Discuss About The Corporate Governance In Financial Institutions.
Lovisa Holdings Limited (LOV) is recognized to be fast fashion jewellery retailer having its stores in international markets. The company has about 265 stores out of which its 145 stores are present in Australia. The company mainly carries out its operations across Australia, New Zealand and Singapore. The company is listed on ASX and therefore need to comply with the corporate governance principles of the stock exchange to ensure its sustainable growth and development within the country. ASX Council principles and recommendations as applied by Lovisa Holdings Limited are disused in detail as follows:
It is necessary for the ASX listed companies to provide details about the roles and responsibilities of Board and management in the governance framework. The company governance framework has provided detailed information about its compliance with this ASX Council principle in its governance framework. The main role of Board has pointed in the governance statement is to improve the company performance and create maximum value for shareholders. It also has provided the information in relation to Board Charter developed by the company for defining the roles of Board and management (Corporate Governance Statement, 2018). The procedures adopted by Lovisa Holdings Limited to examine the performance of Board and management are also discussed in its governance framework as per ASX principles. Board performance is reviewed on annual basis by its committees and the feedback is discussed with an external facility and the managing director and CEO. The performance of the management team is assessed by the remuneration committee developed by the Board (Mallin, 2016).
ASX Council has also maintained that the Board should maintain an effective composition with relevant size and consisting of members with high skills and expertise. Lovisa Holding Limited governance framework has all the necessary details about Board structure. Board of the company consists of five directors comprising of non-executive and executive directors. The board members possess adequate skills and knowledge in relation to retail field, strategic thinking and high level of business thinking. It also emphasis on maintaining a balance proportion of people in the Board comprising of different diversity, gender, geographic location and background (Corporate Governance Statement, 2018). The proportion of women employed in relation to the men by the company in the Board in the year 2017 as compared to that of 2016 is depicted in the below table provided in its governance framework:
|
Proportion of Women |
2017 |
2016 |
|
Board |
20% |
20% |
|
Senior Management |
55% |
50% |
|
Company |
96% |
94% |
Structure the Board to Add Value
The Board as per the ASX Council principle of Lovisa Holdings Limited has maintained its effective compliance with high level of integrity and ethical standards in its business operations (Fleckner and Hopt, 2013). There is presence of a formal Code of Conduct that has outlined the behavior and nature of business operations to be maintained within the workplace. It provides a benchmark for the professional behavior within the workplace and all the ethical policies and standards maintained by the company is also provided on its online website. Also, there is a policy maintained by the company known as Policy for Dealing in Securities for providing the relevant standards for maintaining ethical behavior within the securities dealings (Corporate Governance Statement, 2018).
As per the ASX Council principle, LOV has in place an Audit Committee for over viewing the overall processes of accounting, auditing and financial reporting. The major responsibilities of the committee are carrying out the process of external auditing regularly to minimize the occurrence of any materialistic error in the financial statements. The Board has also received a declaration as per the Corporation Act that all the financial statements are developed as per the standard accounting rules and policies (Plessis, Hargovan and Bagaric, 2010).
It also has adopted adequate measures for providing the relevant information to the shareholders as per the ASX governance principles and framework. It has also adopted a continuous disclosure policy also provided on its website to communicate the materialistic information to the shareholders. The company in accordance with the ASX Listing rules has maintained sufficient procedures in place as stated in its governance framework (Corporate Governance Statement, 2018).
Lovisa Holdings Limited has implemented in place a variety of communication platforms such as forums, publications and the website of the company to regularly communicate and interact with the shareholders. The website of the company contains all the relevant information made by it on ASX including its annual report to provide them with all the required information. Also, the website of the company has provided a facility for the shareholders to elect or to receive communications via email (Nordberg, 2010).
The Board of the company in accordance with the ASX principle has developed a risk committee to develop and implement a risk management policy. The specific functions of the committee in relation to management of risk include maintaining in place adequate policies and procedures to mitigate the potential risk. One of the major responsibilities of the risk committee is to implement in place effective internal control policies and procedures to minimize the operational risk present within the company (Crowther, 2017).
Ethical and Responsible Way of Acting
The remuneration committee developed by the Board of Lovisa Holdings Limited as per the ASX Council principles holds the responsibility of all matters about the nomination and remuneration of directors and the CEO. The policy objectives of the committee include developing a remuneration structure that is attractive for retaining skilled executives and management personnel (Corporate Governance Statement, 2018). This is achieved by the committee with the use of short and long term incentives for providing encouragement to the board management for improving their performance and achieving the company’s long-term goals and objectives (Klettner, 2016).
