CASE ANALYSIS: Big Builder's Conglomerates Inc.

Big Builder's Conglomerates Inc. is one of the biggest construction companies in the town of Bamban, a classD municipality of Tarlac. The company is a family corporation owned by the clan of Gabriel Sy. The Sy familyalso owns one of the top rural banks in their town, and lately, they started a new venture of developing a citymall. The three (3) business ventures have majority interlocking boards of directors nominated mostly by Mr.Sy. In short, Mr. Sy is the majority stockholder of the three (3) companies and acts as the Chairman and

President. They have been compliant in all of the regulatory requirements, particularly for the constructioncompany and rural bank. The new city mall venture is just one (1) year in operation when the government's Build, Build, Build Project in the nearby New Clark Green City had pushed the development in the said town. Thus, an ambitious expansion was planned for GSy Citymall.

At present, the mall is leasing the one-hectare land from Big Builder's Conglomerates with a 10-year leasecontract. The building was constructed with a cost of P10M a year ago. Under the new expansion plan, anadditional P40M is needed. The Special Consultant on Financial and Management Advisory of the three (3) companies proposed to the board of GSy Citymall of getting a P10M loan from their sister company, RuralBank. Aside from that, the company has existing P8M for the construction of their mall booked under

Leasehold Rights and Improvement. It also had issued common stocks to new investors for the amount ofP30M. The Rural Bank does not require collaterals from the loans of both the construction and Citymall,because, Mr. Gabriel Sy is maintaining a substantial personal special savings deposit account enjoyingpreferential Interest rate with the bank. The Rural Bank charges the GSy Citymall a little bit high retail rate onits loan and the lowest and super-prime rate to Big Builder's. The funding of the expansion of the mall was successful, and they expect its completion before the year ends.

Of the three (3) companies, the construction business is the most profitable, with its total assets almostbecoming double every two (2) years, the Rural Bank, remains to produce moderate income, and the Citymall

still incurring losses on its second year of operations. The three (3) companies engaged three (3) differentmajor audit firms in the area so that they don't consolidate their conglomerates' statements of financial

position. They have been successful every year in their filing and submissions of reports to different regulatorybodies as they are well connected.

Required:

Answer the following (4 items x 5 points):

a. Assuming you are the auditor of the three (3) companies: Builder's Conglomerates, Rural Bank, and

GSy City Mall, what are the major issues, concerns, and disclosures that need to be addressed? (TIP:Focus more on Related Party Transaction)

b. After identifying the major issues, do you think Big Builder's Conglomerates has effective disclosurespolicies and procedures? Why or why not?

c. How can Big Builder's improve their disclosure policies and procedures? Create one (1) based on yourknowledge from the Code.

d. What can you say about the hiring of Special Consultant on Financial and Management Advisory by Mr. Sy?