Posted: May 25th, 2022
F&C International Inc.
Defining the Issues and Problem Statements
The case illustrated a large scale fraud that had plagued the F & C. international Inc. during 1990s.
The case reveals challenging issues facing stakeholders in undertaking valuation of a publicly listed company
The case also highlights a dilemma that can face top executives who intend not participating in the financial frauds of a company
The fraud strategies were be inflating the company financial records and overestimated the inventories.
The company top executives inflated sales revenues and overstating period-ending inventories in the 1990s.
For example, the barrels labeled as high concentrated flavors were filled with water.
Major cause of the problem was the fraud that had perpetuated the company in the 1990s.
The effect of the fraud made the company to record financial losses during the period.
Sale revenues declined that made the company to record a net loss.
Moreover, the company would not be able to raise banks loans with its financial records.
The company would not be able to raise shares from the public with its financial problems.
Analysis of the Case Data
The case shows that a company that lacks an internal control system faces the risk of internal frauds that can lead to bankruptcy.
Part of the problems was that the company concealed the real financial data from the F & C. independent auditors.
The executives also diverted the attention of the auditors from its suspicious activities.
The company cumulative pretax earnings were overstated to approximately $8 million in 1990s.
In the fiscal 1992, F&C overstated its pretax net loss that reached $3.8 million.
Moreover, F&C’s financial data were distorted systematically during the second quarter of 1993 fiscal year.
Approximately $1.5 million worth of inventory could not be located and accounted for.
The case reveals the F&C had inventory problems worth between $3- 4 millions.
Different alternatives can be employed by the company to solve the problems
First, the company needs to design effective internal control systems compatible to the Section 404 of SOX (Sarbanes-Oxley) Act.
Moreover, the company should use external auditors to carry out a periodic auditing of the company financial records.
The internal auditor should not perform the same function of both internal and external auditor.
External auditor should carry out the auditing of the company financial records for a fiscal period before it is published in the annual report.
The company should set up an audit committee to serve as a watchdog of the company financial records.
Selecting Decision Criteria
The criteria to use are to select the option from the alternatives that can eliminate the frauds within the company.
Decision criteria are also based on selecting option that can improve the financial records of the company for the fiscal year.
To select alternative that can make the executives to be financial responsible and abide by the financial and auditing laws.
To select option that can make the company free from financial risks.
Analyzing and Evaluating Alternatives
Application of Internal control system is the management policy of controlling fraud by which CFO (Chief Financial Officer) will ensure that the company financial reporting is free of fraud.
Separating internal auditor from external auditor is to ensure that both auditors serve as watchdog to another in order to eliminate frauds from the company.
Audit Committee is to be set up to investigate any suspicious financial misappropriations in the company.
Selecting the Preferred Alternative
Designing an effective internal control system is the preferred alternative out of all the alternatives
Effective implementation of internal control system will make the company to abide by the Section 404 of SOX Act.
Internal control policy will make the internal auditor to refrain from any financial misappropriations
Effective internal control policy will make the Chief Financial Officer to refrain from any financial misappropriations.
Application of internal control system will make all employees to refrain from financial frauds that can lead to a bankruptcy of the company.
Developing an Action/Implementation Plan
Approve at least $300,000 that will be used for the implementation of the program.
The fund should be use to carry out a training programs for all the top executives.
Three months should be used for the implementation of the program.
Chief Financial Officer should undertake a training program to understand how the internal controls system is carried out within a company.
The company should also offer internal control training program for all top executives.
The company should provide a period training for all executives to enhance effectiveness of internal control system within the company.
Crundwell, F. (2010). Finance for Engineers: Evaluation and Funding of Capital Projects. UK. Springer.
SEC (2010). Sarbanes-Oxley Section 404. United States Securities and Exchange Commission.
Case 4.2. F & C. international Inc.
Pride, W. Hughes, R. & Kapoor, J. (2013). Business. Cengage Learning.
Varaiya, N. Bergmark, B. & Taylor, R. (1997). F & C. International: A Case Study off an IPO Valuation. Journal of Financial Education. 23: 114-123.
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