Transcript
Module 2 – Assignment 3 Practice Case Examination Additional Information (Time Allowed: 4 hours) Notes:
i)
Candidates must not identify themselves in answering the question.
ii)
All answers must be written on official answer sheets or in official electronic files. Work done on the question paper or on the Backgrounder will NOT be marked.
iii)
Included in the examination envelope is a standard supplement consisting of formulae and tables that may be useful for answering the question.
iv)
Examination answer sheets MUST NOT BE REMOVED from the examination writing centre, except for the Instruction Sheet to Electronic Exam Writer, if applicable. All used and unused answer sheets, working papers, Backgrounder, Additional Information, the supplement and, if applicable, a USB key containing electronic answer files must be sealed in the examination envelope and submitted to the presiding officer before the candidate leaves the examination room. Candidates writing the examination electronically must keep the Instruction Sheet to Electronic Exam Writers, which provides instructions for uploading their responses following the examination.
v)
Only the following models of calculators are authorized for use on the Case Examination: 1. Texas Instruments 2. Hewlett Packard 3. Sharp
TI BA II Plus (including the professional model) HP 10bII+ (or HP 10bll) EL-738C (or EL-738)
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Additional Information Information
Practice Case Examination Examination – M2A3
Foreign Aid Canada (FAC) Additional Information Update During 2011 and 2012, a worldwide economic and food crisis caused some setbacks in many developing countries. The price of food increased, which presented a challenge for aid organizations to meet their goals. Some non-governmental organizations (NGOs) lost their main sources of funding and were forced to discontinue operations. In 2012, the Canadian government announced that it has reached its target of doubling aid to Africa from $1.05 billion in 2007 to $2.1 billion in 2012. The effort to combat the AIDS epidemic has succeeded in reducing the number of deaths resulting from the disease; however, the need for AIDS assistance remains high. The Canadian government also indicated that a new action plan has been developed to make its international aid more targeted and effective, and to ensure better reporting of results to Canadians. Part of the plan is to direct the majority of aid resources to 20 countries of focus, of which 14 are in Asia and Africa. The recession in Canada is predicted to abate in 2013, and donations to Canadian NGOs are expected to increase by 3% per year for the next three years. CIDA indicated that funding to NGOs will be maintained at 2012 levels for the foreseeable future and that only projects with a high probability of achieving specific targets will be funded. In response to public pressures, CIDA will provide funding only to NGOs that limit their support service expenses (i.e. administration, fundraising, and public and donor relations) to no more than 20% of total project activity expenses (down from 22% in 2012).
Meeting with CIDA In November 2012, Dr. Green and Florence Taylor met with representatives of CIDA to discuss CIDA’s priorities and determine the amount of funding FAC could expect to receive over the next few years. Given FAC’s past performance in both relief and development, the CIDA representatives indicated that funding to FAC would likely match the 2012 funding level for development and relief projects in each of the next three years. The CIDA representatives also indicated that some of the AIDS organizations CIDA has been supporting have not been very effective in ensuring that the maximum amount of funding reaches its proper destination, and that they would welcome FAC’s participation in AIDS projects. They indicated that CIDA would be willing to contribute sufficient funds to FAC to cover 75% of operating costs and 90% of the capital costs for any projects designed to fight AIDS in Africa and Asia, with a target of treating 3,000 to 6,000 AIDS patients per year for the next three years. CIDA also indicated that the project activity expenses of treating AIDS patients should not exceed $700 per patient per year.
