Wednesday 3 November 2010

(4 hours)

CASE STUDY
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 November 2010 Case Study: Eastern Energy Experts Ltd

List of exhibits

1 About you (Adie Maynard), your firm (Gunter Jensen LLP) and your client (Eastern
Energy Experts Limited)

2 The Kyoto accord and its implications for UK carbon emission control

3 Eastern Energy Experts Limited client file extracts: history and structure

4 Eastern Energy Experts Limited client file extracts: operations

5 Letter from Jo Carey (EEE MD) to Sukanta Woolf (GJ)

6 EEE management accounts: Summary for the 4 years ended 30 September 2009

7 Email from Bernie Zhang (EEE Call Centre Director) to Kristoff Hughes (GJ) : EEE call
centre and customer development

8 EEE operational activity data in the 4 years to 30 September 2009

9 Email from Len Wozniak (EEE Operations Director) to Kristoff Hughes: Insulation
installation

10 Average insulation costs per job

11 Website extracts
− The arguments for and against the Kyoto accord
− Extracts from UK government information re energy efficiency incentives
− How the Feed in Tariff (FIT) scheme works

12 Housing Investor Chronicle: UK government “Feed in Tariff” proposal (April 2010)

13 Email from Jo Carey to Sukanta Woolf: EEE future plans and opportunities in the UK
and abroad

14 News articles

The following items are newly provided:

15 Email from Sukanta Woolf to you: Report for EEE board

16 Email from Jo Carey to Sukanta Woolf: EEE results to 30 September 2010 and future
opportunities

17 EEE management accounts for the year ended 30 September 2010

18 Email from Dany Parker (EEE FD) to Jo Carey: Review of GPS proposal for EEE and other
future opportunities

19 Email from Len Wozniak to Jo Carey and all board members: EEE’s solar panel business

20 Recent news articles

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ICAEW/CS/N10 2 of 17
 EASTERN ENERGY EXPERTS LIMITED

Case Study requirement

You are Adie Maynard, a final-year trainee Chartered Accountant working for Gunter Jensen LLP.
You are a member of the business advisory services department and report to Sukanta Woolf. Your
current client assignment relates to Eastern Energy Experts Ltd (EEE), which provides insulation
installation services to households in the East of England.

Requirement

You are required to prepare a draft report for the EEE board, as set out in the email dated
3 November 2010 from Sukanta Woolf to you (Exhibit 15). Your report should comprise the
following four elements:

• An executive summary
• Your responses to the three detailed requirements set out in Exhibit 15, including financial
appendices (as required).

State clearly any assumptions that you make. All workings should be attached to your answer.

Your report should be balanced across the three detailed requirements, and the following time allocation
is suggested:

Reading and planning 1 hour

Performing calculations and financial analysis 1 hour
Drafting report 2 hours

Marks allocation

All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated
broadly as follows:

Applied to the four elements of your report (as described above)

• Assimilating and using information 20%
• Structuring problems and solutions 30%
• Applying judgement 25%
• Drawing conclusions and making recommendations 20%
95%
Applied to your report as a whole
• Demonstrating integrative and multidisciplinary skills 5%
100%

Approximately 15% of the marks are awarded for the executive summary and 10% for the
appropriate discussion of ethical issues within your answer to the requirements.

In planning your report, you should be aware that not attempting one of the requirements will have a
significantly detrimental effect on your chances of success, as will not submitting an executive
summary. In addition, as indicated above, all four skills areas will be assessed under each of the four
elements of your report. Accordingly, not demonstrating your judgement and failing to include
appropriate conclusions and/or recommendations in each element of your report will affect your
chances of success.

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 EXHIBIT 15
EMAIL

From: Sukanta Woolf

To: Adie Maynard
Date: 3 November 2010
Subject: Report for EEE board

Yesterday I received an email from Jo Carey of EEE (Exhibit 16) which I am forwarding to you
together with the following items:

• EEE’s management accounts for the year to 30 September 2010 (Exhibit 17)
• Some detailed figures prepared by Dany Parker regarding an opportunity for EEE to work with
Victoria Power Supply (VPS) in Australia (Exhibit 18)
• An email from Len Wozniak about EEE’s solar panel business (Exhibit 19)
• Two news articles concerning solar panels (Exhibit 20).

I have spoken with Jo, and she has asked us to produce a report to the EEE board dealing with a
number of matters. I would like you to prepare a draft of this report, comprising the following:

1. A review of EEE’s management accounts for the year to 30 September 2010 so that the
members of the board understand the company’s financial performance.

