission and vision of the business are the reasons for its existence. The qualities that an entrepreneur should have include desire to achieve, commitment and perseverance, risk taking, initiative, responsibility, independence, optimism and confidence. Finally, to set the business in motion the entrepreneur should come up strategic action plans for goal achievement which are defined in the business plan. A business cannot be successful without these essential ingredients.

 

References

Blackwell, E. (2011). How to Prepare a Business Plan. London: Kogan Page.

Brott, R. (2009). Advancing a Successful Business: Managing Your Organization. New York: ABC book Publishing.

Kew, J., & Stredwick, J. (2005). Business Environment: Managing In a Strategic Context. London: Chartered Inst. of Personnel and Development.

Kuratko, D. F. (2009). Entrepreneurship : Theory, Process, Practice. Mason: South-Western Cengage Learning.

Simpson, D. (1994). Rethinking vision and mission. Planning Review , 9.

PROFESSIONAL ETHICS FOR AUDITORS

The main aim of this report is to highlight the professional ethics that govern Auditors in Australia. To this end, it will identify and discuss the fundamental principles of professional ethics and the applicable audit standards and sections of the Corporations Act. Other than that it will highlight the concept of “audit expectations gap” and explore the factors that have led to the decline of this gap in the recent past with particular reference to the 2008 global financial crisis. It will generally be argued that the application of stringent rules and regulations in the aftermath of the global financial crisis has contributed a great deal to diligence on the part of auditors which has seen them perform their responsibilities more effectively. Meanwhile, there has been a negligible change in managers’ expectations, which implies that the expectations gap has been dwindling over the years.

The Accounting Professional & Ethical Standards Board (APES) 110 Code of Ethics for Professional Accountants stipulates that there are five fundamental principles of professional ethics. They include integrity, objectivity, professional competence and due care, confidentiality, and professional behavior (APESB, 2010). The integrity principle imposes an obligation on all auditors in Australia to be honest and straightforward in all their business and professional relationships, which calls for truthfulness and fair dealing. The principle also prohibits auditors from knowingly being associated with communications, reports, returns or any other information that contains statements that are materially false or misleading, information or statements that have been furnished recklessly or reports that are characterized by the omission of vital information hence rendering them misleading. If an auditor finds out that they have been associated with such information, they should make deliberate efforts to dissociate themselves from that information.

The objectivity principle imposes an obligation on all auditors not to compromise their business or professional judgment due to conflict of interest, bias or undue influence from others. In the event that an auditor is exposed to a situation that could potentially impair their objectivity, they should refrain from performing the professional service in question.

The principle of professional competence and due care imposes an obligation on auditors to have sufficient professional knowledge and skills to enable them to offer competent professional services to clients. They are also required to act diligently and consistent with applicable professional and technical standards when providing professional services. In order to offer competent professional services, auditors should exercise sound judgment in applying professional knowledge and skills while performing such services. Apart from attaining professional competence, they should also ensure that they maintain it, which in turn calls for them to constantly enhance their awareness and understanding of relevant professional, technical and business developments. This puts them in a position to develop and maintain capabilities that go a long way in helping them to work effectively in a professional environment.

Diligence entails the responsibility to act according to the requirements of an assignment, thoroughly, carefully and produce results timely manner. Auditors should make a reasonable effort to ensure that those working under their authority in a professional capacity have the appropriate training and supervision. Where applicable, they should disclose the limitations inherent in their professional services to their clients.

The confidentiality principle imposes an obligation on all auditors to refrain from disclosing confidential information acquired through professional and business relationships to outsiders without proper authorization from the contracting organization unless they reserve a legal or professional right to do so. Similarly, they should refrain from using such information for their own personal gain or to the advantage of third parties. It should be noted that the principle of confidentiality is also applicable to prospective employers or clients and continues to exist even after the relationship between the auditor and the client has come to an end. While they are allowed to use prior experience with subsequent clients, auditors are prohibited from disclosing any confidential information regardless of whether it was acquired or received through a business or professional relationship. Other than that, auditors should maintain confidentiality of information at all times including in social environments, where they should be cognizant of the possibility of inadvertent disclosure, particularly to close family members or business associates.

Finally, the principle of professional behavior imposes an obligation on auditors to comply with relevant laws and regulations and avoid at all costs any action or omission that might discredit the profession. “This includes actions or omissions that a reasonable and informed third party, weighing all the specific facts and circumstances available to the [auditor] at that time, would be likely to conclude adversely affects the good reputation of the profession” (APESB, 2010, p. 22).

Auditing Standards are stipulated by Section 336 of the Corporations Act, which intern refers to the Auditing and Assurance Standards Board as the primary benchmark for auditing standards in Australia. The AUASB prescribes the overall objectives of an independent auditor and how they should conduct an audit that is consistent with the Australian Auditing Standards (AUASB, 2013). According to the board, while auditing a financial report, the main objectives of an auditor are twofold. First, they should obtain reasonable assurance as to whether the financial report as a whole is completely fee from material misstatement, either as a result of fraud or error, hence enabling the auditor to express their professional opinion on whether the report fully complies with the relevant financial reporting standards. Secondly, they should report on the financial report and use their findings to communicate as stipulated by the Australian auditing standards.The provisions of the AUASB mainly revolve around these two objectives

Different researchers have different definitions for the term exception gap. The phrase was first applied by Liggio (1974) who defined it as the disparity between the levels of expected performance as envisioned by an auditor and by the users of financial reports (Koh & Woo, 1998). This definition was later extended by the Cohen Commission, which considered whether a gap may exist between the public’s needs and expectations and what auditors can and should reasonably expect to accomplish (Commission on Auditors’ Responsibilities, 1978). After reviewing several definitions, McEnroe & Martens (2001, p. 345) conclded that the expectations gap is generally “the difference between what the public and other financial statement users perceive auditors’ responsibilities to be and what auditors believe their responsibilities entail.”

