Royal Manufacturing is a manufacturer of wind turbines. The company got its start in 1995 as a small family owned business in Windy City, Nebraska. Current CEO John Royal started the business with grants from the U.S. Environmental Protection Agency and the U.S. Small Business Administration. Bolstered by a recent interest in green energy and a desire to make the U.S. less dependent on foreign energy sources after 9/11 the company's sales have grown dramatically in the last decade. This recent growth has mostly come based on federal tax incentives for clean energy as well as technological advancement that greatly reduced the cost of these wind turbines. The rapid growth has certainly put stress on the company's operations and information systems. The company moved its headquarters in 2006 to Omaha, to be located more central to its service region and closer to a regional airport.
Company Operations
The company purchases steel and other materials to manufacture its turbines on a regular basis. The steel purchases typically come from companies, such as Nucor in Norfolk, Nebraska as well as from suppliers in the Pittsburg, Pennsylvania area. All raw materials and supplies needed are delivered to its plants in Windy City, Nebraska, Oz City, Kansas and Green Town, Iowa. These three plants are the company's only plants. The manufacturing and installation of turbines shows a seasonal pattern. Royal builds many of the turbines in the winter and early Spring, so that they are ready for installation in the warmer time of the year, when the ground is construction ready. The turbine production is a custom, advanced manufacturing process. The turbines are build on certain standard specs, but are then adjusted based on customer needs. Customization, for example, could be needed for the specific geographic location, local regulations and power needs using advanced manufacturing technology. The company also provides services such as installation as well as repairs and maintenance on the installed turbines. The parts needed for these services are also manufactured by Royal Manufacturing. The company's success is evidence of, and a text book example for, the return of manufacturing jobs to the United States. Royal is considering analyzing its current information systems needs.
Partnership with Wind IT
The software and related hardware components necessary to gather data about meteorological conditions, the power grid, and operating performance as well as to operate the turbine based on these data is provided by Wind IT. Royal and Wind IT are legally separate, financially unrelated companies, but they collaborate closely on turbine installation projects. Royal and Wind IT are partners in all Royal's turbine installations. Royal sends turbine project proposals to potential customers in consultation with Wind IT that include the production and installation of the turbine including Wind IT's hardware and software. Wind IT typically serves as a subcontractor for these prospective client proposals. A new accounting information system could potentially build efficiencies in the operations of this partnership between Royal and Wind IT as well.
Sales
The company sells its products to utility companies in Nebraska, Iowa, Kansas, and Missouri. Thus, potential customers are easy to identify for Royal's sales force of four traveling sales agents (one per state) and six sales clerks at the company's headquarters. The agents need the technical knowledge to explain the product to the potential customer. Agents also need to work in partnership with product experts at Wind IT to address IT questions related to its turbines. The sales agents are also responsible for part sales and repairs. Minor part sales and repairs often get handled by the sales staff at the corporate headquarters, though all customers have their state's sales agent as their single point of contact. Sales agents call the corporate sales staff with information regarding sales. However, often they find it easier to email the information to the corporate headquarters upon return to their home offices at night. Based on that information and after approval by the vice president of sales a standard contract will be mailed to the sales agent. Often, this process by mail is slow and overnight courier services are used to speed up the process. The sales clerks are responsible for mailing invoices to customers upon notification from the shipping department and installation & repair personnel that the transaction is complete. Any unforeseen parts that installation & repair personnel need are ordered through the sales agent.
Purchasing Department
When a manager of the production departments in any of the three plants notices that inventory levels of a certain material are low, the manager calls the company's purchasing department at the company's headquarters. The agents all have years of experience in the industry and are familiar with the suppliers in Nebraska and Pennsylvania. Suppliers have been screened through a detailed selection process and the company values its relationships with these suppliers. Because of the importance and costs of steel components in the turbines 95% of purchases relates to steel. When the steel is ordered it is important that it be delivered according to specified sizes, qualities, and thickness and labeled with identification numbers that identify both Royal's customer and the customer's specific project. One of the agents receives the request from the one of the production department managers in one of the plants, contacts the few, established suppliers to find the best deal and makes arrangements about payment and delivery. The agent then prepares a purchase order, signs it and sends a copy to the supplier (by regular mail) and one copy to the company's accounts payable department. The agent then receives a sales order in Pdf format by email from the supplier, which is filed with the related purchase order by date in the purchasing department.
Receiving Department
The receiving department is conveniently located in a corner of the plant. It consists of a loading/unloading dock within the warehouse part of the plant. The warehouse door into the plant is always open, so production personnel can easily access the warehouse and verify inventory levels. When the shipment arrives, a member of the receiving department signs the shipper's documents as evidence that the units have been received. Then the receiving department member sends one copy of the bill of lading to the purchasing agent to notify the agent of the receipt and one copy is filed in the receiving department. The receiving crew opens the materials, notifies the production department of the receipt and stocks the materials in the company's warehouse.