You should cover revenue, gross profit and operating profit, evaluating these figures against the
actual results for the year to 30 September 2009. You should discuss the results for each of the
business activities and also comment on the cash flow statement.

2. An analysis of Dany Parker’s proposal for the board to consider expanding into Victoria state in
Australia, where there is an opportunity for EEE to repeat its UK success.

In your analysis, you should include a calculation of the project’s profitability for the total 5-year
period and comments on the assumptions made by EEE. You should prepare a sensitivity
analysis evaluating the effect of a change in the estimated success rate on calls being converted
to contracts. You should also consider the opportunities for, and threats to, EEE of this proposed
expansion into Australia, including movements in the Aus $:£ exchange rate.

3. An assessment of the economic benefits and risks relating to EEE’s proposed strategy to
develop its business from solar panel sales and solar panel installation in the UK.

Your assessment should consider how EEE might deal with these risks, and also address
Jo Carey’s and Len Wozniak’s concerns over, and the ethical issues relating to, the
development of EEE’s solar panel business.

I look forward to receiving your draft report.

Sukanta

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 EXHIBIT 16

EMAIL
From: Jo Carey
To: Sukanta Woolf
Date: 2 November 2010
Subject: EEE results to 30 September 2010 and future opportunities

I am attaching a copy of the management accounts for the year to 30 September 2010 for your
information and analysis (Exhibit 17). I would appreciate your analysis for the EEE board of the
income and cash flow statements.

Victoria Power Supply

The board would also welcome your review of the Global Power Supply (GPS) proposal for a
project in Victoria, Australia set out in Dany Parker’s email (Exhibit 18). In particular we would like
an overall calculation of the project’s profitability for the total 5-year period, together with your
consideration of our assumptions for this project.

The proposal is to work with GPS’s Australian operation – Victoria Power Supply (VPS) – to
provide an insulation installation programme similar to that in the UK. The project will be located
near Melbourne in the state of Victoria, in south-east Australia, which has a similar climate to the
UK. It appears that the regional authorities in Australia have decided to use the same method as in
the UK to attempt to reduce regional carbon dioxide emissions by using power companies to entice
households to insulate their homes.

The Australian market presents an interesting opportunity for us, not only because there is no
problem with the language, but we can also use our UK call centre with a new work pattern to take
advantage of the time difference (Australia is 9-11 hours ahead of the UK). In addition, Bernie
Zhang was born in Melbourne and Len Wozniak did his MBA programme there. Both of them are
entitled to work in Australia, which makes it an easy market in which to transfer our expertise.

In terms of size of project for EEE, the overall market is similar to the one in East England.
However, we believe that we have learnt from our experience in the UK and because of that we
hope that we will be able to achieve a better contract conversion rate in Australia than here.

Solar panel business

In the UK, EEE needs to decide whether to expand significantly its solar panel business, and in
what way, in order to take advantage of the increasing number of opportunities. It is apparent that
the solar panel industry is facing a number of important issues as identified by Len Wozniak in his
email (Exhibit 19) and in various newspaper articles concerning solar panel supply and power
generation (Exhibit 20).

The public demands to be more informed on the details of any new industry. Some statements
made by promoters of the installation of solar panels about the savings to be made may have been
overly optimistic, or obscure. We are aware of the risks of being tarnished by the general public
scepticism and we would welcome your professional views on how we might address them.

Jo Carey

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 EXHIBIT 17

Eastern Energy Experts Limited Management Accounts

Income statement
For the year ended 30 September 2010
Notes £000s

Revenue 1 9,949
Cost of sales 2 (6,602)
Gross profit 3,347
Overheads/administrative 3 (2,127)
Earnings before interest, tax, depreciation 1,220
Depreciation 4 (290)
Loss on disposal of non-current assets (42)
Operating profit 888
Net finance expenses (15)
Profit before taxation 873
Taxation (244)
Profit after taxation 629
Dividends paid (200)
Profit for the year after tax and dividends 429

Statement of financial position

As at 30 September 2010
£000s
Non-current assets
Tangible assets 4 350

Current assets
Inventories 164
Receivables 816
Cash and cash equivalents 1,658
2,638

Total assets 2,988

Shareholders' equity
Ordinary share capital 100
Retained earnings 2,164
Total shareholders' equity 2,264

Current liabilities 724

Total shareholders' equity and liabilities 2,988

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Eastern Energy Experts Limited Management Accounts

