Prospective Client Risk Assessment
Assessed By:
Vanessa Fetter
Zenab Alghasra
Siyuan Li
Patriese Richards
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Con
Industry:
The Four Seasons is a luxury hospitality company dedicated to satisfying the needs of their guest
through friendliness, efficiency and world class hotel keeping. Company founder, Isadore Sharp,
first opened the doors to the first Four Seasons hotel in 1961 in Toronto Canada later introducing
first US Four Seasons branded hotel in 1979 on Pennsylvania Avenue in Washington DC. Today
the Four Seasons have 96 hotels in 36 countries. In 1986 the Four Season went public on the
Toronto Stock Exchange then on the New York Stock Exchange in 1997 and later returned to
private ownership in 2007. Majority of the properties are operated under the Four Seasons name,
but some are Regent hotels, which is another luxury hotel chain name.
Products:
Four Seasons is a service oriented company therefor they do not provide many products to
consumers. They do however have four primary service divisions: rooms, food and beverage, spa
and golf course. Service to guest is most important to the Four Seasons. This is the division of
first contact for guests. When people think about hotel their first instinct will be to associate it
with only rooms. However, it includes more than that. The room service team is in charge of
reservations, concierge, housekeeping, laundry and telecommunications. At the Four Seasons
they do everything necessary to ensure that the guests are happy and comfortable. Four Seasons
is known for their award-winning reputation for quality cuisine. The Food and Beverage team is
Company Overview
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responsible for the exceptional quality of service provided in restaurants and lounges, the
kitchen, catering, and banquets.
Corporate Strategy: The Four Seasons’ corporate
strategy is based on four pillars of
its business platform: providing
their guests with distinctive,
exceptional service, focus on
medium sized luxury hotels of
exceptional quality, culture and
concentrate on managing hotels
instead of owning them. The Four Seasons policy ensures that all guests receive the same
remarkable service therefore not allowing discrimination. Their aim is for both employees and
guest to feel welcomed and respected. This is further achieved through their other three pillars.
Having smaller hotels and focusing on managing them allows employees and managers to
concentration more on guests and building relationships with them and each other. Isadore Sharp
and his team developed a formal credo based on the Golden rule for Four Seasons: “We treat
others – all others: customers, employees, partners, suppliers – as one would wish to be treated.”
(fourseasons.com) This credo is the corner stone of the Four Seasons. These four pillars are what
set the Four Seasons apart from their competitors. Their renowned service is respected and
greatly appreciated by their clients allowing them to maintain their portion of the market share.
Four corporate strategy pillars
Exceptional Service
medium sized
hotels
culture
managing instead of
owning hotels
Four Seasons Corporate Strategy Pillar
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Raw Material:
Being a service providing company the Four Seasons does not have a significant amount of raw
materials. Most of their raw material is utilized in the food and beverage division in order to
provide their guests with quality food. These raw materials would include the ingredients
necessary to prepare the meals.
Size:
The Four Seasons is relatively small when compared to some of their competitors. This is due to
the fact that the Four Seasons focuses on medium size hotel instead of larger scale hotels. The
table below compares Four Seasons with other Hotels in the Hospitality Industry for 2006, the
year before Four Seasons went private.
Four Seasons and competitors Accounts for 2006 (in millions)
Account Four
Seasons
Marriott
International Inc
Starwood Hotel
and Resorts
Worldwide
Hilton Hotels
Corp
Revenue 253 12160 5979 8162
Net Income 50.3 608 1043 572
Total Assets 992 8588 9280 16418
Market Capitalization 3053.8
Stockholder’s Equity 648 2618 3008 3727
In 2006, Four Seasons earned revenue of over $253 million with a net income of more than $50
million. Their total assets were shy of $1 billion totaling approximately $992 million. Four
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Seasons market capitalization was 3.05 billion and their Shareholder’s equity was 648 million.
The difference in stockholder’s equity and market capitalization shows that there is some
flexibility with regards to Four Seasons. It shows that Four Seasons is expected to grow in the
future. The market capitalization is about 5 times higher than book value giving investors
assurance that their stock is worth more than it was bought for.
