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V Mini-Cases on ERM and Risk

Bim Consultants Inc.

JOHN R.S. FRASER

Senior Vice President, Internal Audit, and former Chief Risk Officer, Hydro One Networks Inc.

Bim Consultants Inc. is a medium-sized consulting firm. It is a corporation with 30 partners who own most of the shares. It has 10 offices across Canada with 3,000 staff, and has been in business for 30 years. Senior staff also own shares and participate in an annual bonus scheme. Salaries are generally on the low side, but bonuses in good years can be quite high. The balance sheet is sound (see Exhibit 26.1).

The company has always prided itself on its customer focus. "Customers are number one" has been the mantra from the chairman, Mr. Smooth, for many years. Recently, however, revenue has been stagnant, and the younger partners are getting restless, wondering if the older partners have lost their edge and whether changes are needed to return to the glory days of large bonuses.

At a recent strategic planning meeting of the major partners, the decision was made to continue focusing on customers as number one, but also to explore how to increase revenue from within the existing clientele and to explore what additional services could be provided to enrich the client experience (and revenues). It was agreed that the strength of the firm was in its blue-chip client base and that this high-quality reputation was worth preserving. Some discussions were also held around the idea of selling a minority share of the company at a large multiple, if such a deal was identified. Bim Consultants' profit and loss and retained earnings are provided in Exhibit 26.2.

Earlier this week, the chairman received a call from the president of the Canadian subsidiary of a U.S.-owned competitor, Bravado International, saying that Bravado was pulling out of Canada and would consider an offer to sell the subsidiary to Bim Consultants Inc. The Bravado subsidiary had 12 offices across Canada and just over 3,500 staff, but had often drawn on its U.S. resources when required for large engagements.

Exhibit 26.1 Bim Consultants Balance Sheet

Bim Consultants Inc. Summary Balance Sheet As of December 31, 2014

2014

2013

Year ended December 31 (Canadian dollars in millions) Current Assets

$

$

Cash and Short-Term Investments

12

7

Accounts Receivable

175

168

187

175

Current Liabilities

Accounts Payable

34

27

Short-Term Loans

100

110

134

137

Working Capital Fixed Assets

53

38

Leasehold Improvements

196

178

Furniture and Equipment

100

94

Less Accumulated Depreciation & Amortization

(153)

(128)

143

144

Net Assets

196

181

Share Capital

Common Shares

100

100

Retained Earnings

96

81

196

181

The chairman called an executive meeting and pointed out that making such a purchase would double sales, catapult Bim Consulting into the number one position in major markets in Canada, and provide a strong marketing thrust into previously untapped midtier markets. Based primarily on the persuasiveness of the chairman, the executive committee approved proceeding with the negotiations.

The president of the Bravado subsidiary cautioned Mr. Smooth that it was imperative not to have word of the negotiations leak out, as this could lead to a loss of key staff and possibly clients. Accordingly, he urged Mr. Smooth not to do the normal due diligence in the subsidiary's offices but to review the necessary records and meet with select senior executives of Bravado at an off-site location. This process seemed to work well, and the Bravado executives were well prepared and very likable. All the information checked out, and the way seemed clear to do a deal.

Exhibit 26.2 Bim Consultants Profit and Loss and Retained Earnings

Bim Consultants Inc.

Summary Profit and Loss and Retained Earnings For the Year Ended December 31, 2014

2014

2013

Year ended December 31 (Canadian dollars in

$

$

millions)

Revenue

300

290

Expenses

Salaries

220

207

Other

20

18

Net Profit before Income Tax

60

65

Income Tax Provision

27

29

Net Income after Tax

33

36

Retained Earnings – Beginning of Year

81

65

114

101

Dividends

18

20

Retained Earnings – End of Year

96

81

ABOUT THE CONTRIBUTOR

John R.S. Fraser is the Senior Vice President, Internal Audit, and former Chief Risk Officer of Hydro One Networks Inc., one of North America's largest electricity transmission and distribution companies. He is a Fellow of the Ontario Institute of Chartered Accountants, a Fellow of the Association of Chartered Certified Accountants (UK), a Certified Internal Auditor, and a Certified Information Systems Auditor. He has more than 30 years' experience in the risk and control field, mostly in the financial services sector, including areas such as finance, fraud, derivatives, safety, environment, computers, and operations. In addition to this book, he also served as editor on Enterprise Risk Management: Today's Leading Research and Best Practices for Tomorrow's Executives (John Wiley & Sons, 2010).

 
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