• There have been several major audit scandals in the past. The fact that audit continues and, indeed, flourishes in the light of these suggests that society has not lost confidence in audit and that it will not do so in the future.
• The major audit scandals appear to be regarded as abnormal occurrences that do not reflect on the work underpinning the vast majority of audits. The cases that have occurred in the past few years represent only a tiny minority of the audits that have been undertaken.
• Each has attracted a great deal of publicity, even notoriety, but there has been nothing to suggest that there is a systematic failure across all audits. Indeed, the publicity generated by each case indicates that these are not routine events.
• Shareholders and other stakeholders almost certainly need the reassurance provided by audit. In the absence of audit they would have little or nothing to support the credibility of the financial statements and this would undermine confidence in investment.
• It would appear that audits are desirable even if they do not offer a guarantee of detecting every single material irregularity in the financial statements. The accountancy profession has done a great deal to enhance the credibility of audit.
• Considerable amounts of time, money and resources have been invested in standard setting, monitoring and regulation of auditors. Major audit scandals are investigated as a matter of routine and any recommendations for the future regulation of audits and auditors are usually implemented as a matter of course.

ISA 250: Consideration of Laws and Regulations in an Audit of Financial Statements distinguishes the auditor’s responsibilities in relation to compliance with two different categories of laws and regulations as follows;
The provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements such as tax and pension laws and regulations; and
Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the financial statements, but compliance with which may be fundamental to the operating aspects of the business, to an entity’s ability to continue its business, or to avoid material penalties (for example, compliance with the terms of an operating license, compliance with regulatory solvency requirements, or compliance with environmental regulations); non-compliance with such laws and regulations may therefore have a material effect on the financial statements.

• If the auditor becomes aware of information concerning an instance of non-compliance or suspected non-compliance with laws and regulations, the auditor shall obtain;
• An understanding of the nature of the act and the circumstances in which it has occurred; and
• Further information to evaluate the possible effect on the financial statements.
• Seek legal advice if sufficient information not made available on material non-compliance, which auditor suspects.
• If information cannot be obtained consider impact on opinion.
• Consider the impact of non-compliance on auditor’s risk assessment and the reliability of written representations, and take appropriate action.

• Monitor legal requirements and ensure that operating procedures are designed to meet these requirements.
• Institute and operate appropriate systems of internal control including internal audit and an audit committee.
• Develop, publicise and follow a code of conduct.
• Ensure employees are properly trained and understand the code of conduct.
• Monitor compliance with the code of conduct and act appropriately to discipline employees who fail to comply with it.
• Engage legal advisors to assist in monitoring legal requirements.
• Maintain a register of significant laws with which the entity has to comply within it’s particularly industry.

The code of ethics for professional accountants require that professional accountants or auditors accept only engagement which they are competent and capable of performing in addition they must ensure that they comply with the relevant statutory and legal requirements. It is therefore necessary for them to carry out procedures and consider the following factors:

• They must consider whether they are professionally and legally qualified to accept the engagement
• They must consider whether there are any ethical issues that may confront them if they accept the nomination. Example threats to the objectivity and independence
• They must consider whether they have the time and resources including expert knowledge and skills to serve the client
• They must consider whether they have been properly nominated and any outgoing auditor has properly parted with his client.
• They must also fulfil the professional etiquette requirement of communication with the outgoing Auditor if any as a sign of courtesy and to require information as to whether there are professional reasons for not accepting the nomination.
• The procedures should also enable the auditors to determine whether the prospective client has integrity and falls within the risk appetite of the firm.
• Therefore on the whole the procedures are carried out to enable the auditor make an informed decision whether to accept or reject the nomination.

• Firm and leadership responsibilities for quality with in the firm:
  Personnel within the firm responsible for establishing and maintaining the firms system of quality control shall have an understanding of the entire text of the ISQC, including the application and other explanatory material, to understand its objectives and to apply the requirements properly, firms are required to ensure that appropriate training is provided to ensure there is complete understanding of the objectives and procedures under ISQC1.
• Human Resources:
  The firm’s overriding desire for quality will necessitate policies and produces on ensuring excellence I its staff, to provide the firm with reasonable assurance that it has sufficient personnel with capabilities, competence and commitment to ethical principles to perform enjoyments in accordance with professional standards and regulatory and legal requirements, and to enable the firm or engagement partners to issue reports that are appropriate in the circumstances.
• Assignment of Engagement teams
  The assignment of engagement teams is an important matter in ensuring the quality of an individual assignments. This responsibility is given to the engagement partner.
• Engagement Performance
  The firm should take steps to ensure that engagements are performed correctly, That is, in accordance with standards and guidance. Firms often produce a manual of standard engagement procedures to give to staff so that they know the standards they are working towards. Ensuring good engagement performance involves:
   Direction
   Supervision
   Review
   Consultation
   Resolution of disputes.
• Monitoring
  The standard states that firms should have policies in place to ensure that their quality control procedures are: relevant, adequate, operating effectively and complied with. In other words they must monitor their system of quality control. Monitoring activity should be reported to the management of the firm on an annual basis for correctively action to be taken.

