Risk Assessment Industry And Operations

Published Date: 02 Nov 2017

Rona is a commercial retailer and distributor of home renovations, gardening products and hardware. According to the company’s profile; "Rona operates a network of more than 800 corporate, franchise and affiliate stores of various sizes and formats with close to 30,000 employees" (Rona, 2011). Although for the past years, Rona has witness a great decline of sales, the Canadian retail chain, generates and estimated "$4.86 billion" (Rona, 2011), with a current ration averaged 2.25 and an inventory ratio of 4.1 based on the annual report calculation. Being that the main Source of revenue for Rona come from its retail stores, its inventory and relies on employees and management performance. The ability to keep control and minimize risks on organizational activities would ultimately measure Rona’s ability to stay in business.

For the above mentioned reason, the following report will analyse the risk factors in the retail and hardware industry and operations. Beginning with threats in inventory management, recording, storage, sales and cash operation, risks will be analysed in order to bring light on this particular industry and no solely Rona. By outlining potential threats to the company’s assets, employees and operations weak points can be identified in existing and future procedures. Furthermore, based on the risk factors analysed, the report will suggest potential control activities to address these threats base on the nature of the business. Finally, the existing control activity of Rona will be presented with complementary recommendation that could greatly improve current processes, operations and enhance day to day transactions.

Risk Assessment, Industry and Operations

Inventory Maintenance and Control

Rona carries a large sum of inventory amounting to $840, 285 million dollars out of its current assets which total $2,780,378 in 2011 annual report. This figures show the importance of regulating inventory within the distributing centers and stores. Also, because Rona reports inventory at its lower cost and net realizable value, safeguarding this asset, setting procedures to prevent and detect misstatement, misuse or theft thou challenging to regulate doing so will allow the company to meet the demand and supply of inventory when need it.

Some of the risk associated with inventory maintenance and control are related to poor qualitative, quantitative, loss, dishonest handling or recording. In addition, damaged or low quality goods returned or received records can distort and impair clear accounting records of credits refunds and or purchases. Furthermore, because of the high and diverse volume of items sold by the retailers, seasonal and raw materials present a high risk when determining the inventory turnover if unauthorized quantities or prices are recorded, materials may be allocated to the incorrect cost centre and used for unauthorized purposes.

Risks with IT Inventory Recording

Each RONA store offers more than 40000 different products in large quantity in various departments.1 Secured and well maintained IT setup is a must to keep track of inventory movements. Any opportunity in IT systems can attract employees and hackers to do practice which can be harmful to RONA. Company can have their system upgraded regularly and also can be assessed by external IT security consultants.

Supply, Ordering and Delivery

Unauthorised use of goods ordering system can take place at RONA. Inappropriate order of goods or inflate orders. Company can have policy to assign separate duties of ordering and delivery receiving. RONA can make sure that authorised orders were made properly before approving payments for them.

Sales, Cash Transactions and Information

Employees operation for price cut:

This is very common in retail industry, when staff don’t follow the company’s policies when it comes to applying discount or proper price reductions. RONA’s employees may give staff discounts or may offer reduced price to their relatives or friends and company will lose in either of the cases. In Rona there have been cases "where employees have damaged items so they can get better discount and one associate would markdown the price for another associate"2.

Price markdown and discount should be approved under proper path in a way to avoid discount frauds.

Articles Misappropriation

As per the National Retail Security Survey, rate of employees stealing from workplace rise from 14% in 1969 to 17% in 2006 and it climbed up to 75% in 2010. 3 Statistics shows that approximate annual amount of stolen by employees from workplace in US is $50,000,000,000 and 75% of employees have stolen at least one time from their employer.4 Rate of employee stealing (42.7%) from company which is more than shoplifters (35.6%).5

There are high numbers of chances that RONA’s employees might be stealing electronic tools, small hardware items or other goods. There can be a policy where superiors or security guards can do the random checks, make use of surveillance cameras. There can also be a Tip-Line where employees can report about such frauds.

Cash Distortion at Check-Out Counters:

Various operating activities had a cash flow of $202.3million in fiscal year 2011.6 there are number of ways in which cash fraud can occur at check-out register. Stealing money from cash counter, fake refunds, ring-up item for less or incorrect amounts. Management level employees can open an extra checkout lane, which will not be reported.

To prevent these frauds RONA should have policies of management approved refunds, use of barcode scanners and examining the gross profit margins as reported.

