Case study illustrative script 2 november 2012 ICAEW

This candidate did not achieve sufficient competent grades in the Executive Summary and the script was marginal in terms of competent grades in Requirement 1 financial analysis, weak in

SECOND ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS

In the commentary below extracts from the script are shown in quotation marks and italics; spelling, grammar, sentence construction and punctuation from the original script have been retained The commentary follows the order and numbering of the script with references to the topics in the marking key It should be read in conjunction with the review of the First Illustrative Script and also the full Examiners’ Report for this session

Examiners’ comments – overview

This script failed the assessment It is slightly above average length (but as always this depends on the actual handwriting), addresses some of the key issues and contains some stronger sections In terms of professional skills this candidate achieved competent grades across the script as follows – Clearly Competent (CC) and Sufficiently Competent (SC) – in 5 out of 8 grade boxes for Assimilating

and Using Information; in 5 out of 12 for Structuring Problems and Solutions; 5 out of 12 for Applying Judgement and 1 out of 8 for Conclusions and Recommendations

The original 29-page length of the manuscript version was broken down as follows:

 Cover and contents – 1 page

 Terms of reference and executive summary – 5 pages

 Report (main body) – 18 pages

 Appendices/workings – 5 pages

The 18 pages of the main body of the report address the issues in the case in a variable way and although there is adequate material in the appendices to provide a starting point for the report there was an imbalance in answering the main requirements This candidate did not achieve sufficient competent grades in the Executive Summary and the script was marginal in terms of competent grades in Requirement 1 (financial analysis), weak in Requirement 2 (assessment of Banbury rental proposal), and just below standard in terms of competent grades in Requirement 3 (evaluation of new business opportunities) For Appendices and Overall the script was awarded a majority of passing grades but the work had weaknesses

Terms of reference and executive summary

This report starts with a brief terms of reference section The remainder of the executive summary (ES) is written in a slightly staccato fashion which is indicative of time pressure at the end of the assessment The ES covers all three areas of the report but there is a decline in adequacy over the three topics

The five main pages of the ES are split: three pages to Topic 1; one page to Topic 2; and just over one page to Topic 3 The summary of the financial analysis of the FS management accounts contains some appropriate numerical analysis covering the key areas which need to be considered and the comparative analysis is expressed in both absolute terms and percentages However the commentary contains both banal and somewhat irrelevant phrases which the FS board may have found

patronising: on the FS foreign language training (FLT): “Revenue has grown which is good We recommend maintaining the relationship with the motor industry” The section on the impact of

translating and interpreting (T&I) services on movements in cash and accounts receivable, and the Myanmarpic2012 (MP) problem, had no numerical information to provide any context for the

commentary In the section dealing with the Banbury rental proposal the ES contains a “contribution” figure which has been calculated in a most bizarre way (by subtraction of a 2012 figure from a 2013 figure in the last line of the appendix) and by a piece of good fortune this coincides with the additional

revenue to be earned from running the English language training (ELT) semester programme (It is

hard not to be amazed by this lucky coincidence.) This section of the ES is both short and light on

content In the evaluation of new business opportunities the candidate presents a very bland

summary of the benefits and risks of these opportunities but does include an ethical issue However, it

is a scattered piece of writing which concludes with the advice that “FS needs to ensure that it

employs a PR/media savvy spokesperson to ensure no further outbursts from Edwin.” It would be

hard to imagine sitting nearby whilst this member of the board read this extraordinary

recommendation

To score better grades on this section, the candidate needed to have given themselves more time, through better planning, which would then have resulted in a more adequate coverage of the topics

and would have allowed better judgement, conclusions and recommendations to be made

FS financial analysis / Myanmarpic2012 [Requirement 1]

The financial statement analysis in this section is accompanied by Appendix 1 (see detailed

commentary below) This appendix supports the comparative analysis of revenues, gross profit, and the revenue streams, in both percentage and absolute terms – it is a good starting point from which the report can be written The appendix is weak on the details concerning the T&I analysis although the Myanmarpic2012 (MP) information is more adequate