(i) In relation to Good Life Insurance Ltd., there is a threat of self-interest arising, as a member of the audit team has an indirect financial interest in the client.
The relevant factors are:

• The interest is unlikely to be material to the client or Sally, as the investment is recent and Sally’s interest is in a pool of general investments made by the pension scheme on her behalf.
• Sally is the audit junior and does not have a significant role on the audit in terms of drawing audit conclusions or identifying audit risk areas.
• The risk that arises to the independence of the audit here is not significant. It would be inappropriate to require Sally to divest her interest in the audit client. If all the elements of risk in this situation are to be eliminated, then the junior assigned to the team could be simply changed. However such a step is not vital in this situation.
  (ii) In relation to Solar Electricals, two issues arise. The first is that the firm appears to be providing multiple services to Solar Electricals, which could raise self-interest threat. The second is that the manager assigned to the due diligence assignment wants to engage in a personal relationship with a person connected to the subject of the assignment, which could create familiarity or intimidation threat.
  With regard to the issue of multiple services insufficient information is given to draw a conclusion as to the significance of the threat. Relevant factors would be matters such as the nature of the services, the fee income and the team members assigned to each. Safeguards could include using different staff for the two assignments. The risk is likely to be significant only if one of the services provided is audit, which is not indicated in the scenario.
  In relation to the second issue, the relevant factors are these:
• The assurance team member, David, has a significant role on the team as second in command.
• The other party is closely connected to a key staff member at the company being reviewed.
• Timing.
  In this situation, the firm is carrying out a one-off review of the company, and timing is a key issue. Presently David does not have a personal relationship which would significantly threaten the independence of the assignment. Therefore, the safeguard is to request that David does not take any action in that direction until the assignment is completed. If he refuses, then his removal from the team should be considered.

• Whether our firm has the necessary resources and experience to carry out the investigation of PQR Ltd’s losses.
• What reliance is to be placed on the report that we produce as a result of the investigation and whether it will be relied upon by any third parties such as lenders
• What type of report it is to be and what level of assurance will be given
• Whether any potential independence issues exist with other clients that our firm has and therefore potential conflicts of interest
• What level of detail is required in terms of the work to be undertaken Procedures to carry out
• Review staff availability and timings to assess whether sufficient resource for the investigation exists.
• Discuss with the management of ECO Ltd the scope of the investigation and its purpose (eg whether any third parties will be relying on it or whether it is an internal report only) and other issues such as expected timing, fees etc.
• Clarify the terms of reference of this engagement in writing from the management of West.
• Draft an engagement letter for this investigation and obtain agreement of terms in writing from the management of ECO Ltd.            (Any 5 points)

• Inventory will be undervalued if cut-off has not been appropriately applied therefore particular focus needs to be on this area of the quarter-end count.
• Inventory will be undervalued if not all inventory items have been included in the count therefore the investigation should focus on the procedures in place for the quarterly counts.
• Inventory will be undervalued if the valuation methods are incorrect. Inventory is valued manually so the investigation should examine how items of inventory, such as scrap are valued.

• Obtain inventory counting instructions in place at PQR Ltd and review to make an assessment of their adequacy for the quarterly counts, together with discussion with appropriate staff at ECO Ltd.
• Perform analytical procedures using figures from the quarterly management accounts, such as comparisons between 31 March 2018 and 31 December 2017.
• Discuss scrap and wastage policy with warehouse staff.
• Examine details of scrap and discuss figures with appropriate staff to establish whether there are any reasons for wastage being higher in this quarter.
• Test cut-off is correct by tracing the last goods delivery notes and despatch notes to the invoices.
• Recast additions on inventory sheets to verify accuracy.     (Any 3 points)

•  If closing inventory has been undervalued or undercounted, this could explain a high materials consumption in this quarter. It could also be due to excessive consumption or wastage of materials. If recorded inventory has been stolen from production areas this could be another contributory factor to a high materials consumption in this quarter.
• If cut-off was incorrectly applied, then this would affect the materials consumption, ie if goods delivered after the year end were incorrectly included as purchases in the quarter then this would give rise to a higher materials consumption.
• Also if revenue is understated due to incorrect cut-off, then materials consumption as a % of revenue will be overstated.          (Any 2 points) 