The Four Seasons has a very diverse work force with 33,742 employees worldwide. Quality
service by Four Season is also extended to their employees. Below is a chart showing the
benefits that are received by employees.
Four Seasons Employee Benefits
Four Seasons has held ranks over the years in various magazines. Some of them include
FORTUNE magazine’s 100 Best Companies to Work For where they ranked #83 in 2013 and
Employee Benefits
Career growth opportunities
Complimentary meals in dedicated employee
restaurants
Employee service awards
Retirement benefits / pension
Dental and medical / disability /
life insurance
Complimentary stays at Four
Seasons properties with
discounted meals
Educational assistance
Paid holidays / vacation
Incentive bonus /
competitive salaries
Best-in-industry training
Unique deep culture
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Great Place to Work Institute Canada – Best Workplaces 2012 they ranked #27 for companies
that employ more than 1,000 people in Canada.
Company Location(s):
Four Seasons is headquartered in Toronto, Canada. The company has 96 other locations in 36
countries. Property locations include the United States, the Caribbean, Europe, the Middle East,
and the Asia/Pacific region. Based on the company’s annual report, the company expects to
open 13 new hotels with funds between 50-60 million in connection with obtaining new or
enhancing existed management agreements. And below is a breakdown of the operating results
by top locations of the company:
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People with Close Association:
Isadore Sharp – Founder and chairman
Christopher W. Hart - President, Hotel Operations-Asia/Pacific
Christopher Norton - President, Hotel Operations-Europe/Middle East/Africa
Craig O. Reid - President, Hotel Operations-The Americas
Sarah Cohen - Secretary, Executive Vice President & General Counsel
John Davison - Treasurer, Executive Vice President & Chief Financial Officer
Susan Helstab - Executive Vice President, Marketing
Chris Hunsberger - Executive Vice President, Product & Innovation
Nick Mutton - Executive Vice President, Human Resources & Administration
Scott Woroch - Executive Vice President, Development
Associated Companies:
Cascade Investment is an American holding and investment company headquartered in Kirkland,
Washington, United States. The company is controlled by Bill Gates and managed by Michael
Larson.
Kingdom Holding Company is a public holding company headquartered in Kingdom Centre in
Riyadh, Saudi Arabia. It is controlled by Prince Al-Waleed bin Talal, and is headquartered in the
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city of Riyadh. The company is publicly listed in the Saudi Stock Exchange, but only 6% of the
shares are public, the remaining 94% are currently owned by Prince Alwaleed
Triples Holdings is owned by Isadore Sharp, the founder of Four Seasons. Sharp continues to
own 5% of the company, following the acquisition of the brand and the subsequent privatization
of the company.
Primary Customers and Customer Base:
The primary customers using the Four Seasons services are people who seek luxury. The
customer base is varied, because the hotels are located in 36 different countries. Plus, the
company has a strong customer relation management that continues to expand the company’s
customer base. In 2013, Four Seasons Las Vegas was ranked as #1 on US News & World
Report’s 2013 list of best hotels in Nevada. This recognition comes from the high customer
satisfaction and the hotel’s advanced reputation of modern chic guest rooms.
Image:
The annual report tries to convey the idea of Four Seasons sustaining a great business model.
The report attempts to give the user an image of luxury and great customer experience, while
achieving high returns on investment in the long term. The company’s report is well organized
and demonstrates Four Seasons high level of transparency. Covering almost every aspect of the
company, the report starts with the business model and the financial statements, then goes on to
describe the company’s portfolio and management of risk, and ends with the future predictions
and potential threats of Four Seasons.
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Segments and Contents of the 10-k:
To start off, the report describes the business of Four Seasons and then describes the objectives
of the company, such as creating a unique customer experience while maintaining high growth
and return on investment. The report also talks about the business model of the company by
describing the management operations and the ownership operations. Included in Four Seasons’
business model are a financial and operational analysis as well as the hotel and resort operating
results.
Another important segment of the 10-k is the balance sheet review and analysis that explains the
company’s corporate strategy relating to investments, long-term receivables, investments in hotel
partnerships and corporations, investments in management contracts, and fixed assets. In
addition, the report discusses the liquidity of Four Seasons and other resources available through
an explanation of contractual obligations and the convertible notes.
