Case Study 2 – 2022 – Information on the day - SA

2022 Case Study 2

Information on the Day
- SA
2022
Professional Competence Development
Programme

CASE STUDY 2

INFORMATION ON
THE DAY OF THE EXAM

Rules During the Assessment Period

 The Assessment Period is defined as the period that commences with the release
of the IOD and ends on the submission deadline.
 Group responses can be submitted between 27 May and 5 June, but by no later
than 4pm on Sunday 5 June.
 Once the IOD has been released, candidates must restrict their discussions to
within their group. For this reason, the class 5 Q&A will not deal with any specific
issues relating to the PharmaTec Case but rather concentrate on the process
required to prepare for an Assessment of Professional Competence.

Disclaimer: All names of persons, places, and business entities mentioned in this case study are purely fictitious in
nature and any resemblance to real people, living or dead, places or business entities are purely coincidental.

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 Case Study 2 – 2022 – Information on the day - SA

APT PROFESSIONAL COMPETENCE DEVELOPMENT PROGRAMME

CASE STUDY 2
INFORMATION ON THE DAY OF THE EXAM

Inbox Newly Qualified CA(SA)

INBOX
Doc From Subject Attachment Received
Mail
1 Peter Florrick (CFO) Research and Development Costs - 27/05/2022
2 Alicia Florrick (CEO) Fwd: Status update – Business -
27/05/2022
Development
Calendar 3 Jeff Trollip (Internal Audit Assistance with risk governance Pharmatec Risk Register 27/05/2022
Manager)
4 Louis Canning (GFC) Presentation on ethical principles Presentation to management 27/05/2022
- Ethical principles –
PharmaTec
Contacts

Tasks

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DOCUMENT 1

EMAIL FROM CFO TO NEWLY QUALIFIED CA(SA)

From: Peter Florrick (CFO)

Sent: 27 May 2022
To: Newly Qualified CA(SA)
Subject: Research and Development Costs

Dear Newly Qualified CA

I trust that you have settled down well at PharmaTec.

The research and development area of our business is extremely complex and therefore we
apply our minds carefully to the accounting treatment of these costs in our financial statements.

Diane has indicated that the medical scientists are currently in the process of developing a
specialised anaesthetic formulation to be used in the alleviation of pain induced during the
labour process. This anaesthetic will be an improvement to the current locally available
products and promises less side effects than the commonly used anaesthetic. Most new moms
often complain of back aches post birth as a direct result of the anaesthetic and our hope is
that we can produce something exceptional. We would of course prefer to begin capitalising
these internal development costs as soon as possible but I am aware that IAS 38: Intangible
Assets is particularly specific about the timing of the capitalisation of these costs.

I have a meeting with Diane next week and need your assistance in formulating questions that
will assist us with the process of acquiring information needed to establish the timing of the
development cost capitalisation. Please can you draft some specific questions we need to ask
in order to determine when we can begin capitalisation of the research and development costs
incurred for the anaesthetic in terms of IAS 38: Intangible Assets. This has a massive
implication for our balance sheet and due to the nature of the accounting standards, I would
like to understand the basis of your questions. Therefore, for each question raised, please
provide a brief reason in light of the anaesthetic research and development process. As part of
the questions drafted please bear in mind any supporting documentation we will need to gather
in preparation for the audit.

Regards

Peter Florrick CA(SA)

CFO

NOTICE: Please note that this email and the contents thereof are subject to the standard PharmaTec (Pty) Ltd email disclaimer. See
http://www.pharmatec.co.za/disclaimer/email.htm for more details.

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DOCUMENT 2

EMAIL FROM CEO TO GFC

From: Alicia Florrick (CEO)

Sent: 27 May 2022
To: Louis Canning (GFC); Newly Qualified CA(SA)
Subject: Fwd: Status update – Business Development

Hi Louis

I see that you were not cc’d on the mail from Ian.

See below an email in response to my request to identifying possible growth and expansion
opportunities. Although Ian hasn’t yet provided me with possible strategies, he has identified a
potential acquisition.

As highlighted in my original email to Ian, I share in his excitement about the opportunity, but he
has not yet identified other alternatives which would assist us in achieving our overarching goal
of creating sustainable stakeholder value. I would like to rope in the analytical skills of you and
your new recruit to assist me to draft a list of questions to Ian which would ensure we reach the
right decision regarding this opportunity. Please provide reasons for each (or group of related)
questions asked. In addition, please identify and briefly motivate other opportunities for growth
and expansion.

