School of Accountancy, Stellenbosch University

Risk and Information Management 784

BComHons (Management Accounting)

Test – 19 July 2021

Examiners: J Smeda
LP Steenkamp
A van Zyl

Internal moderator: R Goosen

External moderator: A Bester

Marks: 85
Duration: 2.5 hours
Number of questions: 1 (All questions must be answered)

INSTRUCTIONS:
1. You are allowed 150 minutes to answer this question paper.
2. You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned.
Question 1

LSC is a public company operating in a South American country which is located near the equator. It
is listed on the local stock exchange.

LSC operates the largest online store in its country. It sells an extremely wide variety of goods, but
not any food. It is a dominant force in the local market, but it only operates in the one country. There
are other online retailers operating in the country, but none are as big as LSC. LSC prides itself on
the following three characteristics:

• Having a very wide variety of goods

• Very quick delivery (within 3 hours in the cities where the distribution centres are located)
• Low prices

LSC has two operating models running simultaneously:

• Selling own goods: Goods are purchased from a wide variety of suppliers, both locally and
internationally. These goods are stored in seven massive distribution centres spread evenly
across the country. Customers place their orders on the website or app and the orders are
fulfilled as quickly as possible from one of the seven distribution centres.
• Acting as an agent: Other businesses can use LSC’s platform to sell their goods. These other
businesses are called “Independents”. Customers place orders on LSC’s website. The order
is then automatically and immediately passed on to the Independents, who fulfil the order. LSC
takes a 3% flat rate commission on every sale and handles the payment. The responsibility for
fulfilment of the order rests with the Independent. The independents receive their payouts once
a month for the preceding month’s sales, net of commission.

The LSC website and app and all business information are hosted on a cloud-based platform where
they rent processing and storage capacity from an external company, ExCloud. LSC does not own its
own servers and pays monthly rental. This enables LSC to scale capacity, both storage and
processing, up and down as needed, without investing in hardware that could potentially stand idle.
ExCloud is one of the top 5 cloud suppliers in the world and host many businesses on its platforms.
ExCloud is responsible for security and backups.

Where LSC sells its own goods, it has an exclusive contract with the country’s largest courier service
to deliver the items that customers bought. The contract with LSC states that LSC deliveries will
always be assigned priority status above other deliveries. This is causing some backlash in the market,
because the courier service is not always able to service their other customers at the promised
customer care levels. For orders over a certain level, delivery costs are carried by LSC.

The distribution centres make use of low-skilled and low wage labour to pick the orders and prepare
the packages for delivery. It is a fast-paced environment, and the staff are paid based on the number
of orders they manage to fulfil during their shifts. Due to the size of the distribution centres, they are
not air-conditioned. This regularly leads to staff being dehydrated and fainting. The country’s labour
laws are very lenient and LSC is not breaking any laws. However, there are regular social media posts
about the working conditions at LSC warehouses.

Required
(a) Identify and discuss the downside risks currently faced by LSC from the above information.

(40 marks)

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One of the junior finance staff members alerted the operations manager of the following social media
post of a week ago:
“LSC is selling t-shirts that with pornographic images on! I reported this a week ago and it is still on
their website!!!”

The post has been shared three times and liked once.

Upon investigation, LSC has now found several items that are indeed pornographic and universally
objectionable – all from two independent sellers using the LSC platform. The independents and their
products have been removed immediately from the website. No further action was taken.

Required
(b) Discuss the actions of LSC in relation to the above scenario.
(5 marks)

(c) Why is it worrying that a junior finance staff member found the social media post and what
should be done about this?
(4 marks)

The following news report appeared in the financial press today:

LSC going brick and mortar?

LSC has surprised the market today with a brief announcement that the company is purchasing, in
cash, the full shareholding in FreshFoods Ltd. Freshfoods Ltd operates 735 convenience stores in
four different countries. They focus exclusively on selling food and drinks (groceries, not fast food).
Little is known about the financial performance of FreshFoods, as the shares were held privately by
the reclusive Rudero family.

LSC stated that they will use FreshFoods to expand into the grocery and foodstuff delivery market,
while keeping the physical retail operations running as well. FreshFoods has been expanding
aggressively in the past three years and this will continue for the foreseeable future.

Required
(d) You are a consultant to a competitor of LSC. Your client is very interested in the action of LSC
and is considering whether they should follow the same route.
Write a report to your client in which you discuss, based on this report in the financial press,:
(i) the strategy that LSC followed and the attendant risks related to this strategy
(12 marks)
(ii) the risk management processes they should have followed when considering this
investment,
(8 marks)
(iii) other additional risks that LSC will face due to this new investment (not addressed
elsewhere).
(16 marks)

(Total marks = 85)

END OF PAPER

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