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 two directors appear to disagree about the need to appoint a non-executive director to the board, even though they agree that governance in the company should be made more formal and both have ideas about appointing a new director. Adofo’s reasons for wanting to appoint a non-executive director appear to be that a non-executive director would bring more diversity and experience to deliberations and decision-making by the board. He appears to hold the view that the company might benefit from an injection of external experience to assist the company to succeed and grow.

• If the company were to appoint a non-executive director, the person appointed should be able to bring knowledge and experience that the existing two directors lack. It is questionable whether a retired retail banker would be able to contribute much to the deliberations of a tourism company. Ghanalux can consult its bank about financing matters.

• It is also not clear how the addition of a director of a transport company would benefit the company, especially since Ghanalux might use rival transport companies for its tours, and the appointee would be faced with conflicts of interest.

• In view of the relatively small size of Ghanalux, it is also questionable whether the company needs to appoint a non-executive director at all. Unless and until the need for external experience and skills is clearly required, the most appropriate recommendation is to reject the idea of appointing a non-executive director.

• Coffie Oduro has suggested appointing an executive director from among the company’s existing tour guides. At the moment, the company has no management structure, other than the two directors. Making an appointment of an individual as an executive director, when there is still no management structure other than the board of directors, seems premature.

• However, there will be a need at some time to establish a more formal organisation structure as the company grows. Initial measures might be taken now. A first step should be to identify areas of authority and responsibility within the management structure. If the management tasks are becoming too much for the existing directors, they should decide which management tasks might be given to an employee. When the division of responsibilities has been decided, the directors can consider the appointment of an individual to fill the new management role that has been created.

• Another element of a necessary change in governance and organisation might be a change in management style. At the moment the two directors are authoritarian, making all decisions for the company except relatively minor operational decisions. They may think that they are being democratic by meeting with employees occasionally and describing aspects of the company and its affairs. However by making a management appointment, the directors should reconsider their approach. The appointment of one employee to the role of manager should open up the prospect of further management appointments in the future. The directors should therefore consider a governance or organisation and management policy of delegating more decision-making to front-line employees.         (Any 4 points well explained @ 2 marks each = 8 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.

Medium-term borrowings should ideally be used to finance medium-term requirements. Converting short-term borrowings into a medium-term loan would indicate a need for the finance on a longer-term basis. The company would need to estimate its financing requirements over a future period of several years in order to decide how much to borrow.

A problem with borrowing a fixed amount to finance varying amounts of working capital is that there will be times when the finance is not required, and the company will therefore be paying interest for finance that it does not currently need. On the other hand, if the company borrows less than it might need at times, it will need to arrange short-term borrowing in addition to its medium-term loan. This is likely to be more expensive.

There are other issues to consider in switching from short-term borrowings to a medium-term loan. These include:
The willingness of the company’s bank to make a medium-term loan. In view of the company’s profit and loss statement for the previous year, when net profit after tax was GH₵639,000 and interest costs just GH₵34,000, it is likely that the bank will agree to provide the loan.
The comparable interest costs. From a financial perspective, the company should seek the lower cost financing method.
(2.5 marks)

Paying bigger cash salaries may well simply add to the costs, without achieving any marked increase in either motivation, or the tendency to stay as a loyal employee. Many studies have shown that increased salaries don’t make a marked improvement in attraction or retention of staff. On the other hand, it is a quick and quite immediate response to the threat of losing staff.

However, the introduction of a share option award scheme may well achieve both the offer of a more attractive package, and help retention (for at least the service vesting period). Studies seem to indicate that such schemes are well received by employees in a fast growing, even if cash poor, company. However, any shares resulting from such a plan would (at least currently given the private status of Ghanalux), be largely unmarketable, and this will reduce the attractiveness of any such plan. Additionally, the calculations involved for accounting for such a plan under the requirements of IFRS 2 Share-based Payments are demanding in all cases, but especially so for private companies. There may be considerable fees to be paid to remuneration consultants or accountants for developing the amounts and disclosures required under IFRS.   (2.5 marks)

The cash flow forecast has indicated that a dividend could be paid in 2019, and in the absence of any capital expenditure requirements, could be at the 2018 level, or see a return to the 2017 level. Even with payment of a dividend of 200, to match the 2017 level of dividend, the company could still expect to finish the year approximately cash positive.