Another important segment of the annual report includes the cash flows which are portrayed
through the investing activities in the hotel partnerships and corporations; the investing activities
also discuss the long-term receivables and investment in management contracts. In addition the
annual report briefly describes the financing activities and their effect on the company’s overall
performance. The financial instruments are a large segment of the report as well. These
financial instruments describe the foreign exchange forward contracts, currency, and interest rate
swaps along with other financial instruments and fair value of financial instruments. Another
segment is the off-balance sheet arrangements, which includes guarantees, commitments, and
indemnities (Director and Officer Indemnification arrangements and other indemnification
arrangements).
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Moreover, future predictions took a part of this report by analyzing their future services,
operating environment, openings, and management operations. Subsequent event is another
important segment of the report; it talks about the acquisition by Cascade Investment and
Kingdom Hotels International of Four Seasons to take the company private. This segment of the
10-k also talks about the interim operations, the termination of the acquisition agreement, and the
impact of finalization of arrangement transaction (convertible senior notes, long-term incentive
arrangements, cost options, other arrangements and agreement, and cost related to pending
arrangement transactions). The portfolio of the company contains the various locations with Four
Seasons properties, current projects under development or construction, and a three year review
of the company’s performance. The report also describes the operating risks by analyzing the
geopolitical, economic, and lodging industry conditions.
Other operating risks examined were competition, dependence on management agreements,
dependence on property owners, and risk associated with expansion, growth and new
construction. The 10-k analyzes investments in and advances to: managed and owned properties,
debt rating risks, government regulations, political risks, insurance, legal proceedings, currency
exposure, seasonality and/or quarterly predictability, and intellectual property. The risks
associated with the Four Seasons branded residential business, and dependence on key
employees is examined as well. Another important segment of the report is the accounting
estimates, which discusses the recoverability of investments, fixed assets, retirement benefit
plan, and income taxes. Recent Canadian accounting standards issued, but not yet adopted,
contribute to a large portion of the report.
The 10-k describes the standards issued by Canadian Institute of Chartered Accountants
(“CICA”) that are not yet adopted. Discussion of the controls, procedures, and Four Seasons’
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disclosures is included. The annual report reviews management’s annual report on internal
control over financial reporting, and changes in internal control over financial reporting. The last
segments are summarized by explaining the reporting currency (C$), additional information, and
endnotes.
Primary Cost Drivers:
The company’s primary cost driver is the income tax. This is mainly because of the increase in
interest expense accrued relating to the currency and interest rate swap agreement the company
entered into in the second quarter of 2005.
The company must also pay interest on long-term obligations. Other primary costs include
administrative costs and reimbursed costs.
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Research and Development:
Based on analysis, the company is attempting to expand and increase the number of Four
Seasons locations worldwide, which would require a lot of research development. The company
is planning to open 13 new hotels within the coming two years with funding between 50 and 60
million in connection with obtaining new or enhancing existing management agreements. In
addition, the company developed a database and improved many of its information technology
systems because the company is expecting a strong demand in the leisure travel, and the
company is expecting increased average daily room rates, requiring even more research and
development.
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Key Economic Factors:
Business Cycle
The tourism industry is a very sensitive industry. During good times, people will have more
disposable income to spend on vacations and traveling, but they will cut off their expenditure
during recessions, for instance the recession in 2008. Moreover, this industry is highly seasonal;
it depends on timing preferences such as the school year’s Thanksgiving, Christmas, and Spring
Break. This industry is also affected by the value of money. When the value of the currency is
weaker in one country with a Four Seasons property, we expect to see more tourists flock to this
Qualitative Information
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country and this property because it is more economical to travel to this area. The graph above
shows the correlation between employment in the given industries and the GDP. The higher the
correlation between the two, the more sensitive the industry should be to the business cycle.
Falling in the middle, the hotel industry is somewhat sensitive due to the seasonality of the
industry.