Accounts Payable Department
Upon receipt of an invoice from the supplier the accounts payable clerk searches the open purchase order file and staples the invoice to the related purchase order. The clerk then verifies the math on the invoice. The clerk files the invoice and attached completed purchase order in the open item folder by due date. Each week the clerk examines the files and selects the invoices that are due within the next 7 days. Next, the clerk will enter the invoice as payable into the system. If the supplier was not set up as vendor in the system, the clerk will do that before entering the invoice. The accounts payable clerk then prints the checks and verifies that the checks agree in amount and name to the open invoices that were selected for payment. Once the clerk determines that all checks agree to the invoices selected for payment, the clerk presents them to the treasurer for signature. Once the accounts payable clerk receives the signed checks from the treasurer (see below), the accounts payable clerk mails the checks and files the invoices complete with purchase orders and copy of the check stub in the paid invoice file in alphabetical order based on the supplier's name. Upon receipt of the invoices and checks the treasurer carefully examines each invoice and the attached purchase order. The treasurer then manually signs the checks and returns the checks and the supporting documentation to the accounts payable clerk.
Human Resources Department
Royal's labor force is not unionized. This simplifies its payroll processing significantly in terms of pay rates, shift differentials and benefit payments. The company benefits are fairly straightforward. The payroll calculations are therefore fairly standard. Royal Manufacturing participates in the Job's for the Future program. This program is a partnership between the Nebraska Workforce Development Office, the U.S. Department of Labor, area community colleges as well as employers. In this collaborative effort Royal hires, trains and provides internships to students in advanced manufacturing technology. As part of this effort Royal must report in a very detailed manner the hours worked by the students, including the projects and manufacturing activities they worked in from day-to-day. The reports must also show the on-the-job training provided, achievement of training goals spelled out in grant agreements and the mentor assigned to each activity. Based on these reports Royal receives reimbursement from the U.S. Department of Labor for part of its cost. At times, sometimes unexpectedly, Royal is asked for other detailed reports about this program. This program is a critical recruiting tool for Royal to hire highly qualified employees that are skilled enough to run Royal's complex production equipment that is the secret to the company's financial success. Supply of such skilled personnel is low, yet the demand is high.
Financial Background Information
In 2006 before the financial crisis Royal went public by listing 49% of its common shares on the New York Stock Exchange as Class B shares. The other 51% of the shares (now Class A shares) is still controlled by the founder John Royal and his two sons and two daughters. The Royal family is still heavily involved in the day to day business of Royal Manufacturing. John's daughter Suzanne is the company's CFO and appears to be in line to become the company's CEO, when John retires. His sons Aaron and Christopher each manage a plant. Aaron in Oz City, Kansas and Christopher in Green City, Iowa. The youngest daughter Maria has interned with the company, but is currently residing on the East Coast, where she is completing her MBA. The company is structured as a "C" corporation and thus files form 1120 annually with the IRS. Because of this choice of tax structure and based on the seasonal pattern in its operations Royal was allowed to choose a fiscal year that ends on October 31st each year. An added benefit as a "C" corporation is that employed Royal family members are eligible to participate in benefit plans without negative tax consequences. The company is subject to an integrated audit under the Sarbanes Oxley Act. For the internal control part of the integrated audit the company has chosen to adopt the COSO Enterprise Risk Model as model for its internal control over financial reporting.
CASE QUESTIONS:
1. Assume you had to make a presentation to executive management to request funds for a new Accounting Information System. There are a number of specific improvements in efficiency that a new system could provide as well as strategic opportunities. State your case for why Royal needs a new AIS by identifying: a. all internal and external stakeholders in the system, b. the financial reporting needs for these stakeholders, c. the gaps between these needs and the capabilities of the legacy system, and d. (with an open systems' perspective) opportunities for the company to strategically improve efficiencies in the reporting of transactions with business partners.
2. By SEC regulations the company is now required to file its SEC reports in XBRL format. Describe the advantages and disadvantages of XBRL in the financial reporting process for stakeholders in Royal's financial reporting. Do not forget to address how XBRL could improve internal control over financial reporting as well.
3. The company could potentially build its own AIS, hire a firm to design and develop it, or buy "off the shelf" "canned" software from a vendor. Choose one of the three options and make your case for the option you chose. Explain whether you will choose the same option for all modules or not. (You could choose a combination of the three options.)
4. Describe the architecture of this new system you propose including the necessary hardware components and provide a compelling rationale for your choices (such as, but not limited to client/server, terminal/mainframe, cloud computing, connectivity, database versus file system, level of integration with other functional areas, use of personal computers, laptops, etc.). Use a way of graphically illustrating your system architecture.
5. Propose a time schedule for the implementation of payroll, inventory, payables, and financial modules. Be sure to explain the rationale for your choices of the time frames and the testing you may perform. Your plan may cover up to one entire year. Prepare a GANTT chart to illustrate the plan. (Example on 587 of your text.)
6. Explain the method(s) (pilot, phase, parallel, direct, etc.) you recommend for the conversion to the new system as well as your rationale for the choice.
7. Draw a (document or systems) flow chart for Royal's current expenditure cycle.
8. Identify and describe five weaknesses in internal control in Royal's current expenditure cycle using the CAR model.
9. Describe/explain how this new system can/will improve the company's internal control system in terms of general controls and application controls in the areas of input, process and output controls. Give specific examples.