• Test cut-off of purchases and sales has been done correctly by matching purchase invoices to goods received notes and matching despatch notes to invoices raised around the quarter-end date.
• Compare value of inventory identified as obsolete or damaged at the quarter-end to the previous quarter-end, discussing discrepancies with appropriate staff.
• Discuss levels of scrap and wastage with warehouse managers to ascertain normal levels and understand how it arises.
• Review a sample of credit notes received after the quarter-end to identify any returned materials.
• Inspect scrap materials to confirm it is not suitable for manufacture and therefore is not included in inventory.                  (Any 2 points)

Suitability of the report
The report is not suitable under the circumstances as there is the need for an EMPHASIS OF MATTER paragraph immediately after the opinion under ISA 560 on the note on Going Concern and Subsequent Events. This must, however state clearly that the inclusion of the Emphasis of matter is not a qualification of the opinion in respect of the matter.         (4 marks)

The paragraph could read like:
Emphasis of Matter
We draw attention to the note … to the financial statements which indicates that the company incurred a net loss of GH¢24.8 for the year ended 31 December 2015 and, as of that date, the company’s current liabilities exceeded its current assets by GH¢37.8M. The note states that these conditions, along with other matters, indicate the existence of a material uncertainty which may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not qualified in respect of this matter.        (4 marks)

Adofo Boateng (Adofo) and Coffie Oduro (Coffie) met in 2010 when they were both students at a university in the United States. They both had ambitions to succeed in business back in their home country, Ghana. They shared common interest in Ghanaian history and culture, and saw commercial opportunities in setting up a business in the tourism industry. At that time, tourism was a growing but under-developed industry. Adofo and Coffie agreed that if they could establish a small and successful tourism business, there would be opportunities for rapid growth within just a few years.

On returning to Ghana in late 2011, they established a private company, Ghanalux Ltd, with money from family backers and some private means. The company’s business was to organise small tour groups of tourists from the United States, mainly the north-eastern states of the US. They had dedicated tour guides taking the groups on planned itineraries lasting about four weeks. Initially, Adofo and Coffie acted as tour guides themselves, although they gradually did less of this work as the company expanded.

The tours are priced at a high rate, but the aim is to deliver high-quality ‘luxury’ holidays for all customers. Ghanalux uses the services of a travel booking company in the US to advertise its tours and attract customers. The booking company charges a commission for its services, as a percentage of the tour prices paid by customers.

Early growth
The tourism industry in Ghana suffered from a skills shortage, and Ghanalux proved a success initially because Adofo and Coffie were both talented individuals, with a strong motivation to succeed, extensive knowledge of Ghana and its tourist attractions, and an ability to communicate easily with their US customers. The company gained a strong reputation in parts of the US for efficient tour organisation, but also exhilarating and life-enhancing tours.

The company operated from a small office in Accra, from which tours were organised and coordinated. In the first year of operations, ending December 2012, they generated revenue of just under GH¢2 million, and although they made losses in the early years, they were pleased with the revenue growth they achieved. As the company grew, it recruited a small number of full-time tour guides, using contacts in US universities to identify and attract Ghanaians who were studying there and were attracted by the prospects of working in the tourist industry in Ghana, and for a company where the prospects of career development seemed strong. In recruiting new guides, the company looked for individuals with strong motivation, an interest in Ghana and its history, culture and resources, and an ability to communicate well with both foreigners and the local folks.

By 2018, the company was operating several tours each year for tour groups of about 16 people who were willing to pay premium prices for a top quality holiday experience, combining elements of Ghanaian culture, heritage, recreation and adventure. They also started to organise special themed tours each year to the PANAFEST festival in Elmina and Cape Coast. The company’s annual revenue in 2018 amounted to just short of GH¢16 million, and the net profit margin after tax was about 4% of revenue or GH¢639,000.

The tourism industry in Ghana
Tourism is now a major industry in Ghana. In 2018, the industry earned about US$3 billion for the national economy, attracting about 1.5 million international tourists from around the world and employing almost 700,000 people. However the industry is fragmented, with many small companies operating hotels, travel services, tours, catering for tourists, and so on. Visitors range from tourists looking for low-price holidays or short breaks to wealthier tourists taking longer holidays and visitors to business conferences.

The government is helping to support growth in tourism by funding infrastructure projects and other initiatives. However, Ghana’s tourist industry is still under-developed compared to other countries in Africa. Factors that appear to be holding back growth are a shortage of individuals with suitable skills, and insufficient branding and marketing of Ghana as an attractive tourist location to other countries. Tourists also often complain about the lack of comfort on tour buses that take them between their hotels and sightseeing locations.

Adofo and Coffie have discussed what Ghana needs to do to be a more attractive destination for foreign tourists.

Growth strategies
Adofo and Coffie believe that they need to think ahead and develop a strategy for taking the company forward and growing the business. There seem to be a number of different options for growth, and they want Ghanalux to be at the forefront of developments in the tourism industry. The strategic options they have discussed are set out briefly below:

Increase the number of tours each year. In 2018 the company ran twelve tours. It might be able to increase this number in future, although there is probably a limit to the number of tours that can be sold to customers in the north-east of the USA. There would be a need to recruit more tour guides.

