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Updated Ford Toyota Case Solutions Auditing A Risk-Based Approach to Conducting a Quality Audit, 9th Edition
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Updated Ford Toyota Case Solutions Auditing A Risk-Based Approach to Conducting a Quality Audit, 9th Edition

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  • August 8, 2022
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FORD AND TOYOTA END-OF-CHAPTER CASE SOLUTIONS

Ford: FYE 12/31/12
Toyota: FYE 03/31/13

CHAPTER 2

2-62

1a.

Ford was founded in 1919, and designs and sells automobiles. Ford operates an
automotive sector and a financial services sector. The automotive sector has reportable
segments consisting of North America (Ford and Lincoln brand vehicles and parts),
South America (primarily Ford brand vehicles and parts in this geographic region),
Europe (primarily Ford brand vehicles and parts in Europe, Turkey, and Russia), and
Asia Pacific/Africa (primarily Ford brand vehicles and parts in Asia Pacific and South
Africa). The financial services sector includes Ford Motor Credit Company (vehicle
financing, leasing, and insurance), and other financial services (real-estate and holding
companies).

1b.

Factors affecting Ford’s profitability include: wholesale unit volumes, profit margins
(which are affected by market factors such as the volume and mix of vehicles sold, costs
of components and raw materials, warranty claims, and costs associated with safety,
emissions, and fuel economy), and fixed structural costs, such that small changes in unit
volumes can affect overall profitability.

Factors affecting the auto industry in general include: (a) a competitive industry with
many producers, none of whom are the dominant producer; (b) seasonality, whereby
results of the third quarter are less favorable than those of other quarters because of high
spring and summer demand; (c) raw materials costs and acquisition uncertainty; (d) low
backlogs, (e) intellectual property that is difficult to develop, defend, and maintain, (f)
and high potential warranty costs.

1c.

Like Ford, Toyota operates in the automotive and financial services sectors, and does
business in the same general geographic areas except that Toyota has a very large
presence in Japan. Toyota’s discussion provides greater insight on the risks the company
faces, and the challenges that they are working to overcome (quality lapses and the
earthquake that struck Japan in 2010 and subsequent effects thereof). Toyota’s report also
contains very detailed discussion of its “Global Vision”, which is a strategy-oriented
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.


FORD/TOYOTA FYE 12/31/12 and FYE 03/31/13 PAGE-1

,discussion. Toyota also reports very detailed strategic and operational details by
geographic region.

2a.

The purpose of the Def14A is to provide a mechanism by which shareholders can gain
the information they need to legally designate another person to vote their preferences in
matters concerning stock.

2b.

The “Def” stands for “definitive proxy statement”, which is the terminology that the SEC
uses to refer to the proxy statement.

2c.

The proxy contains information about proxy statements in general (for educational
purposes of shareholders), the annual meeting of shareholders, the board of directors,
corporate governance structures and policies, and management compensation.


3a & b.

Stephen G. Butler (Independent)
Kimberly A. Casiano (Independent)
Anthony F. Earley, Jr. (Independent)
Edsel B. Ford II (Consultant)
William Clay Ford, Jr. (Management)
Richard A. Gephardt (Independent)
James H. Hance, Jr. (Independent)
William W. Helman IV (Independent)
Jon M. Huntsman, Jr. (Independent)
Richard A. Manoogian (Independent)
Ellen R. Marram (Independent)
Alan Mulally (Management)
Homer A. Neal (Independent)
Gerald L. Shaheen (Independent)
John L. Thornton (Independent)

3c.

A majority of the directors must be independent directors under the NYSE Listed
Company rules. The NYSE rules provide that no director can qualify as independent
unless the Board affirmatively determines that the director has no material relationship
with the listed company.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.


FORD/TOYOTA FYE 12/31/12 and FYE 03/31/13 PAGE-2

,3d.