In light of the global financial crisis and a series of corporate failures and scandals across the globe, several stakeholders have raised their concerns about the quality of auditing (Holm & Zaman, 2012; Sikka, 2009). Consequently, several countries have made deliberate attempts to regulate auditing practices in a bid to alleviate the exception gap. At the same time, the international community is also making concerted efforts to prevent the occurrence of financial crises and corporate scandals by tightening the disclosure requirements of multinational corporations. This has exerted a lot of pressure on organizations, which has caused them to have higher expectations of their auditing partners. From the foregoing, it is evident that while tightened rules and regulations have prompted auditors to perform their duties more diligently, they also have the capacity to raise managers’ expectations of auditors, hence exacerbating the expectations gap. As such, it is difficult to conclude whether such rules and regulation have reduced or increased the expectations gap. This section will therefore focus on evaluating the impact of the auditing policies and standards in various countries on the expectations gap.

After extending prior research by directly comparing the perceptions of audit partners and investors about the responsibilities of auditors involving various dimensions of the attest function, McEnroe & Martens (2001) found that there was an expectations gap because investors had higher expectations for various facets and assurances of the audit than auditors did. The author suggested that the accounting profession should engage in appropriate measures to reduce this gap. Several efforts have since been made towards this end. The biggest milestones were however made after the 2008 global financial crisis which served as a wakeup call for financial sector stakeholders across the globe. Some notable auditing related measures that were taken to prevent the reoccurrence of similar crises in future include the revision of the International Standard on Auditing (ISA) 700 framework and the enactment of the Sarbanes Oxley Act.

In a recent study that sought to test the effectiveness of expectations as mandated by the revised ISA 700 auditor’s report in reducing the audit expectations gap, Gold, et al., (2012) used a summary of a firm’s financial statements and an auditor’s report to experiment on German auditors and financial statement users. The reports were manipulated to appear as though they had been mandated by ISA 700 as opposed to being a mere audit opinion. The Participants were asked about their perceptions regarding the responsibilities of auditors versus the responsibilities of managers and their opinion about the reliability of the financial statements. Even though there was strong evidence to suggest that there was a persistent expectations gap with regard to auditor’s responsibilities, both auditors and financial statement users reached a reasonable consensus about the responsibilities of managers and the reliability of financial statements. However, it was found that the explanations of the ISA 700 auditor’s report do not contribute a to smaller expectations gap. The findings of the research further suggested that a mere audit opinion was sufficient to provide relevant information to users.

Despite the failure of the ISA 700 to reduce the expectations gap, several other policies have proven to be quite successful at achieving this. The Sarbanes Oxley Act has for instance had a profound impact on corporate culture for both auditing firms and organizations in the United States. Senior management employees are forced to ensure the accuracy of their financial disclosures, failure to which they might be liable to criminal prosecution. As such, they take financial disclosure very seriously and use rigorous processes to ensure that they are confident of the information they release to the public.

The Sarbanes Oxley Act generally prompts senior managers to engage in ethical reporting. The managers in turn make deliberate efforts to ensure that junior managers and other employees within their organizations are also engaging in ethical practices (Ferrell, Fraedrich, & Ferrell, 2013). Similarly, they impose pressure on auditors to rigorously inspect their financial reports to ensure that they are free of errors. The Act therefore not only promotes the adoption of an ethical corporate culture within audited firms but also within auditing firms. Ethical corporate culture is therefore mutually beneficial to both organizations and auditing partners. Nevertheless, there will always be unscrupulous business practitioners who will seek to make profits using unorthodox means and as such further misconduct is bound to occur. In light of this, Daugherty (2006, 53) conducted two experiments to explore the potential unintended impact of the Sarbanes Oxley Act on the professional judgment of auditors and the expectations gap.

The first experiment sought to investigate whether participating auditors were inclined towards using qualitatively inferior methods of selecting accounts receivable balances for confirmation at different levels of competing environmental and organizational pressure. The results of this experiment proved to be very encouraging to both auditors and the public because the respondents appeared to demonstrate a preference for qualitatively superior methods as opposed to succumbing to normative influence to maximize self-interest. The author also lacked sufficient evidence to suggest that environmental pressure has a moderating organizational pressure such that the strongest preference for non-statistical method would occur in the participating group influenced by low organizational pressure and high environmental pressure. The author concluded that individual auditors had responded to increased environmental pressures appropriately and had not allowed vested interest to overcome their professional obligations and responsibilities, which implies that the expectations gap is not as high as it had been anticipated.

The second experiment sought to investigate whether the SOX mandated reports (by both independent auditors and the senior management of public companies) on the effectiveness of a company’s internal control over financial reporting has had any impacts on the expectations of both public companies and their stakeholders. This experiment also addressed some of the basic issues affecting junior employees in the wake of newly mandated reporting on internal control effectiveness by auditors and managers. The results suggest that public expectations have remained largely unaffected by increasing reporting transparency. Junior employees were also found to be more sensitive to reporting standards due to stringent organizational policies.

