Synopsis of Toy Manfold

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A Synopsis of the Case Study
Manfold Toy Company Ltd. is a listed company in Hong Kong specialising in the production of bath and water toys. It was founded by Joseph Wan in 1983 and since its establishment, the company has experienced phenomenal growth. Despite its fast-growing business, Manfold’s management paid little attention to the internal control aspects of its operations. For example, when the company secretary, Vivian Chen, proposed to the Managing Director, Daniel Kot, to adopt some internal control best practices in the company, she was told to see into the basic requirements of the Hong Kong Exchange only. The issue was never revisited.

Hoping to sell Manfold at the best possible price before his retirement, Joseph approached a US corporation Mitchell & Meyer about a takeover bid which required a 20% growth in sales on Manfold’s 2006 year-end report. To achieve the target, Joseph instructed Daniel and President of its Mainland operations, Wu Jiaxiong, to increase market shares and profit margins and minimise the cost respectively. These two trusted lieutenants then set out to work on their given tasks. Daniel decided to loosen their credit policy, extend long-term credit to their customers and secretly signed collateral agreements with the distributors to buy back products unsold after 12 months. He also treated a financial analyst from a huge investment bank to a toy fair in Thailand, resulting in the rating of Manfold’s stock in the press as “outperform”. As for Wu Jiaxiong, he planned to make short-term savings by cutting down on maintenance costs and delaying the replacement of aging machinery. Wu also accepted the recommendations from his production manager, Peter Lee, to obtain cheaper but lower grade material although there were rumors that Peter might be too close to some suppliers.

Joseph was also acquainted with the external auditor of Manfold, Ken Tse, as they belonged to the same vintage car association. Being the godfather of Ken’s...
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