Develop new bespoke high-end luxury tours, tailored to the specific requirements of individuals, couples or small families, where customers are accommodated in top quality hotels and have their own tour guides and private cars. These bespoke tours should sell for at least twice the price per person that the company charges for its existing tours.

Develop a range of themed tours. Currently, the company’s tours have an itinerary that combines different types of activity, such as visits to local festivals and events, visits to UNESCO heritage sites linked to the country’s history, adventure tours to rain forests and game parks, and recreational days at beach resorts. The company could develop tours that deal exclusively with just one type of activity.

Seek strategic tie-ups with other businesses in the tourism industry in Ghana, such as hotels and festival event organisers, so that they actively market each other’s services and products to their customers.

Merger. The company might consider a merger with one or more other tour companies. The directors of Ghanalux think that they would be unable to raise enough finance for an acquisition of suitable size, so any growth by way of business combination would have to be in the form of a merger, involving a share-for-share exchange.

A restriction on the company’s growth potential is that currently all its customers come from the north-eastern part of the USA. Ghanalux would be able to sell more tours if it could market its services successfully in other countries.

Company performance
The directors are pleased with the progress that the company has made since it was established. Annual revenues have grown, although profit has only been a relatively recent outcome, and there are encouraging future prospects. However, the company’s business is still at an early stage of development, and the directors understand that the company needs to sustain or improve the quality and efficiency of its operations and the skills of its employees. It cannot stand still and so needs to innovate, and it must find new ways of attracting customers so that its business continues to grow.

Until now, the directors have not made formal plans or budgets for the business, but they think that the company is reaching a stage where greater formality is required in the process of setting business targets and monitoring performance.

Shortage of talent
The company has so far been very careful in its selection of guides to lead its tour groups. Guides are well-educated, communicate well with other people and enjoy the tourism industry. However, many of them are also ambitious. If they think that Ghanalux is unable to offer them an attractive career, they are likely to move elsewhere in time, and possibly set up their own businesses. Already two experienced tour guides have left the company to seek a career elsewhere.

Adofo and Coffie think that if they are to retain as well as attract the top talent available, they will need to offer long-term incentives to their best guides. Incentives should encourage them not only to stay with the company, but also to contribute innovative ideas about how the company should develop.

At the moment guides are paid annual salaries of around GH¢60,000, plus a small annual bonus, but other forms of incentive might be needed.

Adofo thinks that if the company is unable to retain talent, it should ‘accept the inevitable’ and recruit guides locally on lower salaries, but give them intensive training before using them as tour leaders.

Ownership and organisation structure
Adofo and Coffie each own 40% of the shares in their company, and are the only directors of the company. The remaining 20% of shares are owned by members of their families. There are 50,000 equity shares in issue.

They recognise that unless and until the Ghana Stock Exchange grows substantially, there are no prospects for the company to obtain a stock market listing.

Now that the company has grown, neither Adofo nor Coffie act as tour guides themselves, and together they handle all the administrative and financial affairs of the company, with the help of an assistant, from their office in Accra.

Although there is no requirement for the company to appoint non-executive directors, Adofo thinks that more diversity of membership would benefit the board and the company’s leadership. He thinks that it might be a good idea to appoint a non-executive director to assist them with strategy formulation. Coffie disagrees, and thinks that if there is any benefit to be gained by increasing the size of the board, the new appointment should be an executive director, chosen from among the company’s tour guides. In this way, the owners would be demonstrating their commitment to promoting the careers of the individuals they recruit for their business.

Decision-making
The directors are reluctant to delegate authority to their employees. Each tour has a strict budget, and most spending is controlled from head office, for example spending on hotels, transport, entry to tourist sites and insurance. Tour guides are given a small budget for each tour for discretionary spending. Problems and concerns of customers during their tour are dealt with initially by the tour guide, but are referred to head office if they cannot be resolved easily.

Even so, the directors are keen to encourage their participation in decision-making, and to this end they hold six-monthly meetings with staff. These meetings are used to discuss issues that have arisen in the business, matters that concern staff, and ideas that the directors have for the future of the business. Adofo and Coffie think that these meetings are constructive and useful. The meetings help them to monitor feelings and concerns among employees, and give employees an opportunity to contribute their ideas about how the company should be run and what it should be doing.

Sustainability
During their period of study in the USA, Adofo and Coffie met and shared ideas with many individuals who were concerned about climate change, pollution of the earth and its atmosphere, and protection for wildlife. As a result of these influences, both directors have a strong sense of business ethics and sustainability. They believe that their company should demonstrate the attractions of Ghana to foreign visitors, but should operate their business without causing unnecessary environmental damage. They strongly support efforts by the government to protect rain forests and game parks, and for the protection of wildlife in game parks.