To conclude, following the implementation of strict rules and regulations for financial reporting, organizations and auditing partners have been prompted to make deliberate efforts to ensure the transparency of their financial reports. Even though this has resulted in both organizational and environmental pressure for auditors, it has had a negligible impact on managers’ expectations. Consequently, there has been a significant decline in the expectations gap because auditors have become diligent in executing their responsibilities while managers’ expectations have remained constant.

 

 

References

[APESB] Accounting Professional & Ethical Standards Board Limited, 2010. APES 110 Code of Ethics for Professional Accountants, Melbourne: Accounting Professional & Ethical Standards Board Limited.

[AUASB] Auditing and Assurance Standards Board, 2013. Auditing Standard ASA 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards, Melbourne: Commonwealth of Australia.

Commission on Auditors’ Responsibilities (Cohen Commission) , 1978. Report, Conclusions and Recommendations, New York, NY: American Institute of Certified Public Accountants.

Daugherty, B. E., 2006. An experimental analysis of potential unintended consequences of Sarbanes Oxley on auditors’ professional judgments and the expectation gap, Ann Arbor: ProQuest Information and Learning Company.

Ferrell, O. C., Fraedrich, J. & Ferrell, L., 2013. Business Ethics: Ethical Decision Making & Cases. 10 ed. Mason, OH: Cengage Learning.

Gold, A., Gronewold, U. & Pott, C., 2012. The ISA 700 Auditor’s Report and the Audit Expectation Gap – Do Explanations Matter?. SSRN Working Paper Series, 9 October.

Holm, C. & Zaman, M., 2012. Regulating audit quality: Restoring trust and legitimacy. Accounting Forum, Volume 36, pp. 51-61.

Koh, H. C. & Woo, E.-S., 1998. The expectation gap in auditing. Managerial Auditing Journal, 13(3), pp. 147-154.

Liggio, C., 1974. The expectation gap: the accountant’s Waterloo. Journal of Contemporary Business , 3(Spring), pp. 27-44.

McEnroe, J. & Martens, S. C., 2001. Auditors’ and investors’ perceptions of the “expectation gap”. Accounting Horizons, 15(4), pp. 345-358.

NPR, 2005. How Sarbanes-Oxley Has Affected Corporate Culture. [Online]
Available at: http://www.npr.org/templates/story/story.php?storyId=4673074

Sikka, P., 2009. Financial crisis and the silence of the auditors. Accounting, Organizations and Society , Volume 34, p. 868–873.

Sikka, P., Filling, S. & Liew, P., 20009. The audit crunch: reforming auditing. Managerial Auditing Journal, 24(2), pp. 135-155.

VOLUNTARY DISCLOSURES IN AUSTRALIAN CORPORATE SECTOR

Introduction

The main aim of this report is to analyze the sustainability standards adopted by Qantas Airways and Virgin Australia Airlines in a bid to determine their level of compliance with the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. To this end, the report highlights the operating activities of these companies in order to determine the environmental, economic and social impacts of these activities on its stakeholders. Moreover, it elaborates the environmental, social and economic disclosures made by the companies in reference to the respective GRI disclosure guidelines. Finally, it identifies the key strengths and weaknesses of the sustainability reports and provides recommendations on how Qantas Airways and Virgin Australia Airlines can improve their reports in future.

Company Backgrounds

Qantas Airways Ltd is the largest airline in Australia by fleet size, international destinations and international flights. Having been established in 1920, it is the third oldest airline in the world. The company is based in Mascot, Sydney and controls 65% of the Australian domestic market (Qantas Airways, 2015). Moreover, it carries at least 18% of all inbound and outbound passengers in Australia. The company’s subsidiaries, which include Jetconnet and QantasLink provide airline services within New Zealand and Australia respectively, operating under the Qantas brand. The company also owns Jeststar, a low cost airline that offers both domestic and international airline services and owns shares in a number of other airlines.

Formerly known as Virgin Blue Airlines, Virgin Australia Airlines is the second largest airline in Australia. The company was established in 2000 and is based`in Bowen Hills, Brisbane. It serves 29 cities in Australia from hubs in Melbourne, Brisbane and Sydney. After operating as a low cost carrier for several years, the company has upgraded its services to become a “New World Carrier” to compete favorably with Qantas in the business travel segment. Both companies are listed on the Australian Stock Exchange and belong to the service sector of the airline industry.

Sustainability Reporting

“Sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development.” (GRI, 2011). It is a broad term synonymous with other terms such as corporate responsibility reporting and triple bottom line that generally refer to reporting on social, economic and environmental impacts of an organization. Reporting organizations should make deliberate efforts to ensure that they provide a balanced and reasonable representation of the sustainability performance of their organizations.

Basing on the GRI reporting framework, sustainability report should disclose results and outcomes that took place within a given reporting period in relation to the organization’s strategy, commitments and management approach (GRI, 2013). These reports serve a myriad of purposes including, benchmarking and assessing the sustainability performance of the organization, demonstrating how the organization affects and is affected by expectations about sustainable development and facilitating a comparison of the performance of different sections within an organization and the organization as a whole in relation to other organizations.

GRI Sustainability Reporting Guidelines offer Standard Disclosures, Reporting Principles and an Implementation Manual to assist organizations in preparing sustainability reports irrespective of their size, sector or geographical location. The guidelines also provide an international reference for organizations that intend to disclose their governance approach and the social, economic and environmental impacts of their operations. These guidelines are prepared after rigorous consultations with several stakeholders including business representatives, labor and financial markets, the civil society, auditors and experts from different fields. Regulators and government agencies from different countries are also consulted to ensure that the guidelines are consistent with internationally recognized reporting standards.