But, the cash flow forecast has not made any allowance for needed capital expenditure, or a contingency, or perhaps at least offering a part cash/part shares deal to the shareholders of Sunlit Hotels. In general, exit shareholders in an acquisition will want some cash, even if to just utilise any capital gains tax allowance, but the main advantage of offering at least some cash is certainty for the exit shareholders. Withholding a dividend in 2019 to be able to complete at least a part cash offer should be seen as an acceptable move by all investors – after all, their shares should be worth more after the event.

On the other hand, although there seems little prospect at the moment of a move to take Ghanalux to quoted company status, the evidence of a broadly constant, or growing, recent dividend history would be essential to the achievement of that long-term aim.
(2.5 marks)

The company does not have any surplus cash in its end-of-year statement of financial position, so any holdings of US dollars are temporary. The surplus cash should be held in the currency where the money will be needed to cover expenditures. If the company expects to make payments in US dollars in the near future, it should retain the cash in dollars.

Most of the company’s revenues are in US dollars, and much of its expenditures (flights, commissions) are also in US dollars. It would therefore seem that dollar income should be retained in US dollars to cover these expenses, and only dollars that are not required for these expenditures should be exchanged into cedis.

Another possibility is that, subject to foreign exchange regulations, the directors of Ghanalux might prefer to retain profits in US dollars too, and operate with a minimum amount of cedis. This might depend on expectations about the future depreciation or appreciation of the cedi against the US dollar. If the cedi is expected to depreciate over time against the dollar, holding cash in dollars rather than cedis would probably be financially more beneficial.    (2.5 marks)

Internal audit assignment involve the following areas and their contributions may be viewed as follows:

• Testing operational or financial controls.
  This may help the auditors to discover deficiencies in the design and operation of internal control and enable them to make recommendations to management to rectify the deficiencies and to ensure strict adherence to the required controls. This should result in the effectiveness and efficiency of the control systems.
• IT system reviews.
  Information technology has become pervasive in the operation of entities. Proper functioning of the IT systems will ensure orderly conduct of transmitting and generation of information on the operations. System review carried out by internal auditors should ensure the system is functioning effectively and efficiently to enable management achieve the objectives of the entity.
• Value for money reviews
  In the non-profit entities the objective is to serve the needs of the various stakeholders. Value for money reviews ensures that the entity or the organisation is fulfilling the need of its stakeholders through the proper use of resources at the minimum cost for higher output.
• Fraud investigations
  Fraud can results in organisation losing valuable assets and this may affect its survival and ability to achieve its objectives. Investigation carried out by internal auditors can help to identify the perpetuators, quantify the loss and help to recover it and make recommendations to prevent future recurrence and this can contribute to survival of the entity
• Review of compliance with laws and regulations
  The existence and operations of organisations are governed by laws and regulations, non-compliance of which may results in various sanctions including fines, damages and outright prohibitions of the operations of the entity. Reviews of compliance with laws and regulations by internal audit will help management to avoid the consequence of non-compliance to ensure the survival of the organisations.
• Customer service reviews
  The continued survival and growth of an organisation depends on continuous patronage of services and products by customers. Customer service reviews conducted by internal auditors should ensure that customers are satisfied with the services of the organisation so that the organisation can survive.