In spite of these views, they want to increase the numbers of international tourists visiting Ghana, even though they recognise that an expanding tourism industry might have adverse consequences for the country’s environment.

Personal security and customer protection
International visitors to Ghana sometimes express their concerns about personal security and the risk of being attacked and robbed. Tourists are often the target for criminals operating around tourist locations, with crimes such as muggings, bag snatching, petty theft and pickpocketing, particularly in markets and tourist sites, and on beaches.

Tour guides are instructed to warn the tourists in their group about the dangers, and to remain vigilant for possible problems. Customers are also advised to take out suitable insurance before starting their holiday.

It is generally recognised that Ghana is a safer country for tourists than some other countries in Africa, but there is also a view that tourist concerns about personal security might be holding back tourist numbers visiting Ghana.

Standards of customer service
The company has produced a code of conduct for its employees. As well as addressing the matter of personal security and crime, the code also deals with standards of service to the company’s customers. There have been occasional incidents in the past when standards of service have been poor; in particular, tour guides have sometimes left their group on their own, waiting for the local guide to turn up. There have also been complaints about tour guides ignoring customer requests for assistance, or forgetting to do something that they were supposed to do for their group.

There have been some indications recently that this problem is getting worse.

Financial issues
When the company was established, it was financed entirely by equity capital. As the business grew and made profits in some years, a proportion of the profits were retained in the business to finance further growth. However, there have been some years of loss, although the director’s still recommended and paid a dividend even in those loss-making years. As at 31 December 2016, there were retained losses, although this has since improved. The company rents its offices in Accra, and does not have many non-current assets. Some thought was given a few years ago to buying two tour buses for the company, but the buses would not be used sufficiently to justify their cost, and the cost of employing the drivers. Even so, it has not been possible for the company to rely entirely on equity finance to support the business operations.

The company needs a relatively large amount of working capital. This is because when a tour is organised, Ghanalux is required to make down-payments to airlines, hotels and other suppliers a long time in advance of the tour. Customers who book tours are required to pay a deposit, but the deposit money is insufficient to cover the company’s payments to other businesses. The company therefore borrows from its bank to finance working capital.

The company prices its tours in US dollars. Its expenses are mainly in US dollars (e.g. payments to airlines) and partly in cedis (for example, payments to hotels). Its short-term borrowings are in cedis.

Occasionally, tour groups visit parts of Ghana where most businesses do not accept credit card payments. Customers also sometimes want to buy cedis for personal expenditure, but have difficulty in finding a reliable foreign currency bureau or bank which can arrange currency transactions. The Ghanalux directors would like to make it more convenient for customers to make payments in cedis or buy cedis, but they are not sure what can be done.

Summary financial statements for the years ending December 2017 and December 2018 are shown in Appendix 1.

Note 1  : There were no non-current asset additions or disposals in the year.
Note 2  : Sundry assets comprise an inventory of brochures, and some small currency notes in a tin.

Various controls can be applied to reduce the threat to the safety and security of customers and the risk of poor customer service. All of these should have been implemented already, but the directors should review existing controls and their effectiveness as a matter of urgency.

Internal controls to improve customer safety and security should include the following measures:
• Tour guides should be responsible for customer safety at all times that they are in direct contact with their tour group. The company’s code of conduct should also set out procedures to be followed in the event that a customer’s safety or security is at risk.

• Customers should also be given clear warnings about possible risks, particularly when they are on their own and not with the group. . To reinforce this message about security, customers should be given warnings and guidance in writing and also verbally from the tour guides.

• They should be advised about measures they should take to reduce the risks to their security, or how to act in the event that a threat occurs.    (3 points for 3 marks)

Internal controls to reduce the risk of poor customer service should include the following measures.
• Staff training. Tour guides should be given training to develop their understanding of their role and the measures needed to provide good customer service, such as promptness and adhering to timetables. Guides should also be given occasional ‘refresher’ courses to reinforce their awareness.

• The process of recruiting new personnel, particularly new tour guides, should be thorough and demanding, so that only very able individuals are offered jobs in the company.

• Customer care issues should be discussed at the regular meetings between the directors and employees, so that the importance of customer care remains at the forefront of employee thinking.

• Measures to supervise employees, particularly tour guides, should be introduced. A number of guides might be appointed as ‘senior tour guides’ with responsibilities that include supervising and mentoring a small number of other guides. Senior tour guides should have procedures for monitoring the activities and performance of the individuals for which they are responsible, for example by means of regular contact by mobile phone.

• There should be reporting and management controls. Procedures should be implemented for reporting incidents of poor customer care, from both customers and tour guides themselves. Management or supervisors should be responsible for acting on reports immediately.