The review starts with an analysis of overall revenue and then overall gross profit comparing 2012

against 2011 but the discussion (which is somewhat wasteful) starts by considering the impact of the

change in sales mix before the actual detailed analysis of these components in the following sections The following analysis does discuss the three primary revenue streams, again in both absolute and percentage terms, but the analysis is light The figures for the analysis of gross profit are also in absolute and percentage terms but this section includes comments on what is not known rather than commenting on what is available: “There has been a trend towards more profitable revenue streams however without knowing how many students have attended courses in the year it is not possible to establish exactly which have grown” Previous preparatory AI contribution analysis should have

helped with this commentary The written analysis on T&I performance is a mixture of relevant facts

“FS has been paying the Burmese translators 75% of the fee which has squeezed margins even further” and irrelevant facts “Specialists are used for these services as the tutors don’t enjoy the work They need experience and these specialists cost a lot FS has paid its Burmese translators on time”

Unfortunately, the analysis of the impact of T&I services on movements in cash and accounts

receivable starts with an irrelevant discussion of the impact of deferred income on cash balances This scattered approach to the analysis of cash indicates a lack of focus in answering the

requirement The analysis of the impact of the MP work is more relevant

The candidate’s conclusions are consistent with the analysis but are bland However the candidate does show some sensible insight such as “Cash has decreased by £343 but FS still hold a strong cash position” Although the candidate provides a list of recommendations they are not all

commercially possible or relevant

To score better grades on Requirement 1, the candidate could have:

 Focussed their work and avoided imprecise commentary to prevent an overrun on time

 Provided analysis based on the numerical work and not on missing information

 Provided more focussed analysis in all sections and eliminated extraneous details

 Provided tighter conclusions and more precise recommendations in the report

Assessment of Banbury rental proposal [Requirement 2]

The financial data analysis in this section is a mixture of muddled thinking and good fortune After two

pages of convoluted (and time-consuming) calculations the candidate arrives at a final figure for

“contribution” in the appendix (which happens to equal the revenue for one semester of the Banbury

programme [£155,520]) and proceeds to use that partially correct (and possibly plausible) figure in the

report

In the first main section of this topic, entitled “cash implications”, this candidate starts by discussing

the broad timing of cash flows for ELT programmes However, the candidate then strays into a

muddled combination of cash issues and some rare breakeven discussion This failure to focus

logically on the point to be made is a common weakness in this script

The second section of this topic, entitled “other important factors”, also contains a variety of factors –

some of which are not important but simply vague comments drawn from the AI The candidate

identifies some generally relevant factors: “in order to maintain its UKBA Tier 4 status, FS needs to ensure that it maintains its quality control (QA) processes and standards” but fails to lace these into

the analysis which has been requested

The next section is entitled “Edwin’s assumptions” which contains three paragraphs: the first one

contains an “assumption” concerning the new rental figure of £120k; the second is a repeat paragraph from the section above; and the third is an irrelevant discussion concerning the scarcity of skilled linguists which lapses into a repeat of the quality control issue

In the very short section entitled “our assumptions” the candidate provides two sentences both of which contain some relevant information concerning the assumptions made

There is no conclusion at the end of this section and the two recommendations made by the

candidate are both so general and banal that if this report were to be handed to FS by Griffiths Brett the firm would probably end up paying the client compensation for wasting their time

Inevitably this candidate’s scatter-gun approach does collect some positive marks but it is insufficient for a passing grade in this requirement

To score better grades on Requirement 2, the candidate could have:

 Carefully followed the instructions in the requirement to provide a structured answer

 Performed a simple contribution calculation for the ELT programme which could be run at the Banbury location

 Provided a more comprehensive and logical review of the assumptions suggested by Edwin Sanguine

