Company History and Business Strategy

Company History:

Super Duper Electronics (SDE Inc.), a retail company that specializes in electronics, has 43 stores that generate sales in excess of $350 million. Today, the company’s outstanding stock has a market value of $660 million. “In the early part of the 1900s, sales in the consumer electronics retail industry grew significantly. As the public’s demand for electronics grew [SDE’s CEO] converted his SDE stores into electronic supermarkets” (pg. 1). In 2005, SDE decided to go public to raise capital to finance the company’s expansion; however, the company was delayed in issuing IPOs for one year due to the discovery of disarrayed financial records. Among other problems, there were extensive related-party transactions, speculative investments unrelated to the company’s principal line of business, interest-free loans to employees, and all of the company’s key executives were related to the CEO. SDE did go public after cleaning up its accounting records and financial affairs. “The sale of SDE’s stock to the public was a great success. Because the IPO was oversubscribed, the company’s underwriter obtained permission from the SEC to sell 200,000 more shares than originally planned” (pg. 3). Even if these problems occurred many years ago, our audit firm should be concerned that SDE is still not continuing in any unethical financial practices. This is important, because if we take SDE as a client and discover that the company is involved in unethical practices, our audit firm’s reputation could be damaged. In this situation, our audit firm should consult with auditing standards # 7 to determine if our audit firm should accept SDE as a client (PCAOB website).

SDE’s Business Strategy:

There are a few ways in which SDE generates revenue. In 2011, SDE featured a couple of product lines. Figure 1A shows the types of products that were offered and their percentage contributions to overall sales for 2011. Aside from a diverse product line, SDE’s CEO encourages the company’s salespeople to generate more revenue by having them pressure consumers to buy product warranties. In the electronics industry, selling warranties is a great way for companies to earn extra revenue. These companies hire people with statistical and accounting knowledge to figure out the percentage of products that will fail within a given time and to determine a warranty price that will more than cover the cost of replacing failed products. Examining other electronic retail companies’ revenue accounts can serve as a benchmark in seeing how SDE is competing against its competitors in generating sales. Another way in which SDE has been able to generate more profits is by acting as an electronic wholesaler. The company “began extracting large price concessions from suppliers and began what is essentially a wholesale operation. The ability to purchase electronics in large quantities with significant discounts enables the company to become a ‘trans-shipper,’ or secondary supplier, of these goods to smaller electronic retailer in the So. California area. Sales testing in 2010 showed that transshipping accounted for 4.8% of sales revenue” (pg. 2). Our audit firm needs to pay close attention to fluctuations in revenue (if revenue has been increasing or decreasing over the years). If there is a sudden fluctuation in revenue, there could be a major material misstatement in SDE’s financial reports. SDE’s main marketing strategy involves heavy advertising.  These advertisements involve radio and television commercials. In addition, SDE hired Doctor TJ, a radio personality, to be the spokesperson for SDE. Doctor TJ has brought the company national awareness.

Figure 1A

Televisions sets					33%
Cell phones and accessories					20%
Radios					15%
Stereo and sound reproducing equipment					10%
Video electronics equipment					6%
Accessories and supplies					3%
Ebook readers and accessories					3%
Miscellaneous					10%
Total					100%

References

“Client Acceptance Department Step 2: Additional ARPs.”

Assignment #2 Outline. Pg. 1-3.

PCAOB website. “Auditing Standards #7.” www.pcaob.org