Cash flow statement

For the year ended 30 September 2010
£000s

Cash flows from operating activities

Profit before tax 873
Adjustments for:
Depreciation 290
Loss on disposal of non-current assets 42
Net finance expenses 15
1,220
Change in receivables 305
Change in inventories 81
Change in payables (116)
Cash generated from operations 1,490
Taxation paid (372)
Net finance expenses (15)
Net cash from operating activities 1,103

Investing activities
Purchase of equipment and vehicles (54)
Proceeds from disposal of equipment and vehicles 18
Net cash used in investing activities (36)

Financing activities
Dividends paid (200)
Net cash (used in)/from financing activities (200)

Net change in cash and cash equivalents 867

Cash and cash equivalents at start of year 791

Cash and cash equivalents at end of year 1,658

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Eastern Energy Experts Limited Management Accounts
Notes to the accounts

Year ended 30 September 2010

£000s
Note 1 Revenue
Commission from AEPS 1,354
Installation projects 5,259
Alternative energy products
− Solar panels 2,510
− Alternative energy stoves 826
3,336
Total revenue 9,949

Note 2 Cost of sales

Call centre direct costs
Staff costs 122
Rent of premises 72
Telephone, internet 31
225
Installation project costs
EEE installation engineers & supervisors 1,165
Subcontractors 2,470
Materials 1,240
4,875
Alternative energy products
Solar panels 1,089
Alternative energy stoves 413
1,502

Total cost of sales 6,602

Note 3 Overheads/administrative
Staff costs including directors 933
Motor, travelling & subsistence 91
Staff training 152
Other establishment costs 265
Repairs & maintenance 90
Marketing costs 322
General administration & other costs 129
Run-off insurance 145
Total overheads/administrative 2,127

The run-off insurance premium paid is to cover any remedial work necessary in the next 3 years
relating to problems concerning insulation installations already completed by EEE.

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Eastern Energy Experts Limited Management Accounts
Notes to the accounts

Note 4 Non-current assets

Tangible assets Call centre
& office Motor Installation Total
equipment vehicles equipment
£000s £000s £000s £000s
Cost
At 1 October 2009 523 726 216 1,465
Additions 34 - 20 54
Disposals (28) (252) (21) (301)
At 30 September 2010 529 474 215 1,218
Depreciation
At 1 October 2009 290 447 82 819
On disposals (18) (209) (14) (241)
Charge for the year 121 118 51 290
At 30 September 2010 393 356 119 868
Carrying amount 30 September 2010 136 118 96 350

Note 5 Staff numbers 2010

Average number of staff during the year was:
Directors 4
Supervisors 17
Engineers 10
Call centre 7
Administration 19
57

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 EXHIBIT 18
EMAIL
From: Dany Parker
To: Jo Carey
Date: 1 November 2010
Subject: Review of GPS proposal for EEE and other future opportunities

Further to our discussions about the GPS proposal for the project in Victoria, Australia working with
Victoria Power Supply (VPS), please find below a summary of the key information and my
estimates and assumptions for that work, based on information supplied by GPS:

1) Victoria has a total population of 5.5 million, with 2 million households/properties.

2) 75% of the population of Victoria live in one city area, Melbourne. The overall profile of
properties in this region is very similar to the East Anglian region in the UK.
3) VPS has 20% of the total market of households/properties in this region for EEE to contact.
4) 25% of these properties (mainly in Melbourne) are not suitable for insulation as they are
apartment blocks or were built to appropriate insulation standards.
5) Using EEE call centre statistics and local advisors, the conversion rate of calls to contracts for
the remaining potential market may be as high as 1 in 3.
6) The reasons for this 1 in 3 expected conversion rate are:
• Based on independent market research, owners of 20% of houses and apartments claim
that their property has had loft and/or cavity wall insulation installed since construction.
• 25% of those called will refuse to consider the scheme and will dislike unsolicited contact.
• In Australia 20% of this potential market will want to do the work themselves – they can
claim a fixed fee ‘grant’ for doing this from the authorities in Victoria if they can produce the
appropriate receipts for materials.
• The remainder have indicated a high willingness to participate in an insulation scheme.
7) Because of the very high incidence of households with internet connections in Australia (more
than 80%), EEE should be able to market its insulation work via this medium – which may
make the success rate even higher.
8) The timing of the work and the contract/work profile is:

Customers
Year ended 30 September 2011 2012 2013 2014 2015
Signed contracts 12,000 24,000 28,000 22,000 14,000
Installations completed 10,000 20,000 24,000 30,000 16,000

9) Forecast income and related costs:

• VPS will pay EEE Aus $200 commission revenue per signed contract plus Aus $600 per
completed installation.
• Call centre costs would be the same percentage of commission revenue as in the UK in
2009.
• Only local subcontractors would be used for this work; the total installation cost (including
materials and supervision) is estimated at Aus $578 per contract.
• There will be fixed costs relating to the installation work in Australia estimated at
Aus $400,000 per annum.
• Annual fixed costs in the UK of £1,300,000 per annum will be attributed to the project.
10) For project planning purposes, an exchange rate of Aus $2 = £1 has been assumed, being the
average rate for the past two years.

