WWBD: What Would Boudreaux Do? Boudreaux Thibodeaux has been involved with the IIA on several international committees and is a CIA, CISA, CRMA, and CFE. He is the Chief Audit Executive (CAE) of PDQ, a globally-recognized, publicly traded manufacturer of high-end bicycles headquartered in New Orleans. Boudreaux has worked for three Fortune 1000 companies in various executive roles, and he is well-respected and known for his ability to apply his business acumen to internal audit and for his keen analytical mind. He is valued by Bill Stell, Chairman of the Audit Committee, for his candid and straight-forward communication. PDQ has just completed an acquisition of Kypo, which is a manufacturer of midmarket and youth-oriented bicycles, even though Kypo has twice the sales volume. The Board has requested that Boudreaux develop a plan for auditing Kypo's operations, to provide an objective and independent assessment. The Chairman of the Board, Belinda Kidd, is concerned that the CEO, Tom Fox, was more concerned about consummating the deal than on the quality of revenue, transparency, and sustainability. She is confident that Boudreaux will be skeptical and will present a balanced, factual report and will not be swayed by the CEO's enthusiasm for the acquisition. The week before the initial strategizing for the Kypo plan was scheduled to begin, a series of events unfolds. The CFO of PDQ's Brazilian operation has been terminated by the CEO and Boudreaux has been requested to assume the role of interim CFO for six months until a search can locate a suitable replacement. Amanda, the Audit Manager, has been requested by PDQ's CEO to lead the internal audit group as CAE until Boudreaux returns. Boudreaux had recommended Brit Marzie, the Senior Director, as the interim but the CEO was adamant that "new blood" was needed. The Chairman of the Board and the Chairman of the Audit Committee have requested that the Kypo review be given top priority. Amanda is viewed as a fast-tracker but only has three years of experience and this will be her first strategic assignment. The majority of her experience has been in inventory and supply chain management audits. During her previous three years, Amanda had Boudreaux as a mentor and resource to turn to for advice. Nonetheless, the CEO has informed Amanda that she needs to be groomed to one day replace Boudreaux. Amanda has confided with her boyfriend that this assignment will be a "make or break" project for her career. 3 The CEO meets with the audit group to wish them well and to emphasize the importance of the acquisition to PDQ's share value. He stated that the bondholders and investors will be closely watching to see if PDQ can realize synergies to achieve the deal's objectives. He stated that unfortunately, the Board would be meeting next month and that he needed a report "pretty damn quick". He wants a week to review the report before he presents it to the Audit Committee and then to the Board. Amanda has accumulated the information listed in the attachment to present to her four-person audit team. Julian, Natalie, Stephanie, and Melissa are relatively new staff members but are excited about being assigned to this high-level project. During the threeday meeting and in-depth discussions, every issue seemed to be followed by the question: "What would Boudreaux do?" Required: What should Amanda do? Write a 5-8 page (12-pt. New Times Roman, double-spaced) evaluation of the case that includes the following: An overview of the case's context: what is going on, what are the key points your analysis will cover? A determination of whether Amanda should accept the interim CAE role, with references to IIA guidance. A risk assessment and plan for the audit of Kypo. Audit objectives and approaches to evaluate the design and implementation of controls related to the key risks. Suggestion: Your team might want to classify your comments as follows to structure your response. The list is not necessarily all-inclusive. Definition of internal auditing Relevance of The Code of Ethics Relevance of the IPPF Staffing issues Internal Audit Charter Audit Committee Charter Communication with the audit committee 4 Red flags in the audit assignment and Kypo's operations Objectives for the Kypo audit plan Compensation Decision metrics Report issues Miscellaneous Attachment Background Information: PDQ Even though PDQ and Kypo are in the same industry and manufacture similar products, the parts are mostly not interchangeable. PDQ has high-end bicycles while Kypo has middle-market products. Some minor components are interchangeable in some cases, but the majority of the frame and wheels are made from different materials. PDQ's products are for serious biking enthusiasts while Kypo markets to family demand and 50% of the business is "kiddie" bikes marketed under the logo "Takaspin". PDQ has 97 stand-alone retail stores, generally in high-income, high-rent areas. PDQ has full-service outlets with a significant portion of the total revenue (59%) derived from parts sales and repair services. PDQ's Enterprise Resource Management (ERM) system is integrated with its financial system, which enables end-to-end reporting, oversight, and data mining. Background Information: Kypo Kypo recently merged with Trico, six months before the acquisition by PDQ. The two organizations were similar in size but Trico specializes in tricycles. Kypo and Trico have maintained their legacy systems, which include separate financial and operations management systems, since the merger. Trico's operations are managed by a collection of older systems that are no longer supported by the vendors; however, the personnel are accustomed to the technologies and the 5 management reports. Kypo's financial and operations management systems are still supported by the vendors, but they are not integrated. Before the acquisition by PDQ, Kypo was in the process of developing a data warehouse to facilitate reporting from multiple source systems. Kypo, based in Grand Rapids, Michigan, has a very strong union shop, while Trico, based in Corpus Christi, Texas, employs non-unionized labor. Kypo's financial statements are audited but are not published since it is a private, family-owned company. The internal audit function is outsourced to a small CPA firm based in Milwaukee. Trico was not publicly traded and was audited by a small, local CPA firm. Trico has a three-person Internal Audit staff, with each having over 30 years of experience in the company. Trico issued a single-step income statement prior to being acquired by KYPO. Trico management negotiated a ten-year contract to continue the management of Trico after the merger. The contract includes the CEO, CFO, COO (Operations), and CIO (IT). Trico has long-term contracts (five years) with its suppliers to lock in favorable terms. Over 50% of Kypo's sales are in Central America. Kypo markets to the major retail stores throughout Central America but does not have its own outlets. Kypo does not sell parts. As a result of the buyout by PDQ, the Kypo CEO will receive a $5,000,000 separation bonus in addition to his other salary and severance benefits. Kypo had signed a contract to build a new state-of-the-art headquarters complex in Grand Rapids, which was scheduled to begin construction in three months. There is a sizable cancellation fee in the contract. Compensation: PDQ The CEO's bonus is based on a percent of the organization's gross sales. The CEO is negotiating to become Chairman of the Board of the new PDQ-Kypo organization. It is widely expected that Belinda Kidd will announce her retirement at the next Board meeting, to be effective at the end of the year. 6 Acquisition Metrics: PDQ The CEO has outlined the following synergies to support the acquisition: Purchasing - economies of scale provided by volume purchase. Administration - joint shared services (payroll, human resources) Marketing - elimination of Kypo staff and transfer of functions to PDQ group. Systems - conversion of Kypo and Trico to PDQ's ERM system. Management - the quality of the improvement in management will result in a more flexible, efficient, and effective organization.