External Audit: Business Continuity Issues
According to Home Retail Group plc (2011), the half-year results reflected a six percent drop in sales compared to the previous year. Fall in sales is not a serious problem but when there is a continuous trend, the company’s management should be concerned (Wright & Noe, 1996). According to Home Retail Group plc (2011), financial reports show that sales of the company went down by three percent to £5,852 million. In 2009, sales were £5,897 million then increased in 2010 to £6,023 which was a good improvement. However, in 2011 the sales dropped to £5,852 which signified a 2.8% reduction. A drop in sales signifies that the company is facing going concerns since this did not reflect the expansive effort made by the company.
Generally, video gaming and large ticket home-related products such as furniture and televisions declined in gross sales which were lower than the previous year. Home Retail Group plc has been having a steady increase in sales over the years and the drop in sales should be taken seriously as either a failure in sales and marketing department or competition has increased. Stores that have been operational for over one year recorded a reduction in sales in the year 2012. As a result, the overall trend of sales showed that Like-for-like sales declined by 5.6%. The contribution of new stores was only 2.5% of the total sales. If the trend continues with a slight downfall, it might degenerate into a serious problem and affect the company’s gross income.
In the half-year results of 2011, benchmark profit before tax drastically reduced by a 70% margin which should concern the management (Home Retail Group plc, 2011) Benchmark pre-tax return on invested capital declined from 12.1% in 2009 to 10.0% in 2011. Sum of Benchmark operating profit and share of post-tax results reduced by a 13% margin to £251 million. This might be the main cause of the decline in share price which has recorded a poor trend in recent years. A reduction in the share price of a company reduces the company’s confidence in the public. This may in turn reduce sales and gross income in the future (Gray & Manson, 2008).
The company recorded net cash of £200 million in the half-year of 2011 which was confirmed by the final year financial statement. The final year financial statement further showed a reduction from £414 million in 2010 to £259 million in 2011. The reduction was drastic considering that there was an increase in the previous year from £284 million in the year 2009 to £414 million in 2010. This would raise going concerns as there if there is no sufficient explanation for the reduction. Furthermore, cash gross margin was down seven percent to £970 million according to the half-year results. In the 2011 financial reports, the margin reduced to 4% from 7% in the half-year results (Home Retail Group plc, 2011).
In the half-year results of 2011, benchmark earning by share was down 68% to an all-time low of 2.5p. The reduction was recorded from 2009 through 2010 to 2011. Basic benchmark earning to the shareholder per share went down nine percent % to 21.3p in the last financial year (Home Retail Group plc, 2011). Shareholders would want their earnings to increase with time but since Home Retail Group plc earnings have gone down, signifying that there is going concern problem in the company (Gray & Manson, 2008.
Gray, I & Manson, S 2008, The Audit Process. 4th edn, Thomson, London.
Wright, M & Noe, A 1996, Management of Organizations, Richard D. Irwin, Chicago.
Home Retail Group plc 2011, Home Retail Group plc Half-Year Results.