Similarities in Disclosure

Both companies made deliberate attempts to disclose the economic, environmental and social impacts of their operations and other issues that might significantly influence the assessment decisions of their stakeholders. Virgin Australia disclosed all the entities that were included in the scope and acknowledged the use of the GRI G3.1 framework as the basis for their sustainability assessment approach. It particularly addressed the direct financial impacts, peer based norms, and policy related performance of the organization while at the same time taking into consideration the stakeholder behavior and concerns and societal norms affecting the company. Each of these issues was prioritized using a materiality matrix that facilitated the plotting of issues based on their relative significance on both the company and the stakeholders.

Qantas Airlines clearly outlined its governance approach, by addressing issues relating to corporate governance, business resilience, the groups security and the risks it faces (Qantas Airways, 2013). Moreover, the report highlighted the stakeholder engagement by outlining its company policies regarding stakeholder engagement and identifying the various stakeholders that are affected by its operations. Other than that, it provided an elaborate discussion of the company’s financial strategies, which include disciplined capital management and prudent investment, underpinned by financial risk management with an aim of enhancing the company’s long term profitability. This section highlighted the company’s sustainable value proposition, strategic priorities and optimized capital structure.

The report also demonstrated the company’s appreciation of the various needs of its different customers, which is an indication that it takes into account the social impacts of its operations on its latter. In this regard, the company has adopted a holistic approach to diversity and has demonstrated its commitment to having a diverse and inclusive workplace. The management believes that a diverse workforce supports the company’s objectives and affords it a sustainable competitive advantage over other key players in the industry. As such it strives to promote diversity through talent, leadership and development programs, human resource planning and flexible working hours. Finally, the sustainability report highlights the impacts of the company’s operations on the environment with special attention to greenhouse gas emissions and fuel consumption.

Differences

Given the different histories and scale of operations for the two companies, the huge discrepancy between their sustainability reports was expected. First, the sustainability report for Qantas Airlines is a separate document while the sustainability report for Virgin Australia is included in the Annual Report. For this reason, the former is more comprehensive and elaborate than the latter. Qantas Airlines’ sustainability report is a 63 page document that clearly elaborates both the company’s governance and it the social economic and environmental impacts of its operations.

On the other end of the spectrum, Virgin Australia’s sustainability report is merely an 8 page report summarizing the company’s sustainability progress and performance for the relevant financial period. Furthermore, the report focuses on the environmental, economic and social impacts of the company at the expense of governance issues. This can be attributed to the fact that the company’s operations are mainly localized in Australia, which implies that it is not bound to adhere to international reporting standards. As aforementioned, only multinational organizations are required to report about their governance approach.

Conclusion and Recommendations

Despite their efforts to produce an elaborate summary of the company’s sustainability progress and performance, Virgin Australia’s sustainability report is not user friendly. The report is too technical for a lay users because it mainly contains statistical data, which will be interpreted differently by different users. While such data might be very useful for professional users, lay users might either find it useless or worse still, interpret it wrongly. Qantas Airway’s repot is more descriptive, which implies that it will make more sense to both lay and professional users. In future, Virgin Australia should produce a more detailed sustainability report with adequate descriptions in order to enhance its understandability by a wider audience.

Nonetheless, while Virgin Australia’s report is not very detailed, it offers more statistical data than that of its counterpart. Even though this data might not be very useful for lay users, it can prove to be very critical for professional users. Moreover, the data facilitates comparability between current and past sustainability performance of the organization. As such, Qantas Airlines should strive to include more statistics in its sustainability reports to enhance their credibility and comparability.

Even though the nature of its operations does not require Virgin Australia to report about its governance issues, the company should be cognizant of the fact that the Australian Stock Exchange is open to foreign investors, who have a wide range of opportunities to choose from the global financial market. As such, it should adopt the sustainability reporting standards used by multinationals in order to compete favorably with other key players in the global airline industry. Moreover, because the company’s vision is “To become a sustainability leader within the aviation industry”, it should go an extra mile in providing relevant disclosures to its stakeholders (Virgin Australia Holdings Limited, 2014). Providing information about its governance approach would be a positive step toward this end.

 

References

GRI. (2011, September 26). Sustainability Reporting Guidelines. Retrieved from Global Reporting Initiative: https://www.globalreporting.org/resourcelibrary/G3.1-Guidelines-Incl-Technical-Protocol.pdf

GRI. (2013, May 14). Sustainability Reporting Guidelines. Retrieved from Global Reporting Initiative: https://www.globalreporting.org/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf

Qantas Airways. (2013, September 18). Sustainability Review 2013. Retrieved from 2013: https://www.qantas.com.au/infodetail/about/investors/qantas-sustainability-review-2013.pdf

Qantas Airways. (2015, May 5). Our Company. Retrieved from Qantas.com: http://www.qantas.com.au/travel/airlines/company/global/en

Virgin Australia Holdings Limited. (2014, June 30). Annual Financial Report 2014. Retrieved from http://static.globalreporting.org/report-pdfs/2014/ba8d596c0f42955ebace11edc608b2e3.pdf

 

Demand Estimation

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Computation of Elasticity

Elasticity of demand refers to the degree of responsiveness of the demand as a result of a given change in any of the different factors that affect the demand. When the elasticity of demand is certainly the one in absolute amount, the demand is said to be perfectly or unitary elastic. Elastic demand refers to the case when the elasticity of demand is more than one in absolute amount. At the other end, the inelastic demand evaluates the elasticity of demand that is lower than one.