Inflation
Inflation can be caused by the huge amounts of money spent by tourists. It leads to an increase
in the prices of food, gas, etc. The Four Seasons Company is expecting an increased demand in
the leisure tourism in the coming years that may drive inflation rates even higher. The industry is
sensitive to inflation as well, because sometimes there will be a decrease in the number of
tourists due to the increase in the hotel rooms rates. Recently in 2013, the Four Seasons Hotel
Las Vegas was ranked #1 by the US News & World Report’s 2013 list of best hotels in Nevada,
this recognition comes from the renovation of the guest rooms that are more chic and fancy. All
of these are signs that the rooms rate at the hotel might increase causing the inflation rates to be
higher.
International Competition
Four Seasons is very sensitive to international competition. With the company’s multiple
locations worldwide, Four Seasons attracts competition from big names such as the Ritz-Carlton
and Starwood. The industry itself is extremely sensitive to international competition because of
the number of brands all over the world. In addition, for the most part, all of these brands are
currently expanding into emerging markets, increasing the amount of competition the luxury
hotel industry faces.
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International Turmoil
Tourism is one of the most affected industries by International turmoil. With almost 90 different
locations in 36 different countries all over the globe, Four Seasons could be heavily affected by
the international turmoil. It is expected that branches located in the MENA (Middle East and
North Africa) area would be highly affected due to the uprisings in that region especially in
Egypt and Syria. Many of the people in these areas are cutting their traveling expenses. In
addition, many people have lost their source of income, which results in a change in priorities
including travel and tourism. Likewise, less people will be able or willing to travel into the
region to stay at the hotels in this region. Four Seasons is also developing their brand in the
Asian market. While the protests in China are not nearly as violent as in the Middle East, it is
unknown to what extent these protests will elevate. If these uprisings become worse, people in
the country would be unwilling to travel, thus not staying in the hotels, and business travelers
would cut back on coming to China, also decreasing the hotel room demand in this market.
Technological Obsolescence
Technology is playing a huge role in almost every industry. The hotel industry, including Four
Seasons, is highly affected by the technological obsolescence. The new advances in technology
is used to enrich customers’ satisfaction and to gain more customers by offering unique
technological features such as staying connected while abroad. In addition, because of the large
customer base Four Seasons maintains around the world, technology is an important factor in
keeping these customers. Companies are now using technologies such as the mobile Smartphone
technology to enable faster communication with customers. Technology also helps hotels
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develop a better cost management system based on artificial intelligence technology. With better
technology come other important issues, such as the security and privacy of the users utilizing in
the hotel’s technology, which is the primary focus of this industry right now. However, statistics
show a decrease in the spending on technology by the hospitality sector, falling behind other
sectors.
Life Cycle:
The life cycle of Four Seasons is currently at its growth stage due to its intention of enhancing
the value of its brand name (2006 Four Seasons Hotels and Resorts Annual Information form, 5).
To add on, by comparing the company’s earnings per share of the year 2005 and 2006, it
increases from 0.14 EPS to 0.36 EPS (First Quarter Report to Shareholders 2006, 2). Even
though the company expanded its hotel brand to different areas, it is still aimed to expand more
and gain more revenue from each new area. All the above considerations illustrate the company
is currently a growing company, and should have a successful future path ahead.
Factors For Success:
The hotel industry is a highly competitive industry. In order for Four Seasons to be successful in
this industry, it needs to be “strengthened by well-recognized and respected luxury brand name
and [their] broad network of management contracts for luxury properties in strategic markets
worldwide” (2006 Four Seasons Hotels and Resorts Annual Information form, 7). The first factor
in establishing success involves the strengthening of the brand recognition. By increasing brand
recognition, people will be able to distinguish Four Seasons from other hotels in the industry.
Second, Four Seasons is focusing on their strategic relationships to expand their management
operations (2006 Four Seasons Hotels and Resorts Annual Information form, 8). The strategic
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relationships are a major source for Four Seasons to obtain better financing for the different
branches of its business. Furthermore, the global wide situation is important to Four Seasons as
well. Since Four Seasons wants to expand their business into more areas and places, they need to
be able to maintain their current outstanding global relationships and strategies. The company
must also establish new and improved relationships within all other areas. In addition, promoting
competent employees is an important factor in order for Four Seasons to be successful.
