Vcl Inc. – Advertising and Revenue Recognition

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-the appreciation of franchise asset value at the discretion of Stuart, the GM

Analysis- Given that a possible offering to purchase VCL from MC Corp is based on VCL’s performance in terms of earnings and cash flows. The valuation of VCL is not reliable based on the current unaudited financial statements.

Recommendation- Keeping our preliminary valuation in mind, we recommend an audit to verify VCL’s earnings and financial position.

With assurance on the balances of the financial statements, we can perform an in-depth valuation base on the audited financial statements. This would give the investors a higher possible level of assurance in the purchasing offer.

Subject- Some of the questionable management decision made by Stuart: the use of promotional products provided by advertising clients for his own office before the promotional giveaway, the use of the 7-day excursion tickets to a 2-day Las Vegas business meeting, the $40,000 premium charged for MC Corp’s advertising space, and the employee loan issued to himself with no interest and payment terms.

Analysis - Decisions are centralized around Stuart. There appears to be a lack of accountability for his decisions, which could result in misappropriate (spending) of VCL’s resources and poor judgment for business decisions.

Recommendation- We recommend that we set up a corporate governance guidelines for VCL, as well as establish governance structure (with board of directors, reporting hierarchy, and bylaws) so that we can gain assurance that decisions made with VCL’s resources are appropriately in line with investors’ objectives.

memorandum

to: partner

from: CA

subject: Stuart jeffries ethical concerns

Stuart Jeffries, the team general manager, has been making questionable decisions. The advertising revenue comes as an “exchange of products or services instead of cash.” In one instance, he used this exchange to fund a trip for him and his wife, the bookkeeper, to vacation in Las Vegas. Stuart views this as saving the company money, instead of accurately reporting the revenue and the expenses, as well as paying for personal expenses on the company’s dollar. Revenue is understated and so are expenses. He does not segregate business and personal, and the decisions he is making, thinking they are for the better of the company are raising ethical concerns. The revenue should be coming in as cash, and expenses should get approved and also go through the company, and Stuart should be removed from being able to decide what is recognized.

Stuart also created an employee receivable for himself, where he used company funds to purchase a house and invest in the stock market. This receivable is interest free and does not have any payback terms or documents in place. Stuart’s contract ends in a year, with no contract in place for the receivable, he could default, leaving no way to enforce payment. This receivable should be settled with Stuart immediately, and be brought to Mr. Elliot’s attention, and have Stuart agree to repay the loan with interest, or pay it upfront.

Stuart has also given Glenda, his wife and bookkeeper, instructions to increase the value of VCL because he “believes that the value of the franchise has increased over the years.” He is making accounting decisions, overstating the balance sheet and the value of the investment, without reason. The lack of separation leaves VCL open to many mistakes, overstatements and fraud. Stuart should be removed from accounting decisions, such as increasing the investment, as well as taking trading advertising for services or products. It is recommended that Mr. Elliot be shown the implications to his business by Stuart, and suggested that his contract not be renewed.