QD = -2000+15A+25Px+10I

Advertising A = 640       Own price P = 200   Competitors Price PX = 300        Income I = 5000   Quantity Demanded = -2000-100 (200) + 15 (640) + 25 (300) + 10 (5000) = 45100

Elasticity:  Proportionate changes independent variable as a result of a change in Independent variable.

This can be Explained as ∂Q / ∂Is *is/Q. Where ‘is’ is Independent variables.

Calculation of Elasticity

Own price Elasticity

∂Q/ ∂p = -100   Elasticity = 100 * 200/45100 = 0.44

This is an indication of an inelastic demand.  A 1 % increase in the commodity price leads to a 0.44% decrease in the quantity demanded. The change in price does not lead to a significant change in demand.

Therefore, the firm should not cut its price as a percentage increase in demand of its commodity is smaller than the percentage decrease in price. Its market share cannot be greatly affected. It remains virtually the same.

Competitor price elasticity

∂Q/ ∂Px = 25     Elasticity = 25 * 300/45100 = 0.166

Similarly, this is an inelastic demand.  A 1% increase in the price of a commodity with respect to that of the competitor leads to a 0.166% decrease in the demand of the commodity. This is not significant because the change in demand is smaller than the price change.

Income Elasticity

∂Q/ ∂I = 10        Elasticity = 10 * 5000/45100 = 1.109

This is a perfectly elastic relationship. A 1% change in income leads to 1.109% change in demand. This is a significant change as a change in income lead to the same amount of percentage change in demand.

Advertising Elasticity

∂Q/ ∂A = 15

Elasticity = 15 * 640/45100 = 0.213

A 1% increase in advertising expenditure result in a 0.213% increase in demand. The change in advertisement spending is of less importance as it causes a smaller percentage change in demand for the product.

The pricing strategy is dependent on the target period. All the goods become more elastic in the long term. With time, consumers can find substitutes easily in the market or even learn to live without a commodity that was almost impossible to live without in the short term.  In the case of inelastic-own price demand, the firm can hold to the high price strategy by taking advantage of the inelastic demand.

In the long term, this is bound to change as the high price attracts new firms to take advantage of the high profits associated with this high price. The market can have many substitutes and an increase in quantity supplied can lead to price reductions. The firm in question risk was losing its market share if it continues to charge a high price. Inelastic demand as a result of a change in competitor price offers the firm an advantage to charge a high price in the short run. However, in the long run consumers can realize the availability of cheaper substitutes in the market and can prefer purchasing cheaper products.  In the short term, income to households may change depending on the business cycle.

On the other hand, permanent income remains almost unchanged during the business cycle. The firm should charge higher prices if it is a period of boom in the business cycle as the income of the consumers at this time is high. Also, they should charge low prices in a recession as many consumers at this time reduce their consumption and are very sensitive to price changes. In the long term, the strategy should focus on other factors affecting demand to determine the price to charge. Advertisement in the case under study produces an inelastic demand in the short term.

This could be because consumers are yet to familiarize with other products in the market that can act as substitutes. The firm should take advantage of the inelastic demand and charge a higher price. In the long term consumers can have full knowledge of the products in the market and the firm is faced with decreased demand for its commodity if it charges the highest price (Smith, 2012).

 

Equilibrium position

The equilibrium is given by the intersection of the demand and supply curves (Schneider, 2003). The graphical representation of equilibrium price and quantity can be illustrated as follows;

The approximated equilibrium price and quantity are; price is 450 and quantity is 250,000.

Significant factors that cause changes in demand and supply of a product

Income in this case causes a significant change in the demanded quantity. The income elasticity of demand of the product is greater than one, indicating that income plays a crucial role in impacting the demand of the product. Other factors that affect the demand and supply of the product include its own price, which has a positive correlation with supply and negative correlation with demand, competitor’s price, advertising level and product quality. The competitor’s price affects the demand positively such that an increase in the price leads to an increase in demand thus increased supply. The more a product is advertised, the higher the demand, which leads to an increased supply. This is the scenario in regard to the quality of the product.

Impacts of short term and long term changes in market conditions on demand and supply

Short term changes in the market have a short term impact on demand and supply. This only causes a tilt of the demand and supply curves, whereby by market forces, the original equilibrium in the market is achieved when the forces elapses. Therefore, the equilibrium position under short term changes is stable. However, in long term changes, the new equilibrium point is formed, an indication that new demand and supply curve are established. The changes are not subject to change, thus new market forces are developed.

Crucial factors that cause rightward and leftward shift of the demand and supply curve

A rightward or leftward shift in demand is caused by changes in demand factors, holding price constant. A change in demand pattern is caused by any other factor affecting demand holding price of the commodity constant. In this case, competitor price elasticity, income elasticity, and advertisement elasticity may result to changes in the demand curve. An increase in the price of a substitute would lead to the right movement shift of the demand curve. A decrease in income of the consumer would ignite to a left movement shift of the demand curve. An increase in advertisement would lead to a rightward shift in the demand curve.

Shift in supply is impacted by changes in any of the factors affecting supply holding price of the commodity constant. In this case the factors include the price of inputs, technology, and a number of firms in the industry. A decrease in the price of input would cause a rightward shift of supply.

