CASE 1: 2GO GROUP INC

GROUP 3 (ISAH, LOMUNDAYA, SALIC)

1. What is the strategic importance of 2GO to SM Investments Group?

SM Investments Group acquiring 2GO is SMIC’s strategy in addressing the rise of

industries like 2GO. 2GO is very known and popular as an integrated transport solutions
provider, an industry that is on the trend nowadays. E-commerce is on the rise, so it’s a
strategy of SM in going into such industry. The economy is growing fast along with
technology. As the largest retail business in the Philippines, investing into a logistics
company is a good step to reach the millions of customers nationwide. With the largest
retail business and the largest logistics business coming together, it would be beneficial
for both parties.

2. Was there a failure of due diligence by the SM Investments Group?

SM Investments Group invested before the restatement of 2GO on their financial

statements. So, we believe that there was no failure of due diligence by SM Investments
Group.

3. What is the impact of the AFS restatement on investors?

If we put ourselves into the shoes of the investors, obviously, restatements of 2GO
that led to a major drop of actual profit would shake our decisions of either pulling our
investments out or not. It’s a normal reaction for an investor to lose confidence in the
credibility of both the entity and the auditors. There would obviously be a negative impact
because of the AFS restatement. It would worry the investors.

4. Did the SEC, PSE, and external auditors follow governance principles in this case?

As far as SEC and PSE are concerned, they followed governance principles. But
in the case of the external auditor, the previous external auditor (KPMG) didn’t follow the
governance principles. KPMG gave an opinion that practically misled the users of the
financial information, which violates the integrity and objectivity principle. SGV, the
succeeding external audit, followed governance principles.

5. What internal controls over financial reporting should a company adopt in order to ensure
that there would be no failure in in identifying accounting problems?

6. Suppose you were part of the internal audit, propose policies to detect improper
accounting as applicable in this case.
 7. Should the Audit Committee be made responsible for not being aware or not doing
anything to address a brewing problem in the corporation?

The primary purpose of a company’s audit committee is to provide oversight of the

financial reporting process, the audit process, the company’s system of internal
controls and compliance with laws and regulations. It has the task of ensuring integrity of
financial statements. It’s their job to address problems, it’s their responsibility to take
action. Yes, they should be made responsible.

8. What liabilities does an external auditor have for failing in its obligation to identify material
misstatements in the FS?

An external auditor is liable for negligence. An external auditor is liable for not being
prudent, for not performing a reasonable care. An external auditor can also be liable for fraud.

Detective Internal Controls

Detective internal controls are designed to find errors after they have occurred. They serve as
part of a checks-and-balances system and to determine how efficient policies are. Examples
include surprise cash counts, taking inventory, review and approval of accounting work, internal
audits, peer reviews, and enforcement of job descriptions and expectations. Detective internal
controls also help protect assets. For instance, if a cashier does not know when her cash drawer
will be counted, she may be more likely to be honest.

Preventative Internal Controls

Preventative internal controls are put into place to keep errors and irregularities from happening.
While detective controls usually occur irregularly, preventative controls usually occur on a
regular basis. They range from locking the building before leaving to entering a password before
completing a transaction. Other preventative controls include testing for clerical accuracy,
backing up computer data, drug testing of employees, employee screening and training
programs, segregation of duties, enforced vacations, obtaining approval before processing a
transaction and having physical control over assets (locking money in a safe, for example).

Corrective Internal Controls

As the name suggests, corrective internal controls are put into place to correct any errors that
were found by the detective internal controls. When an error is made, employees should follow
whatever procedures have been put into place to correct the error, such as reporting the problem
to a supervisor. Training programs and progressive discipline for errors are other examples of
corrective internal controls.

Limitations
It is important to keep in mind that internal controls, while effective, are not a guarantee that a
company's objectives will be met. Human errors and computer errors are not accounted for by
internal controls. In addition, internal controls assume employees are honest and that they would
not bypass guidelines or alter data to benefit themselves.