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 EXHIBIT 19
EMAIL
From: Len Wozniak
To: Jo Carey and all board members
Date: 30 October 2010
Subject: EEE’s solar panel business

As part of my review of current operations, I am writing to inform the board about a number of
critical matters which are affecting the speed of the development of the solar panel business.

It appears that there are concerns amongst potential customers surrounding the long-term
government support for the annual Feed-in Tariff, given the need to reduce public expenditure in all
sectors. The main concerns are that:

• a 25-year subsidy programme has plenty of scope for outright failure, or to face significant
reductions caused by changes in current UK Government policies and priorities
• any future change in government may bring about a change in policy emphasis, or a
change in priority funding towards households which meet more stringent economic and
social deprivation criteria
• even if the subsidy time period is maintained, any of the rates for the three specific
components making up the overall FIT rates may fall significantly behind future increases in
energy unit costs
• there has been no specific guarantee that FIT rates will rise in line with energy price
increases and specific power company charges, only that FIT will rise in line with the Retail
Price Index.

There is also the more immediate and specific problem, as far as EEE is concerned, of the
sourcing of solar panels. One of the attached articles (see Exhibit 20) encapsulates the issue,
which is also being raised in the popular daily press. Because of increased prices from its current
suppliers, EEE has recently been sourcing about one third of its solar panels from abroad,
including Vietnam.

We are also aware of a number of “solar power generating companies” who are becoming
increasingly active in this industry. It is relatively easy to set up such a business – particularly at
this time. EEE needs to consider whether it can, or should, negotiate supply and possibly
installation contracts with these solar power generating companies. This could become a
successful and profitable operation – particularly if these generating companies target lower
income households.

Len

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 EXHIBIT 20

The UK House Constructor News October 2010

Accuracy of solar panel energy generation is questioned

There is an increasing level of scepticism, accentuated by certain sections of the mainstream

press, which relates to the accuracy of the claims concerning the level of energy to be saved by
households that install solar panels. This is because the savings claimed are quoted in thermal
units which the average person does not understand; and the figures quoted are household
“averages” which it can be very difficult to verify.

There has been considerable reaction from the general public, including a large number of solar
panel customers, to the news that over the past few months significant quantities of solar panels
have been imported from Vietnam and installed in properties throughout the UK. There are a
number of quality and environmental concerns, including evidence that these imported panels:
• have a lower solar energy conversion capability resulting in lower electricity generation per
panel
• appear to lose their effectiveness at generating electricity more rapidly than other panels
• are structurally weak which means the panel is prone to crack and break when subject to high
winds
• have fixings which are liable to snap after a time, when installed on steep roofs
• are not “self cleaning”, meaning that householders have to make arrangements to have them
cleaned more regularly to preserve maximum efficiency
• are manufactured using non-renewable resources.

All of this is on top of other negative publicity concerning the qualifications of solar panel installers
and the quality of installation work.

DAILY NEWS RECORD October 2010

Sunny offer: Free solar panels and lower electricity bills
Homes throughout the UK are being offered the chance to rent their roofs to “solar power
generating companies” in exchange for cheaper electricity bills. These companies are proposing
schemes which involve the installation of solar panels at no cost to the householder. The companies
claim that the householders will benefit from a saving in electricity cost of well over 50% of their
annual bills – the average home saving will be approximately £340 a year. However, the
homeowners will be tied into contracts with these companies for 25 years; so if they sell their
homes, the buyer will generally have to take on the contract. Also, the installers’ businesses might
fail, making it hard for homeowners to enforce maintenance contracts.

These schemes mean that homeowners who cannot afford the typical cost (over £10,000) of
installing panels will still be able to take advantage of the UK Government’s FIT scheme for small-
scale renewable forms of electricity. Energy companies pay homeowners a fixed rate for every unit
of electricity generated by this method, regardless of whether the home uses it or it is fed back into
the main UK grid. Under the “rent your roof” schemes, the solar power generating companies will
earn the full FIT of approximately £900 per year, per roof.

The energy companies propose to pass on the full costs of the scheme to all consumers through their
energy bills, meaning that homes without solar panels will end up paying for those who have had
solar panels installed.

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