Improvement in technology reduces production costs leading to a rightward shift of supply. Finally, a decrease in the number of firms in the industry would cause a leftward shift of supply (Frank & Bernanke, 2007).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Frank, R. H., & Bernanke, B. (2007). Principles of microeconomics. Boston: McGraw-Hill/Irwin.

Schneider, E. (2003). Pricing and Equilibrium: An Introduction to Static and Dynamic Analysis, Volume 6. East Sussex: Psychology Press.

Smith, T. J. (2012). Pricing strategy: setting price levels, managing price discounts, & establishing price structures. Mason, Oh: South-Western Cengage Learning.

 

Sample Paper

Strategic Marketing Report

Introduction

As pointed out before, Joe Schmoe was content with his initial evaluation of the three products and as such, he did not make any effort to monitor the external environment in order to adjust the company’s marketing strategy accordingly. Instead of maintaining the project in an “autopilot” mode, I monitored the environment very closely and used the information gathered from both the internal and external environments to support my marketing strategies. I also liaised with other employees within the organization to ensure that they were cognizant of the strategic vision of the production and marketing departments. This not only facilitated efficiency and effectiveness within these two departments but also other parts of the organization.

Marketing and Production Strategies

X5 tablet is designed for consumers who are significantly price conscious as opposed to seeking functionality. In the last half a decade or so, this product has performed well particularly in the face of competing products by rival firms. In light of this, I reduced the research and development budget for this product to 10% and lowered the price slightly to $280 to cement the brands position in the market while at the same time maximizing the overall profitability of the company. On the other end of the spectrum, X6 tablet targets consumers who are have an inclination towards functionality and performance as opposed to price. As such, I increased the research and development budget for this tablet to 60% and increased its price to $525. Finally, despite the fact that X7 tablet is a relatively novel product to be introduced in the markets it is yet to perform well. The company can however not afford to discontinue the line because it is the most affordable brand for the company to produce. I set the research and development budget for X7 at an estimated US$ 7,200,000 (30%) and ensured that the product was sold to consumers at $80. Because consumers were sensitive to both price and performance, I decided to set the price for X7 lower than X5 to create the illusion that it was more economical despite the fact that it was cheaper to produce. This would however also create an impression that it was of less superior quality. Other than that the market saturation for X7 was only 2% which means that the company almost enjoyed monopoly power. Charging a low price would ensure that the company gained significant brand loyalty in the short run, which would prove to be invaluable in the long run.

In 2012, Revenue for the three brands increased significantly but the profitability of X7 declined slightly. Nevertheless, the overall profitability of the firm increased by 11% from US$ 81,571,138 (16%) to $325,720,907 (27%). The total profitability of X5 and X6 increased by 13% and 18% respectively while that of X7 declined slightly by 12%. On the other hand, despite its good performance, X6 still cost less than most other products in its category. Moreover, the fact that the tablet was still in the growth phase of its product lifecycle had a significant influence on its general performance. The performance of X5 also compared favorably with other tablets in its category. The slight decline in the profitability of X7 can be attributed to the fact that it was still new in the market. From the foregoing, I decided to raise the price for X6 from $525 to $550. Because X5 was performing very well in the market, I decided to increase the research and development budget to 20% and reduce the price slightly to $275 in an attempt boost sales and enhance brand loyalty. I also reduced the research and development budget for X7 to 20% and increased the price to $100. Having successfully introduced the brand to the market. This would enable the company to enhance its overall profitability.

Table 1: Pricing Strategy

Prices 2011 2012 2013 2014 2015
X5 $ 285.00 $ 250.00 $ 275.00 $ 250.00 $ 250.00
X6 $ 430.00 $ 525.00 $ 550.00 $ 525.00 $ 525.00
X7 $   80.00 $ 100.00 $ 100.00 $ 100.00

 

 

Table 2: Research and Development Activities

R&D 2011 2012 2013 2014 2015
X5 49% 10% 20% 30% 50%
X6 51% 60% 60% 40% 20%
X7 0% 30% 20% 30% 30%
Total 100% 100% 100% 100% 100%

 

2013 was characterized by a 9% growth in the overall profitability form 3$25,720,907 (27%) to $596,324,580 (36%). This was due to an increase in the total profitability for the three tablets, from 29% to 33% for X5, from 34% to 42% for X6 and from -12% to 34% for X7. Nevertheless, due to an increase in market concentration in the market for X6, other competitors were offering lower prices for similar tablets. This prompted the company to reduce the price back to $525. X5 had reached a stakeout phase in its product lifecycle, which had resulted in a sales decline for the product. As such, I reduced the price for the tablet and despite the fact that customers were only sensitive to prices as opposed to functionality. I increased the research and development budget for the tablet not only to enhance its functionality but also to explore cheaper production techniques. Finally, because the performance of the X7 tablet was below that of other competitors in the market, I increased its research and development budget to 30% primarily to enhance its quality but maintained the price at $100.

In 2014 the company’s overall profitability only increased slightly from 36% to 39%. This was occasioned by the sharp decline in the total profitability of the X5 tablet. Nevertheless, the profitability of the X6 and X7 tablet increased to 43% and 41% respectively. I increased he research and development budget for X5 to 50% at the expense of the X6 tablet and maintained its price at 250 in a bid to boost its sales but apparently this was the wrong approach because the sales only worsened in 2015 resulting in a loss of -24%. I should have concentrated on lowering the price instead of trying to enhance it functionality. Additionally, efforts to minimize production cost through innovation, which would have been achieved through research and development were also futile. Despite reducing its research and development expenditure in 2015, the profitability of the X6 tablet remained at 43%. Unfortunately, the profitability of the X7 tablet also declined to 16% in 2015 but this was because I practically did nothing to promote its sales volume. I retained both the price and research and development expenditure for 2015.