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 cash flow statement for the year ended December 2019 can now be forecast:
Forecasted statement of cash flows for the year

                                                                                                 (7 marks evenly spread using ticks)
Comment on forecast:
It is apparent that without any capital expenditure during the 2019 year (probably can’t be delayed forever), and with no dividend distribution, then the bank overdraft will be eliminated by the year end. If the cash flows are broadly constant over the year, then the bank borrowings could be expected to be eliminated by (262/475 x 12 = 7 months) just after the middle of the year.

Given this projection, it would then be possible to estimate the amount of interest that would be payable for borrowings declining to zero over 7 months, and the forecast above reworked. This has not been done because the impact would be insignificant to the scale of numbers involved. (Approximate interest rate for 2018 was 34/ (445+262)/2 = 10% pa, so for half a year on 262 = 13).

Clearly the payment of a dividend, and/or any significant capital expenditure, can be accommodated within these forecasts, in a total of as much as 213, and still leave the company with zero net borrowings at the end of the year.    (1 mark) 

• It would appear that the company has made an effort to address its high level of borrowings by reducing the dividend in the most recent year. Whilst effective at bringing down the bank borrowings, it is likely that such a decision will have been unattractive to Adofo and Coffie from a personal tax perspective, and may have been relatively more unattractive to the family members who helped back the formation of the company.

• The company should also look at ways of reducing costs. There is no detailed information about salaries and wages, although these are the smallest cost in the income statement. Some sundry operating costs might be reduced, and these should be analysed with a view to preparing lower-cost budgets in future years. Commission costs are about 5% of sales (800/15,840). It might be possible to negotiate a lower commission rate with the company’s agent in the USA, but as (most) sales appear to come through this agent, the company cannot seek to impose a drop in the commission rate. A reduction in commission rate by about one percentage point to 4% would reduce costs (and improve cash flow) by about GH₵158,000 per year – or more, since sales revenue continues to grow; however, as stated previously, such a big cut in the commission rate is unlikely to be achievable.

• Growth in sales will improve the cash flow position, but the benefit is much reduced, since adding to sales appears to increase working capital requirements too, reducing net cash inflows.

• Customers are required to pay a deposit of 10% when they book a holiday. This might be a low amount, although the company should investigate deposit rates charged by other tour companies operating in north east USA. If Ghanalux could increase deposits from 10% to 20%, say, without any reduction in tour bookings, working capital requirements would fall by about GH₵223,000 because advance bookings would double in amount (equal to the level of advance deposits in the statement of financial position). This on its own would be almost sufficient to eliminate the bank borrowings.

• The company might also seek to reduce the prepayments that it makes to airlines and hotels. It might seek to negotiate either lower advance payment rates, or later payments. Either of these would reduce the prepayments that the company has to make. These are GH₵673,000 in the statement of financial position, so a negotiated reduction of, say, 10% would reduce working capital requirements and improve the cash position by about GH₵67,000.

If the company is able to adopt the measures suggested above, it might be able to eliminate its bank borrowings even sooner in 2019, but it would then need to ensure that any future increases in working capital each year are less than the company’s retained profits for the year.                        (Any 3 points well explained for 3 marks)

• Failure on the part of the Auditor General itself: The constitution gives the Auditor General power of disallowance and surcharges. So far it appears the auditor General has not exercise this power effectively and therefore people found to have misappropriated funds have not been made to refund such monies. The Auditor General must therefore start exercising the powers entrusted to him to ensure recoveries of the amount misappropriated in the public sector.
• Ineffectiveness of the work of Public Accounts Committee: The Public Account Committee is required to ensure implementation of the recommendations in the Auditor General’s report but after its public hearing on the audit report, it appears no concrete action is taken to get offenders to make restitution to the State in respect of amounts misused. This situation does not help to strengthen the Auditor General’s functions of accountability to ensure proper use of public funds
• Ineffectiveness of the Audit Report Implementation Committee (ARIC): Audit Report Implementation Committee are mandated under the audit service Act 2000 to ensure that implementation of all audit report recommendations from both the Auditor General and Internal auditor from this respective organisations. But the committee as presently constituted by the act are dominated by internal members whose actions are reported on in the reports. This internal members are reluctant to enforce the recommendations which affect them and the external members have no means of forcing them to do so. The composition of ARIC membership should be changed to bringing in more independent external members who can enforce the implementation of the audit report recommendations.
• Lack of linkage between the Auditor General’s office and the law enforcement agencies: Currently there is no requirement for the Auditor General’s report to be referred to the law enforcement agencies such as the police, EOCO for investigation to be carried out and report made to the Attorney General’s office for prosecution of offenders after the Public Accounts Committee has deliberated onthe report. There is the need to amend the Act to provide the needed linkage between the auditor General and the law enforcement agencies to prosecute persons known to have miss used state funds.