 Provided more comprehensive and focussed recommendations

Evaluation of new business opportunities [Requirement 3]

This candidate starts this section with the conclusion that “FS should not go ahead with the business opportunity once it has considered all the risks”

From this negative starting point the analysis continues as per the requirement, to consider the

benefits that might accrue under each revenue stream starting with the ELT programmes: “with an increase in the market in Brazil there is an opportunity for an increase in English language students

as relationships develop and corporate clients send their employees to England” This is a sensible

piece of analysis because it takes account of the fact that FS is based in the UK and does not

currently have any overseas operations so the only way in which the ELT programme might benefit is along the lines suggested here

Under the consideration of FLT revenue the candidate also refers to one of the three companies identified in the news article and by Paz Trans, which is an important piece of commentary The analysis of T&I revenue correctly identifies FS experience in big event work such as the Olympics However, the candidate offers no opinion as to where the real opportunity lies between these revenue streams

The risks are also considered in the above logical order, by revenue stream, but instead of linking the risks to the actual opportunities offered by the named companies the candidate discusses broad risks currently associated with the revenue streams: UKBA visa restrictions for ELT programmes; quality of tutors for FLT programmes; local competition for T&I work for the future World Cup and Olympic events in Brazil A review of the current opportunities which might be possible by working with the companies who have contacted FS may have quantified and then eliminated these risks

In the section headed “ethics” the candidate mentions the issue that the use of European-Portuguese

linguists would be a problem The candidate also states “we have also been made aware of

“commissions” which need to be paid in order to gain introduction” but then does not develop a

solution

The candidate provides some general conclusions but also, somewhat surprisingly, identifies the lack

of technical (product) skill, and touches on the ethics involved in having to be able to deal with

financial services products: “it is possible that as the Brazilians are less informed about financial products and pensions that they will need more advice and specially trained translators in order to help them understand FS does not currently have this technical knowledge of expertise and therefore would not be best placed to go ahead with this at present time” – a piece of clear relevant thinking

which was all too rare in this script

The section finishes with a list of recommendations, some of which repeat recommendations from elsewhere in the script, while others are simply broad bland statements not tied to the context

provided – “establish links and promote FS in Brazil” and “diversify into Brazilian Portuguese” – which add very little to the current FS situation

To score better grades on Requirement 3, the candidate could have:

 Developed a more disciplined approach to answering the requirement as per the request made by

FS

 Provided a more comprehensive analysis of the benefits and risks of this new business

opportunity in relation to the three businesses that have already contacted FS

 Provided a more useful analysis of the opportunities by considering which revenue streams might

be positively affected and how significantly

Appendices

Appendix 1

This relates to the financial statement analysis (Requirement 1) and provides a series of well laid out columnar analyses of the summarised FS income statement extracts for 2012 compared with 2011 with the analysis of revenue and gross profit provided overall and then by primary revenue stream The analysis of movements between the years is made in both absolute and percentage terms The analysis of the MP problem provides a detailed reconciliation but the T&I analysis is confined to a calculation of days receivable for 2012 and 2011; there is no analysis of cash Overall this is an adequate, relevant working document which provides a basis for the analysis provided in the body of the report

Appendix 2

This short appendix relates to the Banbury rental proposal (Requirement 2) This candidate used two columns to attempt to calculate the contribution: (1) based on total ELT revenue in 2012 (per Exhibit 10) and then proceeding to do a proportional 2013 calculation based on that approach; (2) based on

an individual student’s “contribution” Although the numerical calculations of the contribution are incorrect the candidate has labelled what has been done and so a reader (and the examiner) can, at least, follow these incorrect approaches The candidate does not really extend their calculation to cover breakeven or margin of safety This appendix is not correct but it is well explained to its

audience (By an extraordinary piece of good fortune a figure on the final line of the calculations in this

appendix is the correct ELT revenue for one semester at the Banbury location which the candidate then uses in the report – but it is not the correct contribution figure.) This incorrect appendix must

have cost the candidate a lot of time

Overall paper

This was a legible clearly written answer which followed a logical format in answering the detailed requirements There were some lapses in style and grammar – including the use of a series of two-line sentences in the ES – but overall the language was mostly appropriate with clear financial

explanations in the body of the report However the report was not appropriately balanced between the three sections – it was evident that too much time was spent on Requirement 1 and the

appendices There were instances of unnecessary facts being provided to the board about their business but the structure of the report was satisfactory although style and language were of variable quality

