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Houston We Have A Problem They Paid Themselves Bonuses Case Solution

Solution Id Length Case Author Case Publisher
2100 1567 Words (7 Pages) Pascale Lapointe-Antunes, Deborah McPhee North American Case Research Association : NA0514
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Amanda Walsh, interim CFO, had figured out that there was something majorly wrong going on with VPC. The call with Houston’s Ken Duffy had put her in a position where she could not be sure of her place as the company’s CFO. Vanderville Plastics Company (VPC)had a lot of severe financial, Management, and control issues when she first joined the company as Controller. The company was under the scrutiny of its owners, who had placed an independent Analyst, Robert, to figure out the root cause of the cash-flow problems. Throughout Amanda’s journey in VPC, she chose to ignore a lot of red flags. 

Case Analysis for Houston We Have A Problem They Paid Themselves Bonuses Case Solution

Vanderville Plastics Company (VPC), located in Meadowbrook, was founded in the year 1962 as a family business. It manufactured products and supplied them to Original Equipment Manufacturers (OEM) that operated in the health care industry. VPC soon became a significant presence in an industry that was highly fragmented with hundreds of small and medium enterprises. The next generation in the family expressed an interest in selling off the company. The plastics industry was booming at that stage, with growth rates higher than the economy and healthy margins. In 1996 it was bought by Miami, a private equity firm, for $20 Million. 20% of the common shares were sold to senior employees in VPC.

The first issue starts with the fact that Peter had withheld crucial information about the company’s financials from Amanda. The Auditors’ statements showed that the company might not be a going concern due to the acute level of cash problems it faced, a large amount of debt, and interest payments. To add to that, financials from two years prior, 2002 and 2003, had not yet been finalized and were still in the draft stage. 

Peter stated that the reason VPC could not service its debt was due to the Canadian-US dollar parity. The weaker Canadian dollar gave an advantage to the Canadian market due to its lower labor costs and high margin. In 2003, the Canadian dollar gained against its US counterpart, and the industry suffered. Miami had engaged in acquiring three companies and had left VPC $30 Million in debt. The banks found VPC incapable of servicing the debt. They were forced to sell off the debt and preferred equity to two private equity firms, Houston and Jersey, at a discount. 

The three equity firms agreed to restructure the debt and clean the balance sheet of VPC. VPC could then be a going concern and could secure financing. However, VPC faced problems in agreeing with all three equity firms on the same accounting principles. Jersey was proving to be a problem for VPC, and Miami was preparing its strategy to exit from the ownership of the company.

The divided ownership of the company was a major hurdle in uniting for a single strategy, and the same accounting principles, which in turn resulted in weaker internal control and less transparency. Conflict and hostility between VPC and Jersey meant VPC had the incentive to withhold information from the owners.

Another major problem Amanda noticed was the weak control and existence of HR in the company. There was no Vice President for HR, and the HR Director reported to the CFO. Peter was responsible for HR and payroll, even though the Auditors had pointed out that salary should be reviewed by Management before finalization. Janis, the HR Director, was not involved with any of the senior staff and was not called to meetings discussing payroll and bonuses. Janis was not involved in VPC’s bonus decisions at all. The concentrated control can lead to fraud and risk management as information is held only at the top (Goldmann, 2010).

The owners of VPC were responsible for evaluating the performance by setting targets at the start of the year. The unconsolidated adjusted EBITDA did not include management fees, one-time costs or unusual expenses incurred by owners. If the goal was met at the end of the year, Miami would allow VPC to distribute a bonus among the employees. Michael had control over the specifications of the bonus pool. The EBITDA was judged based on audited financials, so the Management could not artificially inflate the numbers. However, the bonuses for 2003 and 2004 were paid without audited financials as delays were caused by Houston and Jersey.

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