Conclusion

Perhaps the worst mistake I made was to increase the research and development expenditure for the X5 tablet instead of focusing on reducing the price because the target market was more sensitive to prices compared to functionality. Notwithstanding, the company outperformed the best competitor in the market. While the company generated profits amounting to $2,361,970,075 over the five year period, the competitor only generated $2,100,000,000. The income statements for the company are illustrated below.

Table 3: Comprehensive Income Statement

2011 2012 2013 2014 2015
Revenue
Total Sales 1,531,940 4,894,546 7,187,120 15,586,384 3,791,023
Revenue 518,232,275 1,200,007,506 1,635,624,813 2,545,181,081 1,178,184,203
Cost
Variable Costs 300,161,138 700,286,599 865,300,233 1,385,358,098 631,653,736
Fixed Costs 112,500,000 150,000,000 150,000,000 150,000,000 150,000,000
R&D Costs 24,000,000 24,000,000 24,000,000 24,000,000 24,000,000
Total Costs 436,661,138 874,286,599 1,039,300,233 1,559,358,098 805,653,736
Profit
Total Profit 81,571,137 325,720,907 596,324,580 985,822,962 372,530,468
Total Profitability 16% 27% 36% 39% 32%

 

 

Table 4: X5 Income Statement

2011 2012 2013 2014 2015
Revenue
Total Sales 968,979 2,866,847 2,301,898 1,004,214 547,750
Revenue 276,159,075 716,711,874 633,021,927 251,053,444 136,937,500
Cost
Variable Costs 145,346,882 430,027,124 345,284,687 150,632,066 82,162,500
Fixed Costs 75,000,000 75,000,000 75,000,000 75,000,000 75,000,000
R&D Costs 11,820,896 2,400,000 4,800,000 7,200,000 12,000,000
Total Costs 232,167,778 507,427,124 425,084,687 232,832,066 169,162,500
Profit
Total Profit 43,991,297 209,284,947 207,937,240 18,211,378 –       32,225,000
Total Profitability 16% 29% 33% 7% -24%

 

Table 5: X6 Income Statement

2011 2012 2013 2014 2015
Revenue
Total Sales 562,961 721,528 1,142,402 1,966,849 1,686,869
Revenue 242,073,200 378,801,954 628,320,838 1,032,595,514 885,606,323
Cost
Variable Costs 154,814,256 198,420,071 314,160,149 540,883,364 463,889,026
Fixed Costs 37,500,000 37,500,000 37,500,000 37,500,000 37,500,000
R&D Costs 12,179,104 14,400,000 14,400,000 9,600,000 4,800,000
Total Costs 204,493,360 250,320,071 366,060,149 587,983,364 506,189,026
Profit
Total Profit 37,579,840 128,481,883 262,260,419 444,612,149 379,417,297
Total Profitability 16% 34% 42% 43% 43%

 

Table 6: X7 Income Statement

2011 2012 2013 2014 2015
Revenue
Total Sales 1,306,171 3,742,820 126,615,321 1,556,404
Revenue 104,493,697 374,282,048 1,261,532,123 155,640,380
Cost
Variable Costs 71,839,404 205,855,126 693,842,668 85,602,209
Fixed Costs 37,500,000 37,500,000 37,500,000 37,500,000
R&D Costs 7,200,000 4,800,000 7,200,000 7,200,000
Total Costs 116,539,404 248,155,126 738,542,668 130,302,209
Profit
Total Profit –       12,045,725 126,126,922 522,989,455 25,338,171
Total Profitability 0% -12% 34% 41% 16%

References

Falletta, S. V. (2005). Organizational Diagnostic Models: A Review and Synthesis. Retrieved

January 9th, 2015 from: http://www.leadersphere.com/img/OrgmodelsR2009.pdf

Gregory, B. T., Armenakis, A. A., Moates, K., Albritton, M., & Harris, S. G. (2007). Achievi-ng Scientific Rigor in Organizational Diagnosis: An Application of the Diagnostic Funnel. Consulting Psychology Journal: Practice & Research, 59(2), 79-90.

Nadler, D. A. & Tushman, M. L. (1980). A Model for Diagnosing Organizational Behavior.

Organizational Dynamics, 9 (2), 35-51.

Shepherd, N. G., & Rudd, J. M. (2014). The Influence of Context on the Strategic Decision-

Making Process: A Review of the Literature. International Journal of Management Reviews, 16(3), 340-364.

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Credit Score and other factors that influence loan approval including years of credit history

Executive Summary

The main aim of this report is to evaluate the relationship between Credit Score and other factors that influence loan approval including years of credit history, revolving balance, revolving utilization and home ownership status. The report identifies the natural dependent variable to be predicted, which is the credit score and another variable, the credit approval status, which can also act as the dependent variable in another setting. The report further identifies the type of relationship and the type of model that best suits the data. Additionally, it evaluates the need for interaction terms and determines whether a categorical approach would be useful. Other than that, multicollinearity and residual analysis are carried to determine the reliability of the findings and finally a variable selection procedure is specified in order to produce the best model to analyse the data.