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Additional Information
FAC Joins the Fight Against AIDS In December 2012, Dr. Green met with the board of directors to begin preparing FAC’s long-term strategic plan. After evaluating several options, the board decided to expand FAC’s mandate to include AIDS projects in Africa and Asia. One of the board members had strongly advocated this decision, citing that the AIDS problem was severely hindering FAC’s development efforts because so much of the population was afflicted that children were being forced to work in the fields rather than going to school. The board revised the mandate and set some performance targets for 2013 as follows: Mandate: Foreign Aid Canada provides humanitarian emergency relief,
development assistance, through agricultural, water, and irrigation projects, and HIV/AIDS prevention and treatment programs to African and Asian countries in need. 2013 Targets:
Number of projects Number of lives improved Average project activity expense per person
Relief
Development
AIDS
80 150,000
60 40,000
$54
$300
? > 3,000 AIDS patients < $700 per AIDS patient
The executive management team met in early January 2013 to brainstorm ideas and strategies for achieving the new mandate and targets. The following are excerpts from this meeting. Dr. Green: The first order of business is to welcome Wayne Ryce, the newly appointed Director, AIDS Projects. Wayne has extensive experience fighting AIDS in South Africa with an NGO that has recently ceased all operations. He has already done some preliminary investigation into potential projects. I expect that you will all give him your full support and cooperation. Ryce: I’ve talked to some of the government officials from a few of the African and Asian countries where a high proportion of the population is affected by AIDS, as well as some CIDA officials. They agree that the greatest need is for medical clinics to be established and operated in some of the rural areas where AIDS has significantly reduced the young adult population, leaving children in the care of impoverished grandparents. These communities need to be educated in methods of preventing AIDS, and a significant proportion of their populations needs AIDS treatment. Another possibility for fighting AIDS is to send out travelling groups of health care workers to rural and remote areas so that they can test the local population for AIDS and dispense antiretroviral (ARV) drugs to treat those who are afflicted. I’ll put together some details for you next week. Dr. Green: If we decide to take on one or both of these projects, CIDA will provide most of the required funding, and we are going to have to raise the rest by either generating more donations, cutting back on some emergency relief and development projects, or
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cutting back on expenses. As well, we have to be sure that our support services costs as a percentage of total project activity expenses are less than 20% and that we meet CIDA’s other targets. Lewis: Why not cut back on administrative costs instead of projects that help people? Does anyone who receives a newsletter actually read it? Taylor: The members have supported us for a long time and deserve to be kept informed on how we are spending their money, and the newsletters act as reminders to people who have previously donated to us. I’d estimate that we would lose 18% of our donations if we stopped sending the newsletters. I’ve been working on a proposal for television advertising that should generate some more donations and perhaps some new memberships. McLeod: Isn’t the public becoming desensitized to the plight of AIDS? And what if the economy does not recover from the recession as quickly as is predicted? There are too many uncertainties involved to take a chance on expensive television advertising. Taylor: I think you’re wrong. There have been a lot of NGOs that have successfully used television advertising to generate donations. Roberts: If we add new programs and have to increase fundraising efforts, we will need more head office staff and other resources. Instead of expanding the non-project functions, perhaps we should consider outsourcing some of these functions. Dr. Green: The CIDA representatives indicated that they would exclude from the calculation of support services costs any costs related to changing the financial reporting system. Therefore, this will not affect our ability to keep the support services to project activity expenses ratio below 20%. Ryce: Are the support service functions that you want to outsource operating efficiently and effectively? Are they achieving their targets? How do you assess performance of your staff and your departments? McLeod: Well, we do not set any specific targets, but the directors all indicate that the support staff adequately complete the responsibilities outlined in their job descriptions. Lewis: We have more problems with the performance of foreign contractors out in the field. For example, we paid $60,000 to a contractor that the local government insisted that we use to install a small irrigation system last year. The contract was completed a month late and the water pumps that were installed lasted only two months before they started breaking down. Now we will have to spend an additional $20,000 to replace the defective pumps. This type of problem has happened before with various contractors. I’ve started an investigation and should have the results soon. Dr. Green: Thank you for your ideas. Please forward all the information regarding these ideas to Linda [Roberts] and her staff, who will be responsible for analyzing the alternatives and providing some recommendations for addressing the important issues Page 4 (8 pages)
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and suggesting a plan for achieving the new mandate. The recommended plan should be accompanied with supporting calculations confirming that the targets and conditions set by the board and CIDA would be met. Roberts turned over the task of preparing a report for the executive management team to the controller, Pat Innes, CMA. Over the next week, the directors gathered the following information.