According to the 2006 annual report, the reimbursement cost, which includes sales, advertising
and marketing, increased by 15.6% compared to the previous year. Successful and proper
promotions will add values to the brand’s reputation and increase market shares. With
appropriate promotions, Four Seasons will be able to put more emphasis on their strengths in
terms of a greater work lifestyle. The table below is retrieved from Four Seasons annual report,
and it shows that the more expenses the company is generating, there actually will be more
profitability for the company.
Another important factor for Four Seasons to be successful is improving customer service. By
providing exceptional customer service, customer satisfaction will be higher; thus, improving the
likelihood for customers to rebook with Four Seasons in the future. Also with a quality customer
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service system, customers will be more likely to give positive feedback, which in turn will add
value to the brand name. With all these factors being properly enacted, Four Seasons will
become a more successful brand in the luxury hotel industry.
Accounting Considerations:
There should be many different accounting considerations for a company like Four Seasons. First
of all, the management team prepares the financial statements, which is an extremely important
and useful tool for third-party users. Four Seasons mentioned the new adoption of changes in
accounting policies on non-monetary transactions and stated that this adoption “did not have a
material impact on [their] consolidated Financial Statement” (First Quarter Report to
Shareholders 2006, 16). Even though the financial statements are prepared correctly, the
company should also consider the fact that it operates in different countries all over the world.
For Four Seasons properties operating within the country, everything should be in compliance
with CICA rules; however, for other companies that operate outside the country, IFRS must be
taken into considerations while preparing the financial statements.
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The chart above is the corporate chart provided in the annual report of Four Seasons; it shows the
major branches the company wants to emphasis. The company is a diverse company and needs to
meet the numerous accounting standards to comply with each single sector of Four Seasons.
Legal and Regulatory Concerns:
The legal matters that relate to Four Seasons include international business policies, foreign
exchange issues, and political unrest. Different countries will enact different rules for operating
businesses in their country. In order to have a successful business in other countries, Four
Seasons must abide by their rules and legal procedures. Also, political unrest is a big concern for
Four Seasons because of their expansion into new markets. For Four Seasons, they are aimed at
not only enhancing their brand values inside the country, but also developing their hotel chain
into other countries. To some extent, there is an existence of differences in terms of political
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affiliations among different countries. The company should try to be consistent with the political
policies for different countries to avoid any possible political unrest. Political unrest may result
in different consequences; such as, government publically objecting to the company, hence
hurting Four Season’s good reputation.
One of the most important regulatory concerns for Four Seasons is insurance. The company’s
management team “require[s] the hotels and resorts that [they] manage to be insured against
property damage, business interruption and liability at the expense of the owner of the property”
(2006 Four Seasons Hotels and Resorts Annual Information form, 21). The insurance issue is
highly considered by Four Seasons; they need to be able to maintain their insurance coverage
level in respect of property damages, interruptions, and liabilities. “If [they] were held liable for
amounts exceeding the limits of [their] insurance coverage or for claims outside the scope of that
coverage or if the indemnities were insufficient for any reason, including as a result of the
owner’s or indemnitor’s financial condition, [their] business, results of operations and financial
condition could be materially and adversely affected (2006 Four Seasons Hotels and Resorts
Annual Information form, 21). Therefore, keeping the insurance coverage at a desirable level is
essential for regulating and financing Four Seasons Company.
Social Concerns:
Being in a highly competitive industry, Four Seasons needs to consider several different social
matters in order to increase performance in the industry. First, pricing strategies are extremely
important and will affect the company’s operational and financial conditions. By setting price
levels, the company sets the social classes of their consumers. As there is in any business there
is a tradeoff between setting prices and the company’s reputation. With a higher price setting,
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Four Seasons indirectly chooses the upper social classes. Having prices at a larger level,
consumers are expecting the company to provide a relatively superior quality of services.
The table above is sourced from the Four Seasons annual report. The table demonstrates that as
the higher room rates, the revenues will be relatively increase as well. Also, as listed in the table,
despite the fact that the prices are high, the percentage of occupancy continues to be high and
consistent, which proves the sound reputation of Four Seasons and its brand.