Risk assessment is the main part of the audit process and it is performed by the auditor before starting the process of auditing. It is performed to check any material misstatement in the financial statements of the company. It also helps to ascertain risks that can impact the audit process and can alter the decision on true and fair view of the financial report (ASA 520, 2009). Auditor responsibility is not only to make audit of the financial statements but also to review the internal controls and other important business strategies that might helps to perform audit in more useful way. In order to verify that financial statements are free from the error and to ascertain the risks that impact the business, there is need to perform the risk assessment process of the company (Gay and Simnett, 2017). Risk assessment does not contribute to the audit opinion but it provides the base for the auditor that financial statements are free from any material misstatement (ASA 520, 2009). The risk assessment has certain steps that auditor need to follow. The risk assessment process is followed by review nature of company, conducting analysis of market of company, overall business strategy of the company and performing the analytical process to review the financial performance (Auditing Help, 2018).
Nature of the company: Lovisa Holding Limited is the well known company in Australia and New Zealand. This company has been engaged in the retail sale of fashion jewelry and accessories. Lovisa Holdings has been publically listed on the Australian Stock Exchange and it derived its revenue from the sale of fast fashion jewellery and its related accessories. There has been more than 288 stores located in 13 countries and also has franchise operations in 6 countries. Some of the important products of the Lovisa are necklaces, chokers, wrist wear, watches, earnings, rings etc (Annual Report, 2017). Lovisa Holding is the parent entity and also the main controlling party in the whole group that comprises of itself and its subsidiaries. Other related parties of the company are key management personal and directors of company (Annual Report, 2017). There is close relationship between the Lovisa Group and BB Retail Capital, which make it compulsory to list the BB Retail Group in related parties (IBIS World, 2018).
Safeguarding Integrity in Corporate Reporting
Market Overview of the Company: The fast fashion jewellery sector in which company operates faces very high competition. The fast fashion retail industry is subject the ever changing customer preferences. In this industry there is need of both time and costs to replicate the business model, IT Systems, design team, brand recognition and store network. There are very low barriers to make entry in the jewellery business and main competitors include retailers selling the predominately fashion jewellery, Jewellery department stores, fashion apparel stores that keeps the fashion jewellery section and other small retailers (About us, 2018). The product manufactures by the Lovisa are discretionary in nature rather than necessities. So it can be said that financial performance of the company is highly sensitive to the future changes in the retail segment of the fashion industry in the countries in which company operates (Annual Report, 2017).
|
Objectives |
Business Strategies |
|
International Expansion |
It is company strategy to leverage the company’s capital in large international market. To discover the option of the franchise partners for selected territories. Aim to expand into the new international markets on trial basis. |
|
Streamline global supply chain process |
Company has designed well planned network of supply chain through using the both air and sea freight while keeping the speed to market operating model (Auditing Help, 2018) |
|
Enhancing the performance of existing stores |