 

 

 

Regression Analysis

The data relates to credit approval decisions, particularly whether or not a client is approved for credit depending on their credit score, years of credit history, revolving balance, revolving utilization and home ownership status. The natural dependent variable to be predicted is the credit score, which is dependent on the years of credit, the revolving balance and the revolving utilization. Apart from the credit score, the approval decision can also be used as a categorical dependant variable. It should however be noted that the ordinary least squares method cannot suffice to produce a good linear unbiased estimator and as such, a linear probability model would have to be adopted. However, in this case, the regression line will not be a good fit for the data, which implies that usual measures such as the coefficient of determination () are more often than not unreliable. Moreover, LPM models are also characterised by heteroskedasticity and most likely produce estimates that are greater than 1, which makes them difficult to interpret because the estimates are probabilities, which should not be greater than one. The error term in such models is also likely to be non-normal, because they follow abnormal distributions. Finally, the relationship between the variables is also likely to be non-linear, which suggests that a different type of regression line would be required to fit the data more accurately, for instance an ‘S’ shaped curve.

The relationship between the credit score and the other variable is linear as illustrated using the excel output below. A first order model is appropriate for model, which implies that the independent variables are only included in the first power.

 

 

Table 1: SUMMARY OUTPUT

Regression Statistics
Multiple R 0.815255
R Square 0.664641
Adjusted R Square 0.642769
Standard Error 53.80668
Observations 50

 

Table 2: ANOVA

df SS MS F Significance F
Regression 3 263940.8 87980.26 30.38875 5.53E-11
Residual 46 133177.3 2895.159
Total 49 397118.1

 

Table 3: COEFFICIENTS

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 771.8923 26.91241 28.68165 5.37E-31 717.7204 826.0641
Years of Credit History -2.09848 1.490347 -1.40805 0.165839 -5.09839 0.901431
Revolving Balance 0.001565 0.000887 1.764622 0.084266 -0.00022 0.003351
Revolving Utilization -246.228 27.93194 -8.81527 1.91E-11 -302.452 -190.004

 

From the foregoing, the simple linear regression equation can be expressed as follows

.

It should however be noted that the coefficients for the years of credit history and the revolving balance are not statistically significant. This is because the P-Values for these variables are 0.165839 and 0.084266 respectively, which are both greater than the significance level (0.05). Consequently, these coefficients cannot be used to make inferences about the relationship between the credit score, the years of credit history and the revolving balance. This is reiterated by the line fit plots illustrated in Appendix 1. Notwithstanding, the coefficients for the intercept and the revolving utilization are statistically significant, which implies that it is only safe to conclude that there is an inverse relationship between the credit score and the revolving utilization. Moreover, the significance F is also greater than the significance level, which suggests that the results of the regression are also statistically significant at the 95% confidence level. The coefficient of determination suggests that 66.46% of the changes in the credit score are influenced by the three independent variables while the remaining 33.54% is explained by other factors.

Even though some coefficients cannot be used to forecast the credit score, interaction terms are not needed in this regression because it only involves continuous variables. Multicollinearity is not problematic because the highest correlation between the independent variables is -0.49, which exists between revolving utilization and years of credit history as illustrated in the table below

Table 4: Correlation Analysis

Credit Score Years of Credit History Revolving Balance Revolving Utilization
Credit Score 1
Years of Credit History 0.311459966 1
Revolving Balance 0.007546214 0.129899328 1
Revolving Utilization -0.796420254 -0.487016047 0.147135738 1

 

The residual plots in appendix 1reveal that all the independent variables are normally distributed. Moreover, the graph below (Squared Residuals against Revolving Utilization) illustrates that there is no heteroskedasticity and finally, the Durbin-Watson statistic is 1.376, which is close to 2 and as such, autocorrelation is not a problem.

The most appropriate model for forecasting the credit score can be derived through a principal components analysis. In this analysis, all the variables with regression coefficients that are not statistically significant are omitted from the regression model. In light of this the most appropriate model will only include the revolving utilization and the intercept. Consequently, the simple regression equation should be obtained from a regression including only these two variables as illustrated below.

Table 5: SUMMARY OUTPUT

Regression Statistics
Multiple R 0.79642
R Square 0.634285
Adjusted R Square 0.626666
Standard Error 55.00605
Observations 50

 

 

 

Table 6: ANOVA

df SS MS F Significance F
Regression 1 251886.1 251886.1 83.24982 4.66E-12
Residual 48 145232 3025.666
Total 49 397118.1

 

Table 7: COEFFICIENTS

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 757.9223 13.94888 54.33572 9.12E-45 729.8762 785.9684
Revolving Utilization -220.732 24.1921 -9.12413 4.66E-12 -269.373 -172.09

 

Using the regression results illustrated above, the simple regression line that would serve as the most reliable predictor for credit score is:

Conclusion

The relationship between the credit score, years of credit and revolving balance is not statistically significant and as such the regression should only be conducted with the revolving balance. From the second regression, it is evident that there is an inverse relationship between credit score and revolving utilization. Specifically, a unit change in revolving utilization results in a decline in the credit score by 220.73.

 

 

References

Montgomery, D. C., Peck, E. A. & Vining, G. G., 2011. ntroduction to linear regression analysis. 5 ed. Oxford: Wiley-Blackwell.

 

 

 

Appendix

Appendix 1: Residual Plots

Appendix 2: Line Fit Plots

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