Another social concern Four Seasons faces is the choices of the locations. For some places, there
can be more population mobility than in other places. By building property in a location with
more mobility there is a greater likelihood that the price and revenue will be fairly higher. In
addition, with the population trend becoming older and older, people will have more time
chances to travel. Having an aging group in the market tends to increase the occupancy of the
hotels, and as a result, increase the revenue as well. More importantly, Four Seasons should
focus on advertising their targets efficiently and effectively to extend the company’s customer
base.
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Primary Competitors:
Four Seasons is unable to “stack-up” to the top competitors in the luxury hotel industry. Sales of
$30.86 million are about $1.08 billion off of Ritz-Carlton’s, the competitor Four Seasons is
closest to in terms of sales. The other top two competitors are Starwood and Wyndham
Worldwide
The Ritz-Carlton Hotel Company, L.L.C
The Ritz-Carlton based in the U.S. is in the luxury hotel industry and provides over 100 luxury
properties in the world. These properties are usually rated among the best worldwide. The Ritz-
Carlton owns approximately 15 time-share properties in addition to its luxury hotels. Marriott
International did buy a large stake in the Ritz-Carlton in the 1990’s and now owns 99% of the
stake in Ritz-Carlton. The Ritz-Carlton is part of the luxury segment at Marriott and is
expanding, as is many other luxury hotels including Four Seasons. In Hong Kong, the Ritz-
Carlton was opened in 2011 and claimed the title of the world’s tallest hotel. In 2012, Ritz-
Carlton’s had sales of $1.1 billion and employed 38,000 people.
Starwood Hotels & Resorts Worldwide, Inc.
One of the largest hotel companies, Starwood is able to boast sales of $5.62 billion, employment
of 171000 people, and a gross profit margin of 23.38% from 1000 properties. The company
includes brands such as Sheraton and Westin. Starwood also operates approximately 15 time-
share properties. The company’s current strategy is reducing investments in real estate and alters
their attention to management and finance operations. Not to be left out, the company is also
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expanding its properties but focused on the Asian market, which includes a 44% growth in China
specifically.
Wyndham Worldwide Corporation
With about 7,200 franchise hotels internationally, including the brands Days Inn and Super 8,
and 4000 vacation rental properties and exchanges, Wyndham Worldwide is also one of the top
hotel firms in the world. With the help of 32,500 employees, the company was able to obtain
sales of $4.35 billion and a gross profit margin of 53.84%. These high numbers are result of
vacation rentals and timeshares, which accounts for more than 80% of Wyndham Worldwide’s
revenue. To expand its business, Wyndham Worldwide is taking a different route than other
luxury hotels by acquiring vacation rentals through acquisitions.
Turnover of Personnel:
Four Seasons believes their “greatest asset, and the key to our success, is our people. The
company’s statement rings true, which is best demonstrated by the fact Four Seasons did not
institute any job cuts in its history until the recession. In 2009, the company did implement a
10% job cut, or approximately 400 of its employees, from its headquarters in Toronto, Canada.
Despite this slight setback, the company was able to obtain the 83rd spot in Fortune’s 100 Best
Companies to Work For. The company currently employs 306 new jobs per year, which is a 3%
job growth. Overall, Four Seasons manages roughly 35000, about 23000 of those employees
work outside the U.S. Women in the company’s workforce equal 46% and the minorities count
for 63% of the employees. Four Seasons established a nondiscriminatory policy as well, which
includes sexual orientation and offers same sex couples domestic partner benefits. The company
also provides a compressed workweek and telecommuting options, which more than likely helps
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the Four Seasons retain its best employees. However, the company does not provide 100%
healthcare, paid sabbaticals, or onsite child care. Since Canada provides universal healthcare,
the lack of healthcare in Canada probably does not impact the employees; on the other hand,
some of the other countries with Four Seasons establishments do not offer that luxury, so the
lack of healthcare may have an impact on the personnel in those locations.