• There should be a system for recording reported incidents of poor customer service, the reasons why they occurred and the measures that were taken to deal with each incident. Management should review reports regularly and consider whether any further policy measures need to be taken, or new procedures introduced.     (Any 4 points @ 1 marks each = 4 marks)

• This does not promote sound corporate governance. A company that has public accountability (it holds deposits from the public) should not have only a married couple as its board.    (1.5 marks)
  Recommendation:
• BOG should require that all Microfinance Institutions (MFIs) should have a broad base blend of executive and non-executive directors who are persons respectable in the society.
• Such non-executive outside directors will ensure that decisions taken will take the interest of public depositors into consideration to knowing that their reputation will be at stake if the MFI fails.     (1 point for 1.5 marks)

• This means BOG will not be able to forecast the failure of an MFI and put in measures to pre-empt the failure in full or even minimize its impact on depositors.          (1.5 marks)
  Recommendation:
• BOG will need to open regional and district offices or install software that will alert it of non-submission and of poorly-performing MFIs.
• It is also recommended that all MFI must be made to install Banking software that can automatically send the prescribed fidelity returns to BOG on the pressing of a button.             (1 point for 1.5 marks)

• This leads to familiarity that erodes the independence of the auditors.            (1.5 marks)
  Recommendation:
• MFIs, like all other institutions regulated by BOG, should be made to change their auditors after every five years.        (1 point for 1.5 marks)

The failure of the auditors of the company to spot and question some dubious accounting treatments adopted by the company due in part to the fact that the consulting arm of the audit firm has been performing all the consultancy work needed by the company since its incorporation and particularly at the time of its application for the microfinance operating permit from BOG.

• This is the results of familiarity, and self-review as well as inability of auditors to stand up to management after compromising their independence.                   (1.5 marks)
  Recommendation:
• BOG should require that the constitution or articles of association should not allow the auditors of the company to perform non-audit assignments for the company apart from Corporate Tax.
• This will make the auditors aware of the need to maintain their independence avoid conflict of interest situations.
• Auditors found not performing their duties to the level expected of them must be reported to IGAG by BOG.                        (1 point for 1.5 marks)

Adofo Boateng (Adofo) and Coffie Oduro (Coffie) met in 2010 when they were both students at a university in the United States. They both had ambitions to succeed in business back in their home country, Ghana. They shared common interest in Ghanaian history and culture, and saw commercial opportunities in setting up a business in the tourism industry. At that time, tourism was a growing but under-developed industry. Adofo and Coffie agreed that if they could establish a small and successful tourism business, there would be opportunities for rapid growth within just a few years.

On returning to Ghana in late 2011, they established a private company, Ghanalux Ltd, with money from family backers and some private means. The company’s business was to organise small tour groups of tourists from the United States, mainly the north-eastern states of the US. They had dedicated tour guides taking the groups on planned itineraries lasting about four weeks. Initially, Adofo and Coffie acted as tour guides themselves, although they gradually did less of this work as the company expanded.

The tours are priced at a high rate, but the aim is to deliver high-quality ‘luxury’ holidays for all customers. Ghanalux uses the services of a travel booking company in the US to advertise its tours and attract customers. The booking company charges a commission for its services, as a percentage of the tour prices paid by customers.

Early growth
The tourism industry in Ghana suffered from a skills shortage, and Ghanalux proved a success initially because Adofo and Coffie were both talented individuals, with a strong motivation to succeed, extensive knowledge of Ghana and its tourist attractions, and an ability to communicate easily with their US customers. The company gained a strong reputation in parts of the US for efficient tour organisation, but also exhilarating and life-enhancing tours.

The company operated from a small office in Accra, from which tours were organised and coordinated. In the first year of operations, ending December 2012, they generated revenue of just under GH¢2 million, and although they made losses in the early years, they were pleased with the revenue growth they achieved. As the company grew, it recruited a small number of full-time tour guides, using contacts in US universities to identify and attract Ghanaians who were studying there and were attracted by the prospects of working in the tourist industry in Ghana, and for a company where the prospects of career development seemed strong. In recruiting new guides, the company looked for individuals with strong motivation, an interest in Ghana and its history, culture and resources, and an ability to communicate well with both foreigners and the local folks.

By 2018, the company was operating several tours each year for tour groups of about 16 people who were willing to pay premium prices for a top quality holiday experience, combining elements of Ghanaian culture, heritage, recreation and adventure. They also started to organise special themed tours each year to the PANAFEST festival in Elmina and Cape Coast. The company’s annual revenue in 2018 amounted to just short of GH¢16 million, and the net profit margin after tax was about 4% of revenue or GH¢639,000.

The tourism industry in Ghana
Tourism is now a major industry in Ghana. In 2018, the industry earned about US$3 billion for the national economy, attracting about 1.5 million international tourists from around the world and employing almost 700,000 people. However the industry is fragmented, with many small companies operating hotels, travel services, tours, catering for tourists, and so on. Visitors range from tourists looking for low-price holidays or short breaks to wealthier tourists taking longer holidays and visitors to business conferences.