AIDS Clinics CIDA would like FAC to build at least two clinics in 2013 and run these clinics until the local governments can be convinced to take over full responsibility for them. The countries with the greatest need indicate that it would likely be five years before they would be in the position to assume responsibility for operating and maintaining the clinics. Ryce consulted with his contacts and received some preliminary quotes from two contractors on the costs to build a medical clinic. Both contractors could build two clinics in 2013. FAC has not previously dealt with contractor #1, who was recommended by one of the government officials with whom Ryce had consulted because the contractor would use local materials and workers. FAC has used contractor #2 on various projects in different countries, most of which were completed on time and within 10% of the budgeted cost (according to contracts with this contractor, FAC is responsible for costs up to 110% of the accepted quote). This contractor would use its own pool of skilled labour and guarantees the quality of its work. As well, the materials used are often imported. The quotes per clinic from the two contractors include the following information: Time required to complete project Cost to construct each building Cost of furnishings and equipment per clinic Estimated useful life of building Estimated useful life of furnishing and equipment Payment terms
Contractor #1
Contractor #2
6 months $500,000 $250,000 15 years 5 years 50% up front, 50% upon completion
8 months $800,000 $300,000 20 years 7 years $137,500/month for 8 months
There is a shortage of qualified health care professionals in Africa and Asia. Therefore, FAC would have to bring in some Canadian staff to run the clinics and care for seriously ill patients. Initially, each clinic would require one doctor, two nurses and one lab technician. For each clinic, six local residents would be trained to perform other functions, such as administration, maintenance, education, counselling, performing simple medical tests, and dispensing drugs. The expected annual operating costs per clinic are as follows:
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Per Clinic
Annual salaries – 4 Canadian medical staff Annual salaries – 6 trained local residents Benefits Direct costs for testing for AIDS and other patient care (not including the ARV drugs) ARV drugs Expected number of individuals tested Expected number of AIDS patients requiring ARV drugs Other operating costs
$265,000 for all four $90,000 for all six 17% of salaries $30 per individual tested per year $250 per year per AIDS patient 4,000 to 5,000 per year 1,500 to 1,800 per year $75,000 per year
Mobile AIDS Units FAC mobile AIDS units can be assembled to travel through rural and remote areas where the residents are too poor to travel to clinics in larger communities. Each unit would consist of two vehicles and four local residents who are trained to perform AIDS testing and dispense ARV drugs. They would travel to each location, test the local residents, provide ARV drugs to those who test positive for AIDS, and transport those who are seriously ill to the closest medical facility. These units would use the four FAC regional offices as home bases and as places to store supplies. The expected costs per mobile AIDS unit are as follows: Per Mobile AIDS Unit
Cost of 2 vehicles (3-year life) Cost of other equipment (3-year life) Annual salaries – 4 trained local residents Benefits Variable transportation costs and direct costs for testing for AIDS (not including the ARV drugs) ARV drugs Expected number of individuals tested Expected number of AIDS patients requiring ARV drugs Other operating costs
$80,000 for both vehicles $40,000 $60,000 for all four 17% of salaries $30 per individual tested per year $250 per year per AIDS patient 3,750 per year 750 per year $35,000 per year
Support Services With the addition of the AIDS Projects department and assuming that the development and relief departments remain approximately the same size, Roberts has determined that four new head office support services staff would be required for a total annual salary of $173,000, in addition to the $95,000 annual salary of the new Director, AIDS Projects. Employee benefits of 17% of these salaries would also be incurred. Roberts contacted several administrative services firms to determine which functions could be outsourced. She felt that the proposal from OS Canada Inc. (OS), the Canadian subsidiary of a large U.S. outsourcing contractor, was better than any other proposals.