Looking forward to hearing from you.

Regards

Alicia

From: Ian Pillay

Sent: 27 May 2022
To: Alicia Florrick (CEO)
Subject: RE: Status update – Business Development

Hi Alicia

The team is excited to present to you and the Board an acquisition opportunity which we believe
will parachute our business to new heights without needing to incur excessive R&D expenditure.

Nutrivex, a privately owned diet supplement company owned by couple Kalinda Sharma and
Will Gardener, owns a number of brands which includes well-known brands in the market such
as Nutritech, Biogen and USN but also a number of unknown brands such as MuscleUp, Osteo
Flex and Pureman’s Pride.

We are exploring an opportunity to buy USN, Biogen, MuscleUp and Osteo Flex as part of an
acquisition.

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Based on the data shared in the virtual room, we believe a fair valuation for the brands are 3.1
times the value of Nutrivex’s sales for the brands, and a multiple of 16.8 times of their earnings
before interest, before tax, depreciation and amortisation (EBITDA).

We expect that we can complete the transaction during the second half of this year. This
acquisition is structured to specifically exclude nutritional products which would be in direct
competition with our current products. It is also worth noting that Nutrivex has established a
significant e-commerce footprint during the pandemic by growing at a 5x multiplier.

The brands to be acquired had sales of R13 million in the year to March 2022, with an EBITDA
margin of 18.3%. We expect this margin to increase above the PharmaTec average margin
once synergies are fully implemented by 2025. Given the fragmented market on nutritional
supplements, the acquisition of these brands will provide us with an additional 5% market share
on our existing 2%.

I am aware of your request for the provision of information on other opportunities, but we think
this opportunity is rife with market expansive possibility and believe that it has potential to
achieve a number of our strategic objectives.

We still have time to draft that outline you requested but I just felt we should present this
opportunity to you in the meantime.

Regards

Ian Pillay
Business Development

NOTICE: Please note that this email and the contents thereof are subject to the standard PharmaTec (Pty) Ltd email disclaimer. See
http://www.pharmatec.co.za/disclaimer/email.htm for more details.

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DOCUMENT 3

EMAIL FROM INTERNAL AUDIT MANAGER TO NEWLY QUALIFIED CA(SA)

From: Jeff Trollip (Internal Audit Manager)

Sent: 27 May 2022
To: Newly Qualified CA(SA)
Subject: Assistance with risk governance
Attached: Pharmatec Risk Register

Good morning

I hope you are well and that you are enjoying working at PharmaTec. By way of introduction, my
name is Jeff Trollip and I have recently been appointed to the internal audit department as
manager. Louis Canning suggested that I contact you for assistance with an important new
assignment.

The background – The board of directors has requested the internal audit department to identify
and report on the weaknesses and deficiencies in risk governance within PharmaTec and to
recommend improvements to the system of governance. My understanding is that board
members expressed concern about how risk is governed within the organisation and that they
inter alia want to ensure that the company complies with the King IV Code on Corporate
Governance.

I have a meeting scheduled with Alicia and Peter Florrick, as well as with Ian Pillay in two
weeks’ time. They made themselves available to answer any questions from the internal audit
department so as to provide information which could assist us with the identification of
weaknesses and deficiencies and suggestions for improvement of risk governance. I am slightly
nervous about this meeting, and I hope that you can assist with my preparation.

May I please request that you provide me with a list of questions which you think would assist
us with the identification of weaknesses and deficiencies in risk governance, as well as with
making recommendations for improvement. I will also appreciate it if you can provide a
motivation for each question to be posed to the three board members (why is this question
important or necessary?).

I asked Louis for any available documentation on risk governance. I only received the attached
risk register from him.

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May I also ask that you in your response to this request briefly explain how risk governance will
impact the external auditor’s identification and assessment of risk.

Many thanks. I am looking forward to your response by email.

Regards

Jeff Trollip
Internal Audit Manager

NOTICE: Please note that this email and the contents thereof are subject to the standard PharmaTec (Pty) Ltd email disclaimer. See
http://www.pharmatec.co.za/disclaimer/email.htm for more details.