The government is helping to support growth in tourism by funding infrastructure projects and other initiatives. However, Ghana’s tourist industry is still under-developed compared to other countries in Africa. Factors that appear to be holding back growth are a shortage of individuals with suitable skills, and insufficient branding and marketing of Ghana as an attractive tourist location to other countries. Tourists also often complain about the lack of comfort on tour buses that take them between their hotels and sightseeing locations.

Adofo and Coffie have discussed what Ghana needs to do to be a more attractive destination for foreign tourists.

Growth strategies
Adofo and Coffie believe that they need to think ahead and develop a strategy for taking the company forward and growing the business. There seem to be a number of different options for growth, and they want Ghanalux to be at the forefront of developments in the tourism industry. The strategic options they have discussed are set out briefly below:

Increase the number of tours each year. In 2018 the company ran twelve tours. It might be able to increase this number in future, although there is probably a limit to the number of tours that can be sold to customers in the north-east of the USA. There would be a need to recruit more tour guides.

Develop new bespoke high-end luxury tours, tailored to the specific requirements of individuals, couples or small families, where customers are accommodated in top quality hotels and have their own tour guides and private cars. These bespoke tours should sell for at least twice the price per person that the company charges for its existing tours.

Develop a range of themed tours. Currently, the company’s tours have an itinerary that combines different types of activity, such as visits to local festivals and events, visits to UNESCO heritage sites linked to the country’s history, adventure tours to rain forests and game parks, and recreational days at beach resorts. The company could develop tours that deal exclusively with just one type of activity.

Seek strategic tie-ups with other businesses in the tourism industry in Ghana, such as hotels and festival event organisers, so that they actively market each other’s services and products to their customers.

Merger. The company might consider a merger with one or more other tour companies. The directors of Ghanalux think that they would be unable to raise enough finance for an acquisition of suitable size, so any growth by way of business combination would have to be in the form of a merger, involving a share-for-share exchange.

A restriction on the company’s growth potential is that currently all its customers come from the north-eastern part of the USA. Ghanalux would be able to sell more tours if it could market its services successfully in other countries.

Company performance
The directors are pleased with the progress that the company has made since it was established. Annual revenues have grown, although profit has only been a relatively recent outcome, and there are encouraging future prospects. However, the company’s business is still at an early stage of development, and the directors understand that the company needs to sustain or improve the quality and efficiency of its operations and the skills of its employees. It cannot stand still and so needs to innovate, and it must find new ways of attracting customers so that its business continues to grow.

Until now, the directors have not made formal plans or budgets for the business, but they think that the company is reaching a stage where greater formality is required in the process of setting business targets and monitoring performance.

Shortage of talent
The company has so far been very careful in its selection of guides to lead its tour groups. Guides are well-educated, communicate well with other people and enjoy the tourism industry. However, many of them are also ambitious. If they think that Ghanalux is unable to offer them an attractive career, they are likely to move elsewhere in time, and possibly set up their own businesses. Already two experienced tour guides have left the company to seek a career elsewhere.

Adofo and Coffie think that if they are to retain as well as attract the top talent available, they will need to offer long-term incentives to their best guides. Incentives should encourage them not only to stay with the company, but also to contribute innovative ideas about how the company should develop.

At the moment guides are paid annual salaries of around GH¢60,000, plus a small annual bonus, but other forms of incentive might be needed.

Adofo thinks that if the company is unable to retain talent, it should ‘accept the inevitable’ and recruit guides locally on lower salaries, but give them intensive training before using them as tour leaders.

Ownership and organisation structure
Adofo and Coffie each own 40% of the shares in their company, and are the only directors of the company. The remaining 20% of shares are owned by members of their families. There are 50,000 equity shares in issue.

They recognise that unless and until the Ghana Stock Exchange grows substantially, there are no prospects for the company to obtain a stock market listing.

Now that the company has grown, neither Adofo nor Coffie act as tour guides themselves, and together they handle all the administrative and financial affairs of the company, with the help of an assistant, from their office in Accra.

Although there is no requirement for the company to appoint non-executive directors, Adofo thinks that more diversity of membership would benefit the board and the company’s leadership. He thinks that it might be a good idea to appoint a non-executive director to assist them with strategy formulation. Coffie disagrees, and thinks that if there is any benefit to be gained by increasing the size of the board, the new appointment should be an executive director, chosen from among the company’s tour guides. In this way, the owners would be demonstrating their commitment to promoting the careers of the individuals they recruit for their business.