Ease of Entry:
Entering into the luxury hotel is a very difficult task. Without merging or acquiring a company
already in the industry it is challenging to overcome the barriers. The properties are high-quality
and therefore require a large amount of funding to build. In addition, to compete in the luxury
hotel industry, it is increasingly becoming important to expand into the emerging markets such
as India and China. To be able to enter into the luxury hotel industry in these countries creates
even more barriers. For example, almost all international brands must form partnerships or joint
ventures to be allowed to get their foot in these markets. These countries place many restrictions
on foreign entities. For example India offers a lower tax for domestic businesses compared to
foreign firm. It would be advantageous for hotels to pair up with domestic business owners to be
able to receive this lower tax. Other barriers include corruption in the political system of
different countries and an inability to find a competent work staff in smaller cities. Although it is
challenging to enter into the luxury hotel field, the revenues that are associated with this industry
provides an incentive for companies to join, maintain, and expand their brands internationally.
Agenda:
Four Seasons is looking to expand their brand by building five to seven properties per year. The
company is looking to erect many of these buildings in the Middle East and Asia. Despite the
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fact that the company already has one property in India, it wants to build at least three more by
the year 2015. While those regions are Four Seasons main locations for expansion, the company
also built two new properties in the U.S. in 2010. Previously, Four Seasons had wanted to create
a luxury ship, they were unable to come up with enough money to finance the project. The
company’s current agenda does seem somewhat realistic with the improving economy and boost
of consumer confidence since the recession. The U.S. market is steady; however, the
international market, which is where Four Seasons is looking at for expansion, is inconsistent.
Even though the world market is bumpy, room pricing has increased 4.2% and occupancy
statistics increased 2.5%. In addition, the room demand is at an all-time high in 2012 with an
increase of 3%. The 2013 projection is an increase as well, albeit in single digit rates. The
industry overall improved with RevPAR (revenue per available room) increased 6.8% in 2012
and a prediction of moderation in 2013. Four Seasons plan to expand into India over the next
two to three years does face problems. For instance, other hotel companies have trouble
retaining staff. Employees are jumping from one hotel to the next in search of the best short-
term benefits. Besides the labor retention problem, current hotels are dealing with labor shortage
issues as well. The number of job openings is much larger than the number of qualified
applicants.
Integrity:
Once a public company, Four Seasons became a private company again in 2007. With a worth
of $4 billion, Bill Gates’ company, Cascade Investment, and Saudi Prince Alwaleed Bin Talal’s
Kingdom Hotels bought 95% of the company with the other 5% owned by the founder and
chairman Isadore Sharp. Sharp stated that by going private the company is able to “protect the
integrity of the brand.” According to Four Seasons website, the company believes it will
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“succeed when every decision is based on a clear understanding of and belief in what we do, and
when we couple this conviction with sound financial planning” and that it “demonstrate our
beliefs most meaningfully in the way we treat each other and by the example we set for one
another.” These statements provided by Four Seasons sets the tone for the company and attest to
the type of culture it wants to maintain, which includes integrity in its day-to-day operations.
In addition to its stated principles, the company proves their integrity through their goals of
supporting sustainability, aiding in community building, and advancing cancer research. Four
Seasons enables sustainability by attempting to preserve the environment through hosting
programs and passing on knowledge and planting trees around the world. The company also
gives charitable donations, volunteers, and participates in community events. Four seasons helps
build communities by offering poverty relief, mentors, and support of local orphanages. Lastly,
the company also supports cancer research by fundraising, volunteering, and the Terry Fox Run.
Terry Fox had lost a leg to cancer but still wanted to run across Canada to raise awareness and
funds for cancer. Once Isadore Sharp heard this story, he donated money, asked for more
support from corporations and has since established the Terry Fox Run held every year in
September.
While Four Seasons beliefs and values state that they work with integrity, the projects the
company is involved with outside of its luxury hotel business helps establish credibility to
management’s integrity.
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Porter’s Five Forces Model:
Michael Porter created the Five Forces Model to use as a tool to understand the overall
competitiveness of a market and its profitability. However, the model does not designate the
profitability of each firm. The Five Forces Model was Porter’s reaction to the SWOT Analysis.
While the SWOT Analysis had four components, Porter’s framework has five that includes
external sources and internal threats. Stated below are the five forces in relation to Four Seasons.
Potential Entrants:
The threat of new entrants is relatively low. The ease of entry into the luxury hotel is very
difficult, which means the likelihood of new competitors attempting to hedge their way into this
industry is small. A large amount of funds is needed to compete in this industry. The funds are
required to start the brand and to expand it. A smaller hotel brand being acquired by a company
29
with a budget that would allow the smaller hotel to extend their brand into the luxury hotel
industry would be a more plausible threat of a new entrant. During the recession, very few
mergers and acquisitions were taking place, and thus this option of threat is also limited.