Attachment: Pharmatec Risk Register

Likelihood Residual
of risk
occurrence (see note
Risk Management response
(see note following
following this
this table) table)
i. Macroeconomic uncertainty in The development of new
key markets from factors such as 4 markets for our products 1
Russia’s invasion of Ukraine, and
the continuation of lockdown
restrictions in China.
ii. Delay in commercialization of 4
product due to challenges
including technological
innovation, clinical trials,
regulatory approvals,
encountering infringement claims
and feasibility.
iii. Outsourcing risk with increasing 4 Adequate service level 1
reliance on third parties for key agreements with third
business functions such as parties
clinical trials, manufacturing,
sales and R&D.
iv. There is a risk of non-compliance By 30 August 2022 all
with the numerous and complex 4 senior financial staff in the 1
requirements of the Companies company must have
Act. This may give rise to our attended a seminar to
auditors raising reportable update them on the
irregularities, which may result in requirements of the
“uncomfortable” questions being Companies Act.
asked by shareholders at our All queries raised by
annual general meetings. external auditors should be
dealt with proactively – to
ensure that they can be
resolved, thereby
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preventing their inclusion in

v. Given the decline of the moral
fabric of South Africans, theft and
fraud is likely – exposing the
company to the risk of financial
losses.
the audit report.
A thorough evaluation of
4 the ethical values of 1
employees is undertaken
on appointment.
Internal controls to prevent
and detect fraud (theft) are
in place and operating
effectively.
If an employee is found to
have committed fraud or
theft, we insist that s/he
resigns with immediate
effect – else we report this
individual to the SA Police
Services.

Note: This addition to the risk register was compiled in a form consistent with the approach
currently followed in the risk register – and hence the rating of the risks is done on a scale from
1 to 5, with 5 being the highest risk and 1 being the lowest.

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DOCUMENT 4

EMAIL FROM GFC TO NEWLY QUALIFIED CA(SA)

From: Louis Canning (GFC)

Sent: 27 May 2022
To: Newly Qualified CA(SA)
Subject: Presentation on ethical principles
Attached: Presentation to management - Ethical principles – PharmaTec

Good morning

I hope you are well.

This may come as a surprise, but PharmaTec does not have a Code of Conduct to assist
employees to respond appropriately to all the ethical dilemmas in our business and company.
Peter (CFO) has therefore requested that we develop such as code and this is where I need
your assistance. My understanding is that there is now much more focus on business ethics in
the training of chartered accountants (in my days all we studied was the SAICA Code of
Conduct, and we were not really equipped with the tools to identify and respond to ethical
issues in business).

Peter and I agreed on the approach to be taken when we develop the Code of Conduct, and the
next step is for me to formulate a list of ethical principles and actions through which the
principles can be applied. That can then be used as a basis for the formulation of rules of
conduct for employees and officials of the company. We also agreed that the starting point
would be to identify the top ethical dilemmas in our business and company so that we can
ensure that the principles and actions address the important ethical dilemmas in our principles.

I have prepared the attached presentation to management in which I hope to first identify the top
5 ethical dilemmas in our business and company, followed by the formulation of ethical
principles and actions through which the principles can be applied. I did not get far with the
presentation and will appreciate your assistance with finishing the slides. I have formulated the
principles and I have also provided some examples of actions through which the principles can
be applied so that you can understand what I have in mind. Please make sure that the principles
and actions adequately cover most ethical dilemmas in our business and company. It is
important that we address all the important ethical dilemmas in the principles so feel free to add
additional principles (see last slide) where necessary.

The presentation to management is in two weeks’ time so I will appreciate your urgent attention
to this matter.

Many thanks

Louis Canning
GFC

NOTICE: Please note that this email and the contents thereof are subject to the standard PharmaTec (Pty) Ltd email disclaimer. See
http://www.pharmatec.co.za/disclaimer/email.htm for more details.

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Attachment: Presentation to management - Ethical principles – PharmaTec

Ethical principles and actions to

inform the development of
specific conduct rules for all
employees and officials
Presentation to PharmaTec management

Top 5 ethical dilemmas in our business and

our company
-
-
-
-
-

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Principle 1
We keep patients at the heart of what we do, therefore we:
- Maintain a dialogue in order to better understand the needs of
patients
- Support the common objective of timely access to medicines
-
-
-
-

Principle 2
We act with INTEGRITY, therefore we:
-
-
-
-
-
-

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Principle 3
We act with RESPECT, therefore we:
-
-
-
-
-

Principle 4
We are TRANSPARENT about our actions, therefore we:
- Share clinical trial data in a responsible manner
-
-
-
-

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Principle 5
We ???, therefore we:

---END---

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