Independence matters to shareholders because board members have significant
responsibilities in advising, challenging, and compensating management. If a board
member is not independent from management, they may be unable to complete their
responsibilities in a manner that is consistent with the best interests of the shareholders.

3e.

Among the most important characteristics directors should possess are the highest
personal and professional ethical standards, integrity, and values. They should be
committed to representing the long-term interests of all of the shareholders. Directors
must also have practical wisdom and mature judgment. Directors must be objective and
inquisitive. Ford recognizes the value of diversity and we endeavor to have a diverse
Board, with experience in business, government, education and technology, and in areas
that are relevant to the Company's global activities. Directors must be willing to devote
sufficient time to carrying out their duties and responsibilities effectively, and should be
committed to serve on the Board for an extended period of time. Directors should also be
prepared to offer their resignation in the event of any significant change in their personal
circumstances that could affect the discharge of their responsibilities as directors of the
Company, including a change in their principal job responsibilities.

3f.

The Board of Directors has agreed that the following compensation will
be paid to non-employee directors of the Company:
• $250,000 per annum
• $15,000 Committee chair fee
• $25,000 Presiding director fee

Importantly, a significant portion of non-employee director
compensation is required to be tied to shareholders’ interests and,
therefore, 60% of a director’s annual Board membership fee is paid in
deferred common stock.

The issue of director compensation and independence is important because directors are
the last line of management oversight and protection against management override. If the
amount of stock were to become very high in relationship to the directors’ net worth, then
there might be a question as to whether director’s would make accounting decisions
based on the effect it might have on stock prices. Further, the value of the company’s
stock is more important over the longer run and would help the directors focus on
building long-term value for the company. That objective should align them with the
shareholders best interest. Thus, Ford is trying to balance immediate cash payments that
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.


FORD/TOYOTA FYE 12/31/12 and FYE 03/31/13 PAGE-3

, are reasonably high (in order to attract and retain high quality directors), while still
aligning board members’ long-term interests with those of shareholders. Ford’s decisions
in this regard are consistent with other similar companies. That is, they usually include
some mix of immediate cash payments and long-term stock grants or options.


4a.

Ford’s audit committee has five members, all of whom are independent. It selects the
audit firm, reviews reports from the audit firm, reviews internal controls, discusses
earnings releases, etc.

4b. Stephen Butler is the designated financial expert. Other members include
Kimberly Casiano (President and COO of a consulting firm), Irvine Hockaday
(outgoing director), James Hance (CPA and former auditor), and Gerald Shaheen
(past president of Caterpillar). While Butler is the only member designated as a
financial expert, the other members clearly have vast financial expertise. Therefore,
it is important for users to read the bios provided to gain an understanding of this
important element of governance.

4c. The audit committee report articulates the duties of the audit committee with
respect to management and the external auditor. The report describes audit fees,
audit-related fees, tax fees and other fees. It also contains a discussion of the
committee’s evaluation of the independence of pwc, the company’s auditor.

5a.

Reading the disclosures reveals that pwc LLP is the auditor for both companies.

5b&c.

Audit fees % of Revenue % of Assets
Ford $36,500,000 36,500,000/ 36,500,000/
134,252,000,000=0.0003 192,366,000,000=0.0002
Toyota ¥3,120 3,120/22,064,192 3,120/
¥=0.00014 ¥35,483,317=0.00008

Ford’s fees are about double Toyota’s on a percentage basis. Potential reasons for this
difference are cost differences in conducting an audit in Japan versus the US (e.g.,
litigation and personnel costs) and differences in the riskiness of the two companies. In
addition, Ford does have significant post-retirement benefits or OPEB’s that have to be
separately audited by pwc, whereas Toyota does not. Implications of these differences are
that fewer hours would be needed to conduct the Toyota audit compared to the Ford
audit, assuming that profitability targets are similar across geographic locations of PwC.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.


FORD/TOYOTA FYE 12/31/12 and FYE 03/31/13 PAGE-4

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