Unauthorized Access to Information Systems

In the past few years, RONA has expanded its business with many acquisitions and highly complex distribution systems, which include commercial and professional market division stores, affiliated stores, franchised stores, specialized stores and big box corporate-owned stores.7 Accompanied by the various distribution systems, the information systems are accordingly of a high level of complexity. In order to attain high efficiency of operation, RONA has invested lots of money in the integration of all these systems, and eventually it preferred to use JDA supply chain management software to conduct demand and merchandize planning as well as to monitor and optimize the inventory.8 During the process of integration, many loopholes derived from the transition can be easily manipulated by related unauthorized operators for their own interests.9

Almost every store has an in-store system that is used to place orders, get update prices of products, and monitor inventory volumes. Such potential risks as unapproved online access to inventories can give rise to unexpected changes and frauds. Meanwhile, there are other information systems including clocking and access system of stores or inventories, with potential risks of clocking in for someone else and unauthorized visit. This unauthorized access presents a threat for the company’s general performance and control.

Internal Control Activities

In order to address the potential risks identified above, specific internal control activities should come into place. The following are some explicit suggestions for the Audit Committee’s reference.

Human Resource Control:

1. Policies and Procedures: The Hunan Resource department should design and enforce clear policies and procedures in reference to their complying responsibilities for the fulfillment of effective internal control activities.

2. "Fidelity" Insurance: Many employees are handling with lots of cash in all the stores every day, for instance, the cashiers. In order to avoid the risk of theft, it is common to buy the "fidelity" insurance for them. Besides, the insurance company will request criminal background check of the employees of RONA. This means that RONA does will not have to do it; it will be a requirement prior to hiring new employees.10

3. Background Check: In the recruitment stage, a specific and thorough background check of every applicant is a must, especially in terms of theft or misconduct history.

4. Vacation Schedules

Many thefts or intended misconduct operations can be identified by allowing employees to take vocations, especially for those taking on positions related to cash handling.11

5.Staff Rotations:

If an employee has been in a position for a long time, he or she may take advantage of the familiar use of systems and commit frauds. This risk can be discovered in time by mandatorily appointing the employees to other functional departments or corporate-owned stores.12

Authorization of Transactions and Activities

Cash Register or Point-of-sale Terminal: make sure that every register or point-of-sale is operated by only one person at a time. And the operator should use his or her personal ID or pass codes to access the system.

2. Authorization of Operation Levels: Each employee should be assigned a specific level of authority that defines the permitted accessible interfaces for this person using their unique username and password.

3. Policies for Credit Sales: some sales may exceed a certain amount and need a written approval for the payment on account. The policies for this should be drawn up by the financial department instead of the sales department, which ensures that the policies serve the needs of financial department and facilitate effective financial reporting.13

Rona Control Activities and Recommendations

Documentation

RONA has its unique dynamic point-of-sale merchandising program (POP program).14 With this program, the consumer can find the products they need easier, faster and more flexible. For the supplier, it makes the transactions record clearer and more transparent. Every single transaction would be record as a digital document in the computer without delay. Fair treatment of all suppliers is one of core principle for this program. POP program will attract more and more suppliers cooperating with RONA.

Recommendation:

RONA should consider setting salary adjustments and promotions documentation in order to know their expenses and cost clearly.

Physical Controls

The inventory in 2011 is $840,287. It is near 67% of the current assets. With this huge inventory, a physical control is very important part for RONA to manage their internal control activity. Every NORA’s warehouses and storage has the alarms to prevent break-ins. CCTV has been used widely in every NORA store to prevent consumer and employee theft behaviours. As everyone knows, RONA is a large hardware store chain in Canada. They sell home security system and equipment to the consumer. Thus they also have a perfect security system to protect their own assets and records. Such as safe box, computer facilities with password, locked warehouses. RONA’s security system is perfectly safe.

Recommendation:

RONA should use biometrics to protect their top-secret documents and valuable property such as fingerprint, voice and face identification system.

Segregation of Duties:

RONA’s management and auditor have responsibility for the consolidated financial statements. "They review and discuss with management, external and internal auditors and the General Counsel the effectiveness of policies and procedures to ensure financial compliance with laws and regulations and financial commitments."15 The Board of Directors fulfills its duty in respect of the consolidated financial statements principally through its Audit Committee.16 On Jan 21st 2013, RONA a new Chairman and from other regions several new board members were chosen, it is not only to steer clear of a backlash with shareholders but also maintain their reliable financial reporting. Every Board of Directors can hold each other accountable.

Recommendation:

Clearly segregation of duties for cash disbursements is also very important; they should ask two employees to do the initiation and approval of wire transfers

Independent Checks for Performance:

In order to make sure a good control environment for reliable financial reporting, Rona published The Code of Ethics. They don’t allow the employee to accept gifts, gratuities; favours or personal benefits from RONA’s business partners.17 Rona’s employees can follow the policies and procedures to maintain their reliable financial reporting. All of their financial statements follow the international financial reporting standards (IFRS).

Recommendation:

However they should check out financial and management background of the employees who handle cash. Whether the employee has the experiences that will influence the effective cash control activities. Recording employees’ performance regularly is also very important.