Company has target to improve the existing store network through continuing to target the high traffic shopping precincts and low pricing. |
|
Brand Recognition |
It is the business strategy of the Lovisa to use the social media to connect with the customers and increase the recognition of brand. |
(Annual Report, 2017)
|
2017 |
2016 |
|
|
Gross Margin = |
140822 |
113562 |
|
178746 |
153461 |
|
|
0.788 |
0.74 |
|
2017 |
2016 |
|
|
Net Margin = |
40442 |
23548 |
|
178746 |
153461 |
|
|
0.226 |
0.153 |
(Putra, 2010)
Liquidity ratio
|
2017 |
2016 |
|
|
Current Ratio = |
29486 |
25622 |
|
19447 |
16561 |
|
|
1.52 |
1.55 |
|
2017 |
2016 |
|
|
Quick Ratio = |
12744 + 3615 |
8295 + 2293 |
|
19447 |
16561 |
|
|
0.84 |
0.64 |
|
2017 |
2016 |
|
|
Inventory Turnover ratio = |
37924 |
39899 |
|
13127 |
15034 |
|
|
2.89 |
2.65 |
|
2017 |
2016 |
|
|
Inventory days on hand = |
365 |
365 |
|
2.89 |
2.65 |
|
|
126 days |
138 days |
|
2017 |
2016 |
|
|
Accounts receivable turnover = |
178746 |
153461 |
|
3615 |
2293 |
|
|
49.45 |
66.92 |
|
2017 |
2016 |
|
|
Accounts receivable days on hand = |
365 |
365 |
|
49.45 |
66.92 |
|
|
7.4 days |
5.5 days |
|
2017 |
2016 |
|
|
Accounts payable turnover = |
37924 |
39899 |
|
10001 |
8350 |
|
|
3.79 |
4.78 |
|
2017 |
2016 |
|
|
Accounts payable days = |
365 |
365 |
|
3.79 |
4.78 |
|
|
96.2 days |
76.4 days |
|
2017 |
2016 |
|
|
Return on assets ratio = |
40442 |
23548 |
|
50695 |
42641 |
|
|
0.798 |
0.552 |
|
2017 |
2016 |
|
|
Debt-to-worth ratio = |
22506 |
31470 |
|
28189 |
11171 |
|
|
0.798 |
2.817 |
(Putra, 2010)
|
2017 |
2016 |
|
|
Net sales to working capital = |
178746 |
153461 |
|
10039 |
9061 |
|
|
17.805 |
16.936 |
|
CONSOLIDATED STATEMENT OF FINANCIAL POSITION |
|||||
|
As at 2 July 2017 |
|||||
|
COMMON SIZE STATEMENT |
|||||
|
Consolidated ($000s) |
Note |
2017 |
2016 |
2017 |
2016 |
|
(000’s) |
(000’s) |
% |
% |
||
|
Assets |
|||||
|
Cash and cash equivalents |
C5 |
12,744 |
8,295 |
25% |
19% |
|
Trade and other receivables |
B1 |
3,615 |
2,293 |
7% |
5% |
|
Inventories |
B2 |
13,127 |
15,034 |
26% |
35% |
|
Total Current Assets |
29,486 |
25,622 |
58% |
60% |
|
|
Deferred tax assets |
A6 |
3,275 |
1,823 |
6% |
4% |
|
Property, plant and equipment |
B3 |
15,658 |
13,123 |
31% |
31% |
|
Intangible assets and goodwill |
B4 |
2,276 |
2,073 |
4% |
5% |
|
Total non-current assets |
21,209 |
17,019 |
42% |
40% |
|
|
Total assets |
50,695 |
42,641 |
100% |
100% |
|
|
Liabilities |
|||||
|
Bank overdraft |
C5 |
1,705 |
3,566 |
3% |
8% |
|
Trade and other payables |
B6 |
10,001 |
8,350 |
20% |
20% |
|
Employee benefits – current |
B8 |
2,075 |
1,594 |
4% |
4% |
|
Derivatives |
C4 |
805 |
909 |
2% |
2% |
|
Provisions – current |
B7 |
1,042 |
655 |
2% |
2% |
|
Current tax liabilities |
3,819 |
1,487 |
8% |
3% |
|
|
Total current liabilities |
19,447 |
16,561 |
38% |
39% |
|
|
Employee benefits – non-current |
B8 |
608 |
401 |
1% |
1% |
|
Loans and borrowings |
C3 |
– |
12,000 |
– |
28% |
|
Provisions – non-current |
B7 |
2,451 |
2,508 |
5% |
6% |
|
Total non-current liabilities |
3,059 |
14,909 |
6% |
35% |
|
|
Total liabilities |
22,506 |
31,470 |
44% |
74% |
|
|
Net assets |
28,189 |
11,171 |
56% |
26% |
|
|
Equity |
|||||
|
Issued capital |
C1 |
208,526 |
208,526 |
411% |
489% |
|
Common control reserve |
(208,906) |
(208,906) |
-412% |
-490% |
|
|
Other reserves |
(461) |
(1,032) |
-1% |
-2% |
|
|
Retained earnings |
29,030 |
12,584 |
57% |
30% |
|
|
Total equity |
28,189 |
11,171 |
56% |
26% |
(Annual Report, 2017)
|
CONSOLIDATED STATEMENT OF PROFIT OR LOSS |
|||||
|
For the financial year ended 2 July 2017 |
COMMON SIZE STATEMENT |
||||
|
Note |
2017 |
2016 |
2017 |
2016 |
|
|
(000’s) |
(000s) |
% |
% |
||
|
Revenue |
A2 |
178,746 |
153,461 |
100% |
100% |
|
Cost of sales |
(37,924) |
(39,899) |
-21% |
-26% |
|
|
Gross profit |
140,822 |
113,562 |
79% |
74% |
|
|
Salaries and employee benefits expense |
A3 |
