Barnes and Fischer, a national CPA firm, is deciding whether to accept Ocean Manufacturing as a client. Ocean Manufacturing is a medium-sized manufacturer of small home appliances. This would be new to Barnes and Fischer, who has current clients in the healthcare service industries. I am writing this memo to suggest that you reject Ocean Manufacturing as a client.
Ocean Manufacturing has a favorable market position and growth potential, things that Barnes and Fischer are looking for. They terminated their current auditor so they can build a relationship with a nationally established CPA firm. That would make it possible for Ocean Manufacturing to make an initial public offering of its common stock within the next few years.
The problems with Ocean Manufacturing are their lack of experience in management and their frustrating new IT system. The reason behind the lack of experience in management is due to the resignation of the vice president of operations and of the controller. They both took jobs in other cities due to personal issues.
The IT system maintains integrated inventory, accounts receivable, accounts payable, payroll, and general ledger software modules. It was handled mainly by the former controller, but with him now gone, it would be difficult for a new controller to adapt to it with no experience. Problems have existed, such as inventory tracking and cost accumulation, receivables billing and aging, payroll tax deductions, payables, and balance sheet account classifications.
If you look at Ocean Manufacturing’s return on equity of 8.94% and return on assets of 4.54% and compare them to the average industry ratios, they are considerable low. It means that they are not receiving enough money back on their investments and assets. The other consideration you should look into is their inventory turnover rate. Ocean Manufacturing has an inventory turnover rate of 6.08 while the average is 8.09. This means that they are...