Professional Skepticism is hard to define but is “fundamentally a mindset” which is linked to the ethical principles of objectivity and independence. It means being alert to evidence that contradicts evidence already obtained or which casts doubt on the reliability of documents or explanations, provided or which may indicate fraud.
It is important in audits because it is part of the auditor’s “skill set” and it is part of professional judgement. It affects decisions about the procedures to be performed, the sufficiency and appropriateness of evidence obtained, the validity of management’s financial reporting judgments.

• Fraud
  Where management is involved in fraudulent financial reporting, they could provide the auditor with representations which may mislead the auditor or contradict evidence obtained elsewhere
• Accounting estimates
  Auditors must ensure that the assumptions used by management are reasonable. Since making accounting estimates require exercise of judgement by management, an opportunity is provided for bias and fraud.
• Going Concern
  Auditors must ensure whether management plans are really feasible and the assessment of going concern by management was done objectively.
• Related Party Transactions
  Related Party relationships and transactions where transactions may not be conducted at arm’s length or be outside the normal course of business. This is another area for manipulation by management.
• Laws and Regulations
  For example, where non-compliance may call into question going concern and determination whether an act of omission or commission amounts to non-compliance which may require the services of legal experts.        (4 points @ 1.5 marks each)

The indications of possible money laundering are;

• Broadly, transactions that appear inconsistent with a client’s know legitimate (business or personal) activities or means: unusual deviations from normal account and transactions patterns.
• Any situation where personal identity is difficult to determine.
• Unauthorised or improper recorded transactions; inadequate audit trails.
• Unconventionally large currency transactions, particularly in exchange for negotiable instruments or for the direct purchase of funds transfer services.
• Apparent structuring of transactions to avoid dealing with identification requirements or regulatory record-keeping and reporting thresholds.
• Transactions passed through intermediaries for no apparent business reason.
• Introduction of a client by an overseas associate or financial institution based in a county or jurisdiction known for drug trafficking and production, other financial services are bank secrecy.               (1 mark each for any 5 valid points)

• There is the need for ethical guidance on money laundering because there is conflict between the accountant professional duty of confidentiality in relation to his client’s business.
• The duty to report suspicions of money laundering to the appropriate authorities is required by law.
• Disclosures in bad faith or without reasonable grounds would possibly lead to the accountant being sued for breach of confidence.
• Professional Accountants are not in breach of their professional duty of confidentiality if they report in good faith their knowledge or suspicions of money laundering to the appropriate authority.
• Auditor’s duty of confidentiality will be breached if they report in good faith, any money laundering knowledge or suspicions to the authority. Statutory protection also applies where reports are made in good faith.

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.

(Tutorial Note: Answers to this question should make use of the financial information provided)

• Expenses
The major factor in the reduction in operating profit margin arises from an increase in sundry operating costs, which have increased from 4.7% (510 / 10,792)) of the total operating costs in 2017, to 5.5% (817 / 14,954) of the total for 2018.