Decision-making
The directors are reluctant to delegate authority to their employees. Each tour has a strict budget, and most spending is controlled from head office, for example spending on hotels, transport, entry to tourist sites and insurance. Tour guides are given a small budget for each tour for discretionary spending. Problems and concerns of customers during their tour are dealt with initially by the tour guide, but are referred to head office if they cannot be resolved easily.

Even so, the directors are keen to encourage their participation in decision-making, and to this end they hold six-monthly meetings with staff. These meetings are used to discuss issues that have arisen in the business, matters that concern staff, and ideas that the directors have for the future of the business. Adofo and Coffie think that these meetings are constructive and useful. The meetings help them to monitor feelings and concerns among employees, and give employees an opportunity to contribute their ideas about how the company should be run and what it should be doing.

Sustainability
During their period of study in the USA, Adofo and Coffie met and shared ideas with many individuals who were concerned about climate change, pollution of the earth and its atmosphere, and protection for wildlife. As a result of these influences, both directors have a strong sense of business ethics and sustainability. They believe that their company should demonstrate the attractions of Ghana to foreign visitors, but should operate their business without causing unnecessary environmental damage. They strongly support efforts by the government to protect rain forests and game parks, and for the protection of wildlife in game parks.

In spite of these views, they want to increase the numbers of international tourists visiting Ghana, even though they recognise that an expanding tourism industry might have adverse consequences for the country’s environment.

Personal security and customer protection
International visitors to Ghana sometimes express their concerns about personal security and the risk of being attacked and robbed. Tourists are often the target for criminals operating around tourist locations, with crimes such as muggings, bag snatching, petty theft and pickpocketing, particularly in markets and tourist sites, and on beaches.

Tour guides are instructed to warn the tourists in their group about the dangers, and to remain vigilant for possible problems. Customers are also advised to take out suitable insurance before starting their holiday.

It is generally recognised that Ghana is a safer country for tourists than some other countries in Africa, but there is also a view that tourist concerns about personal security might be holding back tourist numbers visiting Ghana.

Standards of customer service
The company has produced a code of conduct for its employees. As well as addressing the matter of personal security and crime, the code also deals with standards of service to the company’s customers. There have been occasional incidents in the past when standards of service have been poor; in particular, tour guides have sometimes left their group on their own, waiting for the local guide to turn up. There have also been complaints about tour guides ignoring customer requests for assistance, or forgetting to do something that they were supposed to do for their group.

There have been some indications recently that this problem is getting worse.

Financial issues
When the company was established, it was financed entirely by equity capital. As the business grew and made profits in some years, a proportion of the profits were retained in the business to finance further growth. However, there have been some years of loss, although the director’s still recommended and paid a dividend even in those loss-making years. As at 31 December 2016, there were retained losses, although this has since improved. The company rents its offices in Accra, and does not have many non-current assets. Some thought was given a few years ago to buying two tour buses for the company, but the buses would not be used sufficiently to justify their cost, and the cost of employing the drivers. Even so, it has not been possible for the company to rely entirely on equity finance to support the business operations.

The company needs a relatively large amount of working capital. This is because when a tour is organised, Ghanalux is required to make down-payments to airlines, hotels and other suppliers a long time in advance of the tour. Customers who book tours are required to pay a deposit, but the deposit money is insufficient to cover the company’s payments to other businesses. The company therefore borrows from its bank to finance working capital.

The company prices its tours in US dollars. Its expenses are mainly in US dollars (e.g. payments to airlines) and partly in cedis (for example, payments to hotels). Its short-term borrowings are in cedis.

Occasionally, tour groups visit parts of Ghana where most businesses do not accept credit card payments. Customers also sometimes want to buy cedis for personal expenditure, but have difficulty in finding a reliable foreign currency bureau or bank which can arrange currency transactions. The Ghanalux directors would like to make it more convenient for customers to make payments in cedis or buy cedis, but they are not sure what can be done.

Summary financial statements for the years ending December 2017 and December 2018 are shown in Appendix 1.

Note 1  : There were no non-current asset additions or disposals in the year.
Note 2  : Sundry assets comprise an inventory of brochures, and some small currency notes in a tin.

The directors of Ghanalux would like their company to act ethically, and they promote this view through its code of conduct and marketing materials.

• Important aspects of ethical behaviour include acting with honesty and integrity, and in a professional way that shows concerns for customers. If there are concerns that some of the company’s tour guides are not complying with the code of conduct and are providing poor customer care, the directors should have taken measures already to deal with the problems. They have not done so, which suggests a lack of honesty (false marketing) and integrity on their part.

• It might also be argued that corporate social responsibility or sustainability policies are also ethical. Here again, the company pays lip service to environmental concerns, but it does not appear to do anything that is obviously beneficial for the environment. Since its flies its customers from the USA to Ghana, it can be argued that Ghanalux is a contributor to environmental pollution.      (2 points discussed @ 2.5 marks each = 5 marks)