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Additional Information
The OS proposal entails the complete outsourcing of FAC’s human resources, travel, facilities, donation processing, CIDA billing and payroll functions. OS has extensive experience in these areas and would commit to meeting or exceeding the existing level of service in these administrative functions. Under the terms of this proposal, FAC would not have to hire any new head office staff to support the addition of AIDS projects; however, 16 head office support services staff, who are currently paid a total annual salary of $755,000 plus 17% for employee benefits, would have to be laid off. Average severance cost would be 15 weeks of salary per person, which exceeds the statutory minimum but is deemed to be reasonable. In addition to severance, FAC would be required to provide accrued vacation pay of three weeks per person, on average. In order to minimize disruption, OS would retain three-quarters of the laid-off workers and train them to use more sophisticated methods and software. The service standards would be defined in a detailed contract, and OS service providers would use the desks and other facilities in the FAC offices. The annual fee for this outsourcing of administrative functions would be $880,000, paid in equal monthly instalments. There would be a one-time set-up fee of $200,000 for a five-year contract. This contract could be terminated only if a fundamental breach of service standards is not rectified by OS within 30 days, or if FAC fails to pay an instalment of the annual fee within 60 days of the invoice date.
Other Information 1. FAC received donations from 17,900 different different donors in fiscal 2012 and 18,250 in fiscal 2011. Currently, FAC has 350 members, and the mailing list includes 25,000 addresses. The total costs for the newsletters (excluding staff salaries and benefits of $93,600 but including printing, stuffing, and postage) amount to about $1.17 per quarterly newsletter per recipient. The organization continues to send out a glossy, full-colour annual report to its members, key stakeholders, and the government. Donors receive the annual report upon request. It costs about $10,000 to produce and send out 500 copies of the annual report each year. 2. In response to an announcement made in in the December 2012 newsletter that FAC would be joining the fight against AIDS, one member pledged to donate $500,000, restricted for use for AIDS projects. 3. In January 2013, Taylor approached various businesses that that had made contributions to FAC in the past. One agreed to contribute the eight vehicles (fair value of $40,000 each) required for four mobile AIDS units if FAC decides to implement this project. Taylor indicated to Innes that this donation should not be recorded in the accounting records or disclosed in the financial reports in order to maximize CIDA’s contributions to the capital costs of this project.
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4. Prior to the decision to to fight AIDS, the the preliminary budget for fiscal 2013 provided for a 3% increase in individual, foundation, and corporate donations. Using its usual promotional media, the announcement that FAC would start fighting AIDS is expected to increase unrestricted donations by an additional 1%. 5. FAC has two outstanding mortgages with with a balance of approximately $214,000. Recently, the head office building, which has $100,000 in mortgages payable remaining, was appraised at $950,000. The bank is willing to refinance the mortgage up to 70% of the value of the building at an annual interest rate of 5%. 6. Recently, two Canadian environmental groups complained in a joint press release that certain African water projects, some funded by FAC, will lower the underground water table, which will be bad for the environment. They also insisted that these are unethical activities for a Canadian NGO. A third group has disputed this claim, saying it was based on a faulty hydro-geologic assessment. 7. Lewis completed his investigation into the problems encountered with contractors. In one case, it was discovered that the contractor was a relative of the government official who recommended him and that he bribed the project manager to sign off on inferior service. In other cases, a particular project manager simply neglected to provide any supervision over the projects. This problem was not discovered sooner because the project manager submitted expense claims with false receipts for trips that were never taken. 8. FAC has been approached by a manufacturer of satellite phones and satellite Internet hookups that work anywhere in the world. The cost of this technology would be $2,500 per regional office, and the Internet connections would be nearly highspeed. Portable units for the field teams are available at a cost of $5,000 per unit. 9. Recently, Taylor engaged an advertising consultant to design a television campaign to bring in new donations. Wealthy individuals with philanthropic tendencies would be targeted. The budget for designing and filming the broadcast appeals is $150,000, and the airtime in fiscal 2013 would cost $800,000, or more if desired. The consultant estimates that $2.5 million in new donations in fiscal 2013 could be raised as a result of this campaign. 10. FAC uses a discount rate of 12% when evaluating capital expenditure proposals.
Required: As Pat Innes, Controller, prepare a report for FAC’s executive management team, advising them on how to address the issues discussed at the management meeting as well as any other organizational issues and concerns requiring management’s attention. Include details of your analysis, supported recommendations, and an action plan to implement your recommendations. In undertaking this task, you will need to take into consideration your background knowledge of the company as well as the additional information provided above.
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