Looked at another way, the revenue has increased by 35%, and the tour expenses, commissions and wages and salaries have broadly matched this. But the sundry operating costs have increased by 60%. A reference to the two directors’ realisation that cost control and budgeting needed to be improved points to the underlying cause of the reduced operating margin. (1 mark)

• Interest
The interest expense is covered 26 times in 2018 (886/34), compared to only 10 times in 2017 (938/98). This is both a healthy and improved position, and evidence that the amount of debt has been significantly reduced. Calculating the apparent interest rate suggests that the interest rate in 2018 has also reduced. (1 mark)

• Cash flow analysis
There are indications that the directors understand the impact on cash flow of the timings of the large payments made to hotels and airlines, versus the receipts from customers.

In 2017, the prepayments amounted to 19 days of tour expenses (489/9,389 x 365 = 19 days). In contrast, the customer advance deposits amounted to 5 days of revenue (161/11,730 x 365 = 5 days). The cash flow implications are serious, reflecting that nearly four times more cash is committed to prepaying the airlines and hotels, than is covered by customer deposit cash flow. How does 2018 compare?

In 2018, the prepayments amounted to again 19 days (same basis of calculation as above), and the customer advance deposits were also 5 days.

The conclusion from this is that although there is a structural imbalance between these two cash flows, resulting in nearly 14 days of hotel and airport booking to be financed by working capital, the situation has not worsened during 2018.
What about the collection of the balance of holiday money from customers? A similar calculation to the above reveals that in 2017, customer balance payments were being received on average 23 days after invoicing (739/11,730 x 365 = 23 days). In 2018 the payment time was 22 days – a small but worthwhile improvement.

Is there any scope for offsetting the total time for customer payment of 5 + 22 = 27 days, with a period of trade credit? Unfortunately it seems not, given that the majority of the cash flow detriment arises from the payments to the main suppliers – hotels and airlines. Other trade creditors are such a small amount that calculating creditor days would not add to our analysis.

We do not know whether the end-of-year statement of financial position of the company is typical or representative of its financial position at other times of the year. However, assuming that it is reasonably representative, the company made a profit of GH₵639,000 last year but had bank borrowings of GH₵262,000 at the year end. Its non-current assets amounted to just GH₵75,000, indicating that the cash flow problems of the company are attributable partly to a continued dividend distribution policy, and much more so to its investment in working capital.  (3 marks)

Conclusion
Although there is scope to improve some cost control, which would help profitability and cash flow, it appears as if the structural imbalance between payments out and payments in is largely to blame for the continuing high bank borrowings.
(1 mark)

Forecasted cashflow statement 2019
Revenue growth rate can be estimated in a number of ways.
• The growth rate g since formation of the company is 2m x (1+g)6 = 16m. Solving this for g gives g = 41%
• Utilizing the two P&L accounts given suggests a revenue growth rate of 35%
(11,730 (1+g) = 15,840)                         (1 mark)

It would be sensible to use this most recent growth rate as the estimate, given the likelihood that 41% pa over 6 years is unlikely to be sustainable (for example concerns over holiday-maker safety). This forecast will use 35% as the next period growth rate in revenue, suggesting a revenue for 2019 of around 21.4m, and with an operating profit margin of (say) 6%, an operating profit of about 1.3m. The major operating cost for modelling purposes will be an estimated 87% of the total operating costs, representing “Tour expenses”. Total operating costs are estimated as 21.4 – 1.3 = 20.1m, of which 17.5m (87% x 20.1) are “Tour expenses”.

