QUESTION 2 45 MARKS In 2002, Bob Bouwer started JR Trailers Ltd (JR) as a small family business. The company consisted of seven employees, including his wife, Maggie, who was the bookkeeper and receptionist. JR manufactures small trailers called the Bobber (short base) and the Bigbobber (long base), which are aimed at the leisure market. Within a couple of years JR has grown into a large company with over 2 000 employees, and it now also manufactures and sells industrial and custom-made trailers. JR listed on the JSE in 2016. Its turnover from operations increased to R478 million for the financial year ending 31 December 2022. The best seller is the Biltong Bob, a compact, low-priced trailer designed specifically for game hunters. None of JRs competitors have a similar product on the market. In 2022, the total revenue of JR exceeded that of its main competitor, Hooki Trailers Ltd, for the first time. Hooki Ltd was hit by a financial scandal involving its executive management selling a significant number of its shares prior to the release of the companys lower-than-expected yearend results. In addition, Hooki Ltd was also required to restate its financial results, due to inflated revenue figures and penalties for hiring illegal immigrants. JRs operations are located in Ladysmith (leisure line), Bela-Bela (industrial line) and Botshabelo (custom line), with the head office in Sandton. JR recently implemented a sophisticated inventory management system to manage and monitor the manufacturing and sales of the various product lines. The new CIO, Ian Mac, who was appointed after the procurement of the new inventory system, indicated that there are several cheaper and more advanced systems available on the market. Ian also expressed concern about after-sales service, as the supplier of the inventory system is located in Spain. He was subsequently told that the previous CIO, Dodgy Davis a very charismatic person had sourced and signed the contract with the supplier on behalf of JR. The procurement department was not involved in the process, as it did not have the required technical knowledge. Dodgy always complained about being overworked and underpaid. Nonetheless, he lived a lavish lifestyle and was even part-owner of a racehorse. Dodgy retired from corporate life when he apparently inherited a fortune from his aunt. JR is under pressure, as it seems the profit predictions of business analysts will not be met in 2023, which may or may not, as per the CEO, Bob Bouwer, negatively impact JRs market capitalisation. Cost of sales showed an unexpected increase in the first two quarters of 2023. The director of operations, Thabo Maseko, indicated that there is no logical reason for the increase, as the cost of raw materials actually decreased during the year. The Bigbobber has been discontinued due to its heavy weight and balancing problems, and replaced by the Bigbobber 2. There are still a number of the old Bigbobbers at the Ladysmith plant, but Thabo is not sure of the exact number. The current value of the discontinued items, as per the accounting records, amounts to R3.7 million, which is twice as much as their estimated net realisable value. The CFO, Barnie Botha, attended a breakfast presentation on fraud prevention, and subsequently suggested to Suki Datha, the internal auditor, and her manager, Mandy Marsh (the head of the budgeting department), that JR conduct a fraud risk assessment. They agreed in principle, but indicated that the internal auditor and her part-time assistant are currently tied up in reconciling AUE4864/102/0/B/2023 8 actual to budgeted figures for Quarter 2. The budget report to the Executive Committee is due in two weeks. JR wishes to borrow additional funds from Buzz Bank early in the next year for research and development of a new line of trailers, aimed at pensioners. It will be called the Swallow. The CEO knows the bank manager uses JRs current ratio as a major factor in his decision process when making a loan. He also knows that the bank manager likes to see a current ratio that is considerably higher than that for a typical manufacturer. The CEO is concerned that the bank manager may decline the loan, or insist on a much higher risk-adjusted interest rate. Either way, this will lead to problems between the board and the executive management team of JR. The CEO discussed a possible journal with the accountant to reduce Accounts Payable to a level where the adjusted financial statements will show a current ratio that is closer to 2:1. After all, a little bit of creative accounting is no big deal. REQUIRED MARKS 2.1 Refer to the fraud triangle and discuss the possible criminal behaviour of the previous CIO, Dodgy Davis. (15) 2.2 Discuss your understanding of the CEO of JRs liability in terms of the Companies Act, 2008 and the characteristics that are required from the CEO as an ethical leader, as per the King IV Report. Note: The CEO is not a director of JR.