In the bustling city of San Francisco, in a sleek office overlooking the bay, GreenTech Innovations Inc. had been the talk of the town since its inception in 2010. Founded by the charismatic entrepreneur, Clara Martinez, GreenTech was hailed as the future of sustainable energy. With a vision to revolutionize the energy sector, Clara led her team to develop groundbreaking sustainable energy solutions, propelling GreenTech to international fame.

The first five years were nothing short of a dream. The company expanded its wings, establishing footholds in Europe, Asia, and South America. Their innovations were not just products; they were statements of a sustainable future.

However, as the sun set over the Golden Gate Bridge in 2017, dark clouds began to gather over GreenTech’s horizon. The global sustainable energy market, once a blue ocean, was now teeming with competitors. Giants from the tech industry started pouring billions into R&D, overshadowing GreenTech’s efforts.

Determined to stay ahead, Clara made a bold move. She secured significant loans, betting on a new product line that promised to be a game-changer. But technical challenges, akin to a twist in a thriller, delayed the launch repeatedly. The mounting debt and interest payments became a ticking time bomb.

By 2020, whispers of GreenTech’s troubles reached the market. Several key clients, once loyal patrons, terminated their contracts, worried about the company’s faltering steps. The corridors of GreenTech, once buzzing with enthusiasm, saw a wave of resignations. Senior engineers, managers, the very pillars of the company, began to leave.

GreenTech’s internal audit function, led by a seasoned auditor named Raj, had been instrumental in the company’s early days, ensuring processes were streamlined and risks were managed. However, with the company’s rapid expansion, the internal audit team faced challenges in keeping up. Their team was understaffed, and there were concerns about their training in the latest audit methodologies.

Raj reported directly to the CFO, a close confidant of Clara. This raised eyebrows in the industry, as it potentially compromised the objectivity of the internal audit function. Furthermore, there were instances where significant findings by Raj’s team, especially related to inventory management and supplier contracts, were downplayed or not acted upon by the management.

Raj’s team had recently undergone a major reorganization, with several new members joining the internal audit function. Their backgrounds varied, with some coming from non-audit roles within GreenTech, raising questions about their audit experience.

The internal audit function had recently adopted a new audit software tool. However, there were teething issues, and the team was still adjusting to the new system, potentially affecting the consistency of their work.

GreenTech had expanded into new markets with different regulatory environments. The internal audit team, while knowledgeable about the U.S. market, lacked expertise in some of these new regions.

Raj had expressed concerns about the limited budget allocated to the internal audit function, which restricted their ability to attend relevant training programs and hire external consultants for specialized areas.

There were also reports of occasional disagreements between the internal audit function and the finance team, especially when audit findings were critical of the finance processes.

The internal audit function had recently outsourced a part of their work to a third-party firm to cope with the increased workload. The competence and objectivity of this third-party firm were yet to be assessed.

GreenTech’s board had recently emphasized the importance of a robust internal audit function and had sought an external review of the function’s effectiveness. The results of this review were pending.

The financial statements revealed that GreenTech’s current liabilities exceeded its current assets, indicating potential liquidity issues. The company’s debt-to-equity ratio had also surged, reflecting its increased reliance on borrowed funds. Furthermore, the company had breached a few loan covenants, leading to some of its debt being reclassified as current.

Market analysts noted that GreenTech’s market share had been steadily declining, and its brand reputation had taken a hit due to the delayed product launch. There were also concerns about potential lawsuits from disgruntled investors alleging misrepresentation.

Amidst the looming storm, Clara’s determination was evident. She was not one to back down without a fight. Recognizing the challenges ahead, she called upon her most trusted advisors and top management for a series of strategy brainstorming sessions. The room was filled with a palpable sense of urgency and hope.

Debt Restructuring

Understanding the impending financial strain, Clara, alongside her CFO, is planning to approach their major creditors. Their goal is not just a mere extension of the loan terms, but a comprehensive restructuring. They are considering proposing a portion of the debt be converted into convertible notes, which would potentially ease the immediate interest burden. Additionally, they aim to negotiate a moratorium on principal repayments for the next two years, providing GreenTech a window to stabilize.

Asset Liquidation

GreenTech’s European division, once seen as a promising venture, has been facing challenges. Located in Berlin, it has been grappling with fierce competition and regulatory hurdles. Recognizing this, Clara is contemplating the tough decision to sell this division. This move is strategic; it’s not just about bolstering the company’s cash reserves, but also about refocusing on more lucrative opportunities.

Equity Investment

The tech industry is rife with speculation. There are murmurs of potential meetings between Clara and some of Silicon Valley’s tech giants. Insiders suggest that GreenTech might be in preliminary talks for a significant equity investment. This potential partnership isn’t solely about capital; it’s about aligning with powerful allies. A potential investment could offer GreenTech not just financial support, but also strategic collaborations and access to advanced technologies.

Operational Efficiency

Clara intends to take a deep dive into the company’s operations. With the support of her COO, she’s gearing up to review all supplier contracts, aiming to renegotiate terms for better rates and extended credit periods. They plan to identify and eliminate any redundancies. The company is also looking at adopting lean management principles to enhance efficiency. Clara is keen on leveraging digital tools to modernize operations, ensuring GreenTech remains nimble in the face of adversity.

With these strategic plans on the horizon, Clara hopes to guide GreenTech through the challenges and restore its former glory. The upcoming months will be pivotal, shaping the future of her beloved enterprise.

Question 1 (15 Marks)

Based on the provided scenario and using your understanding of the going concern principle, evaluate the factors and evidence that would influence your judgment on GreenTech’s ability to continue as a going concern.

Note to students

Your answer should comprehensively discuss the financial indicators, operational indicators, external factors, and management’s future plans and strategies as presented in the scenario. Structure your response in a clear and coherent manner, ensuring that your evaluation directly relates to the information provided about GreenTech.

Question 2 (15 Marks)

With the recent internal audit review on inventory management casting its own set of shadows, outline the considerations you’d weigh before deciding whether or not, or to what extent to, place reliance on the internal auditors’ findings.

Answers to Above Questions on GreenTech Case Study

Answer 1: The going concern principle is one of the most significant principles in accounting which is based on the premise that the business will continue to operate for an indefinite period of time. In the given case scenario of Greentech, there are many such factors that need to be considered in evaluating the ability of the company to continue as a going concern.

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