Other figures needed for modelling are:
• Prepayments for tour expenses at Dec 2019: 19/365 x 17,500 = 911
• Trade receivables at Dec 2019: 22/365 x 21,400 = 1,290
• Customer advance deposits at Dec 2019: 5/365 x 21,400 = 293
• Taxation expense and cash flow: 25% x 1,300 = 325
(2 marks evenly spread using ticks)

• Direction provides an opportunity for the engagement partner and the audit manager to brief the audit staff about the objectives, time and nature of the work they are to carry out and the responsibility of each member of the engagement team.
• The briefing points out risks and possible problem areas which may confront the engagement team and who they must turn to when they encounter such cases
• Direction enables the audit team to understand how their individual work contributes to the achievement of the overall audit work and the need for coordination and cooperation among the audit staff
• Direction also involves providing the audit staff with the planning documents and the audit program which clearly outlines the work to be done by each member of the audit/assurance team to avoid repetition or overlaps
• Direction therefore helps the assurance team to know the direction in which they are heading during the performance of their work. It therefore clears any confusion and ambiguity associated with the work
• Briefing enables members of the assurance team to understand the detail approach to the performance of the engagement. This understanding may contribute to achieving the objective of the engagement effectively and efficiently.           (Any 5 points)

When work is assigned to staff, the engagement partner and the audit manager remain ultimately responsible for execution of the job. It is therefore important to for those charge with supervisory responsibility to take proactive action to ensure that:

• They check on the staff performing the engagement to determine whether they understand the work they are performing.
• They are performing the work in the manner required
• Whether the staff are encountering any difficulties in the execution of their various task and to help them solve those problems.
• Problems identified during the audit supervision of staff will enable the engagement partner and the manager to amend the audit programme so that the difficulties may be overcome
• Supervision therefore enables the engagement partner to discover problems which will affect the quality of performance and early completion of the assignment early enough before they derail the whole process

The threats to independence here are:

• Being auditor of the company for 15 years:
• Familiarity as we have been the auditor for many years.

Evaluation of this threat: not very serious as the firm has a means of minimizing the threat by ensuring a rotation of partners and audit team on regular basis.

The handling of the importation and clearing of the TVs for the client by the Procurement Advisory Section of our firm
The threat to independence is Self-review.

• This threat is very significant as the audit team now has to perform an audit of the acquisition and deal with the suspected tax avoidance by use of names of individuals to avoid import duties.
• Our firm uses a different team (section) to perform the function other than persons in audit department which partly eliminates the treat of self-review.This does not entirely absolve the firm from prosecution by the Ghana Revenue Authority for aiding the company to avoid tax.
• There appears to be no safeguard here except to advise the company to volunteer to pay the import duties to GRA and ensure that in future our advisory sections seek for engagements outside our audit clients.
• It is safe to assume the additional fees from the non-audit work may not pose an intimidation threat as the firm appears to be large, with various sections. If that were the case, the firm could decide whether to concentrate on Audit or rather leave audit and concentrate on non-audit work depending on the economy of scale of the profitability of the two assignments.           (Any 5 points)

• Exceeding the time and cost budgets substantially due to unforeseen difficulties associated with getting reliable information for agreeing the opening balances means our firm could possibly have engaged in lowballing when preparing our bid since this should have been anticipated.
  The Code of Ethics for Professional Accountants frowns on this and requires that firms guide against this. The effect may not be serious as it will affect the first year audit only. The firm must, however, guard against this as it could lead to compromising the quality of audit work.
• The second issue is that the Audit Manager seems to have become financially involved with the client through her husband. The threat is serious as it could affect the quality of audit work since the Audit Manager is a very important member of the audit team.
  The Audit Manager’s husband got his loan prior to our audit appointment and it is difficult to establish her personal involvement in the writ-off of the loan of her husband’s business so the firm cannot institute any disciplinary action against the Audit Manager. The Audit Manager was however aware of the loan her Husband’s business had with KMF when she was asked to become the manager on the audit.
•  If our firm has regulations for voluntarily giving this information then she could be subject to disciplinary procedures. If the firm does not have this independence declaration as part of its processes at the beginning of each year for existing clients and on acquisition of any significant audit engagement before a team is assigned then this must be introduced.
• To eliminate the treat to the independence of the firm, the Audit Manager must be removed from the audit and a review performed on the audit work she has done so far to ensure no audit quality compromises has taken place, and if so these must be rectified.