BM2001

CASE ANALYSIS: Big Builder’s Conglomerates Inc.

Big Builder’s Conglomerates Inc. is one of the biggest construction companies in the town of Bamban, a class
D municipality of Tarlac. The company is a family corporation owned by the clan of Gabriel Sy. The Sy family
also owns one of the top rural banks in their town, and lately, they started a new venture of developing a
city mall. The three (3) business ventures have majority interlocking boards of directors nominated mostly by
Mr. Sy. In short, Mr. Sy is the majority stockholder of the three (3) companies and acts as the Chairman and
President. They have been compliant in all of the regulatory requirements, particularly for the construction
company and rural bank. The new city mall venture is just one (1) year in operation when the government’s
Build, Build, Build Project in the nearby New Clark Green City had pushed the development in the said town.
Thus, an ambitious expansion was planned for GSy Citymall.

At present, the mall is leasing the one-hectare land from Big Builder’s Conglomerates with a 10-year lease
contract. The building was constructed with a cost of P10M a year ago. Under the new expansion plan, an
additional P40M is needed. The Special Consultant on Financial and Management Advisory of the three (3)
companies proposed to the board of GSy Citymall of getting a P10M loan from their sister company, Rural
Bank. Aside from that, the company has existing P8M for the construction of their mall booked under
Leasehold Rights and Improvement. It also had issued common stocks to new investors for the amount of
P30M. The Rural Bank does not require collaterals from the loans of both the construction and Citymall,
because, Mr. Gabriel Sy is maintaining a substantial personal special savings deposit account enjoying
preferential Interest rate with the bank. The Rural Bank charges the GSy Citymall a little bit high retail rate on
its loan and the lowest and super-prime rate to Big Builder’s.

The funding of the expansion of the mall was successful, and they expect its completion before the year
ends. Of the three (3) companies, the construction business is the most profitable, with its total assets
almost becoming double every two (2) years, the Rural Bank, remains to produce moderate income, and the
Citymall still incurring losses on its second year of operations. The three (3) companies engaged three (3)
different major audit firms in the area so that they don’t consolidate their conglomerates’ statements of
financial position. They have been successful every year in their filing and submissions of reports to different
regulatory bodies as they are well connected

Required:
Answer the following (4 items x 5 points):
a. Assuming you are the auditor of the three (3) companies: Builder’s Conglomerates, Rural Bank, and
GSy City Mall, what are the major issues, concerns, and disclosures that need to be addressed? (TIP:
Focus more on Related Party Transaction)
Some major problems and concerns that need to be addressed is the fact that there is only one Chairman
presiding the 3 businesses mentioned. It is better to have one chairman each so that there would not be any
confusion when it comes to judgement and decision making as it is easier that each chairman would be able to
monitor each business properly since evidently, 3 businesses will not have the same performance such as with
regards to their profits and losses. Another thing that should be addressed is that the sister company Rural
Bank is charging GSY Citymall a little bit high retail rate on its loan and it could cause a huge financial problem
since Citymall is still incurring losses on its second year of operations. It is also better that they consolidate
their statements of financial position so that they could determine how they can resolve losses incurred by a
company by the other and if the conglomerate businesses are able to support each other. The disclosures that
need to be addressed are:
 The company should establish corporate disclosure policies and procedures that will help give a fair
and complete picture of its financial condition, results and business operations (especially because as
conglomerate businesses, the performance of each individual business must be specified.
 The company should disclose its policies governing Related Party Transactions and other unusual or
infrequently occurring transactions in their Manual on Corporate governance (since RPT’s frequently
 happen on conglomerate businesses)

b. After identifying the major issues, do you think Big Builder’s Conglomerates has effective disclosures
policies and procedures? Why or why not?

The company does not have effective disclosure policies and procedures because their statements of financial
position are not consolidated. This will result to poor disclosure of policies and procedures that that help give
a fair and complete picture of the conglomerate’s financial condition, results, and operations.

c. How can Big Builder’s improve their disclosure policies and procedures? Create one (1) based on your
knowledge from the Code.

The company should improve on their transparency by ensuring better protection of shareholders and
stakeholders’ rights through full disclosure of the company’s corporate governance policies, programs and
procedures. They should also consolidate their financial statements so that the users will have better
understanding of the company’s condition, results and operations.

d. What can you say about the hiring of Special Consultant on Financial and Management Advisory by
Mr. Sy?
The hiring of the Special Consultant on Financial and Management Advisory is good since it will be beneficial
for the company so that it can manage the 3 companies very well and offer advice on how the businesses can
be profitable. However, the consultant should have exercised wise judgement and thought carefully on getting
a P10 million loan from Rural bank since it proved to be burdensome on its investments for mall’s expansion
and it turned out wasted the assets that they for investments because they just thought of improving the mall
without thinking carefully if this would be profitable and worth the risk since City mall started to incur losses on
its second year of operations regardless of its expansion.
Rubric for grading:
CRITERIA PERFORMANCE INDICATORS POINTS
Content Applicable ideas were presented 3
Organization of Ideas Details were discussed with no grammatical error 2
TOTAL 5

02 Task Performance 1 *Property of STI

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