(45,276) |
(29,980) |
-25% |
-20% |
|
Property expenses |
(28,683) |
(25,881) |
-16% |
-17% |
|
|
Distribution costs |
(4,464) |
(4,340) |
-2.5% |
-2.8% |
|
|
Depreciation and amortisation expense |
(5,539) |
(6,034) |
-3.1% |
-3.9% |
|
|
Loss on disposal of property, plant and equipment |
(785) |
(162) |
-0.4% |
-0.1% |
|
|
Other expenses |
(15,371) |
(12,943) |
-8.6% |
-8.4% |
|
|
Operating profit |
40,704 |
24,222 |
22.8% |
22.3% |
|
|
Finance income |
142 |
49 |
0.1% |
0.0% |
|
|
Finance costs |
(404) |
(723) |
-0.2% |
-0.5% |
|
|
Net Finance costs |
(262) |
(674) |
-0.1% |
-0.4% |
|
|
Profit before tax |
40,442 |
23,548 |
22.5% |
21.4% |
|
|
Income tax expense |
A6 |
(11,396) |
(6,995) |
-6% |
-4.6% |
|
Profit after tax |
29,046 |
16,553 |
16.1% |
16.9% |
(Annual Report, 2017)
Relevant audit risk and potential steps to reduce risk
The relevant audit risk as identified from the financial reporting process of the company that can cause the occurrence of material misstatements are identified and discussed as follows:
- Market Risk: The significant audit risk relates to the potential chances of error occurrence due to change in the external market condition such as volatility in exchange rates, interest rates and equity prices. The company adopts the use of sensitivity analysis for managing the foreign exchange risks and also adopts the use of forward exchange rates and currency options against the movements in the foreign currencies.
- Liquidity Risk: The risk arises in the company due to its inability for meeting the future obligations. The company manages the risk by ensuring that it possess sufficient liquidity to meet its liabilities and also continually monitors its cash flow forecast (Gay and Simnett, 2017).
References
About us. 2018. Lovisa Holdings Limited. [Online]. Available at: https://www.lovisa.com/our-journey/ [Assessed on: 11 May, 2018].
Annual Report. 2017. Lovisa Holdings Limited. [Online]. Available at:https://www.lovisa.com/media/wysiwyg/pdf/Annual_Report_to_shareholders_1_.pdf [Assessed on: 11 May, 2018].
ASA 520. 2009. Auditing Standard ASA 520: Analytical Procedures. [Online]. Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf [Assessed on: 11 May, 2018].
Auditing Help. 2018. Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment Auditing Help. [Online]. Available at:https://auditinghelp.com/identifying-and-assessing-the-risks-of-material-misstatement-through-understanding-the-entity-and-its-environment-13914 [Assessed on: 11 May, 2018].
Corporate Governance Statement. 2017. Lovisa Holdings Limited. [Online]. Available at: https://www.lovisa.com/media/wysiwyg/pdf/Corporate_Governance_Statement_2017_5_.pdf [Assessed on: 11 May, 2018].
Crowther, D. 2017. The Goals of Sustainable Development: Responsibility and Governance. Springer.
Fleckner, A. and Hopt, K. 2013. Comparative Corporate Governance: A Functional and International Analysis. Cambridge University Press.
Gay, G. and Simnett, R. 2017. Auditing & Assurance Services. McGraw-Hill Education (Australia) Pty Ltd.
IBIS World. 2018. Overview: Lovisa Holdings Limited. [Online]. Available at: https://www.ibisworld.com.au/australian-company-research-reports/retail-trade/lovisa-holdings-limited-company.html [Assessed on: 11 May, 2018].
Klettner, A. 2016. Routledge Contemporary Corporate Governance. Routledge.
Mallin, C. 2016. Handbook on Corporate Governance in Financial Institutions. Edward Elgar Publishing.
Nordberg, D. 2010. Corporate Governance: Principles and Issues. SAGE.
Plessis, J., Hargovan, A. and Bagaric, M. 2010. Principles of Contemporary Corporate Governance. Cambridge University Press.
Putra, L.D. 2010. The Use of Analytical Procedures in Auditing. [Online]. Available at: https://accounting-financial-tax.com/2010/04/the-use-of-analytical-procedures-in-auditing/ [Assessed on: 11 May, 2018].
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