ILLUSTRATIVE SCRIPT 2

Draft Report

To: Fluent Speech Limited

From: Griffiths Brett Chartered Accountants

Date: 7 November 2012

Subject: A financial review of Fluent Speech’s performance for the year to 30.9.12, an

assessment of the BBP rental and an evaluation of Brazil new business opportunities

Disclaimer: This report has been written for the Board of FS Ltd and should not be disclosed to

third parties without the express permission of Griffiths Brett Griffiths Brett accept

no liability for actions taken based on the contents of this report

Executive Summary 1

Review of Fluent Speech Ltd’s performance for the year ended 30.9.12

Revenue has grown by £1,798k (20.7%) which is good This is a better performance than 2011 There has been an increase in demand for translation and interpreting services in the 12m build up to and following the Games

There has also been an increase in foreign language revenue which FS has explicitly focussed on recently This is also linked to the success of the motor industry

Revenue has grown which is good We recommend maintaining the relationship with the motor

industry

Gross profit overall has decreased by £1,105k (22.3%) and the margin has fallen to 36.6%

This is due to changes in the sales mix More translation and interpreting services have been

provided but at a lower margin to FS

GP is down which is not good It would be useful to be able to determine the true profitability of each course and so we recommend that FS apportions its OHs proportionately

English language revenue has fallen by £161k (6.5%) which is not good, but expected

This is due to visa restrictions being imposed by UKBA and therefore fewer students

English language GP has decreased by £24k (2.1%) and the margin increased to 48.7%

This is down to a trend of more profitable courses being run

We recommend establishing number of students on courses for further analysis

Foreign language revenue has increased by £295k (17%) which is good

There has been more focus placed on these courses by FS and they are also linked to the success of the motor industry

GP has also grown by £159k (18.8%) and margin to +9.6%

There are less costs involved as the work generally takes place @ the client’s work

We recommend further analysis into the sales mix within courses

Translating and interpreting revenue has increased by £1536k (85.2%)

This is due to more work generated by the Games and through public sector requests

GP has risen by £20k (2.6%) but GPM fallen massively to 23.7%

This is because of a potential change in the mix of the 2 services and also the rise in costs paid to the Burmese translators

Cash and accounts receivable have both been impacted by translation and interp services

Cash has not been received in a timely fashion although cash position is still strong

AR are high and debtors are very slow to pay, particularly within T&I clients

MP has made a large impact on this by failing to pay their due accounts on time

Executive Summary 2

An assessment of the new rental proposal with BBP

Additional contribution of £155,520

Cash implications is that English students will pay in advance and this will enable better cashflow for

FS When it has to pay its rental in advance

FS needs to maintain its Tier 4 Status and ensure that it keeps its quality control checks in place in order to ensure it can continue to keep the students

Edwins assumptions are based on maintaining the standards which is very important

Our assumptions are based on same costs as previously and minimum numbers remaining the same

FS should do the rental as it will increase their contribution

Executive Summary 3

Evaluation of business opp in Brazil

FS should go ahead with business opportunities in Brazil but it should first ensure that it has

considered all risks

Benefits to FS are that there would likely be an increase in both English language and foreign

language courses Translation and interpreting would be likely to rise too as a result of more work through more Games

However risks include that it is more likely that any increase in courses would be for corporate clients and these provide a much lower margin

There is also the likelihood that the Games opportunities could be less than anticipated due to

potentially being offered to local workers before FS

Ethically there are many issues The main issue is that FS is considering using European Portuguese instead of Brazilian – Portuguese for freelance work initially

This is unethical as it does not provide the correct translation and not only will the end user be

affected, but FS will run a major risk of damaging its own reputation

Compliance is key to ensure FS remains accredited and QC standards are also key to maintain Tier 4 status

FS needs to ensure that it employs a PR/media savvy spokesperson to ensure no further outbursts from Edwin

Analysis of revenue and gross profit both in total and by stream; impact of translation and interpreting on cash and accounts receivable; also the MP issue

For all calculations, please see Appendix 1

Revenue – total

Revenue has grown by £1,798k (20.7%) in 2012 This is good This is a better performance than

2011

This is due to the steady demand which rose in the 12m before the Games in translation and

interpreting services There has also been an increase in foreign language course revenue; FS has been concentrating on this over the past few years

The motor industry remains a large client particularly for foreign language courses It is important to keep this relationship strong as many other courses are fed through to FS from their motor industry corporate clients

The success of foreign language courses is heavily dependent on the motor industry which is

currently doing well

Translation and interpreting has spiked in 2011/12 because of the Games

Gross Profit – total

Gross profit has decreased by £1,105k (22.3%) and the margin has fallen from 43.2% to 36.6%, a fall

of 6.6 percentage points

This is likely due to changes in the sales mix Previously FS was delivering more of its higher margin courses such as foreign ‘days per week’ courses The move to more translation and interp work in the past year has seen a shift in the sales mix to lower margin work

It would be useful for FS to be able to calculate the true profitability of its courses; in order to do this

we would need to apportion overheads consistently

As GPM has fallen quite significantly and this is due to the sales mix, FS will need to change going forward: translation and interp work is likely to have spiked following the Games and this is the

majority of the revenue also

However paying 75% of the fees to translators leaves FS a much smaller margin overall There should be a change made in the sales mix

Revenue – by stream

English Language

This has fallen by £161k (6.5%) This is worse than 2011

Historically this has always been the highest revenue stream in the sales mix but has been steadily falling

This is due to tighter UKBA visa restrictions and fewer English language students

There has also been increased competition for foreign language schools

Foreign language

Revenue has increased by £295k (17%) This is good This is better than 2011

There has been more focus placed on FL courses by FS recently, and the success of the courses are also linked to the successful client relationship with the motor industry The revenues for FL peak and trough with the motor industry

The motor industry is currently doing well and as such this is reflected in FL course revenue 65% of

FL is from motor clients

Translation and Interpreting

Revenue has increased significantly by £1,536k (85.2%) This was anticipated following the

successful run up to the Games however would not be expected to continue

FS broke the £1m barrier in 2010 due to this and it appears this has continued since

There has also been an increase in motor and public sector requests for these services, together with increased work from the Olympics has really pushed up the revenue

Gross Profit – by stream

English language

GP has decreased by £24k (2.1%) yet the margin has increased by 2.2 percentage points to 48.7% This is a mixed result

FS refurbished in 2010 in anticipation of an increase of student before the visa restrictions were increased Therefore numbers didn’t materialise and have continued falling since Costs may still be being incurred

There has been a trend towards more profitable revenue streams however without knowing how many students have attended courses in the year it is not possible to establish exactly which have grown

Foreign language

GP has grown by £159k (18.8%) and margin also by 0.8 percentage points to 49.6%

These take place generally at the clients’ place of work and as such incur less costs

This is the highest GPM within the streams

In order to explain why the increase has happened we would need to know the sales mix within each course type

Translation and Interpreting

GP has risen by £20k (2.6%) but GPM has fallen by a massive 19.1 percentage points to 23.7% from 42.8%

Translation and interpreting services have both risen as a result of the Olympics and further public sector and motor industry work

However the interpreters are paid between 65% and 75% historically, and translators from approx

£40 per page