Bargaining Power of Suppliers:
The luxury hotel industry’s main resource needed to provide to its customers is a competent
employee. Therefore, the bargaining power of suppliers is somewhat strong depending on the
area of location. For Four Seasons, in Canada, the bargaining power of suppliers is not high.
Likewise, the suppliers to the brand’s properties in the U.S. face a low bargaining power because
the unemployment rate is high and many qualified personnel are looking for work. However, in
India, the number of adequate employees is a problem many hotels have to deal with. Therefore,
the bargaining power of suppliers in this area is high. Overall, the location of the Four Seasons
hotel determines the bargaining power of suppliers.
Bargaining Power of Buyers:
The hotel guests, or buyers, have a high bargaining power due to the number of competitors in
the industry. Although it is difficult to enter the luxury hotel industry, there is competition
amongst the top brands. With the all the different brands vying for the top spot, the hotels aim to
win over the buyers, thus giving the buyers the power. In addition, during the recession,
consumers traveled less causing a negative impact on the hotels. With the upturn in the
economy, the consumers are starting to regain their confidence and vacation again. The luxury
hotels have to draw these consumers back in.
30
Threat of Substitutes:
The threat of substitutes is medium. These consumers can stay at luxury hotels or stay at the
next best thing, upper scale hotels and upscale hotels. The upper scale and upscale industries
provide substitution to the luxury hotels; however, with the economy improving it is more likely
that consumers will continue to pay to stay in the luxury hotels. In addition, with the uptick in
the economy, more consumers have been staying in luxury hotels as demonstrated by the
increase in room demand in 2012.
Rivalry:
The competition in the luxury industry is relatively high. With mergers and acquisitions of the
top luxury brands, there is an increase in the amount of money being spent on current properties
and on the expansion for more establishments. It is critical that brands are expanding into the
emerging markets, such as China, to keep up with the competition. Also, it is important that the
brands customize their products in these new emerging markets to set themselves apart.
Accounting and Governance Risk:
The Accounting and Governance Risk (AGR) is a rating used to measure the statistical reliance
and transparency of a company’s financial statements and governance practices. Developed by
Audit Integrity, AGR attempts to identify factors that are associated with fraud and quantifies the
possible risks for third party users, such as the stakeholders. To quantify these risks, Audit
Integrity analyzes hundreds of metrics to find certain factors that could lead to the discovery of
fraud in a public company. Since Four Seasons went private in 2007, there has not be an audit
31
accounting and governance risk on this company because they do not file financial statements
and do not have shareholders that would rely on this type of information.
Company health:
A company’s financial health can be analyzed using various techniques and metrics. In assessing
Four Season’s financial health, ratios analysis is one technique that allows us to compare the
company’s performance in the present year to that of previous years. This will enable us to
determine if the company is performing more profitably and is in a better position to meet its
obligations now, than in the past. A comparison of ratios for the years 2004, 2005 and 2006 will
be done to analyze the company’s performance. A company’s strengths and weaknesses can also
be identified by comparing its ratios for a given year to those of its industry or close competitors
in the same year. Therefore for 2006 we compared Four Season’s ratios to other companies in
the same industry. These comparisons are done using Liquidity Ratios, Activity Ratios,
Profitability Ratios, and Coverage Ratios.
Ratio Analysis
Liquidity Ratios:
Liquidity ratios measure the ability of a company to meet its short term debt obligations as they
are due. It shows the capability of current assets to be converted into cash when needed.
Generally, the higher the liquidity ratio, the better the position the company is in to meet its
Financial Health
32
obligations. A liquidity ratio of 1 or higher displays the company’s ability to fully meet their
short term obligations. The two liquidity ratios analyzed are the current ratio and quick ratio.
The current ratio indicates a company’s ability to meet its short term debt obligations over the
next 12 months. Four Seasons’ current ratio increased at a steady rate over the three year period
growing from 4.87 in 2004 to 5.4 in 2005, then 5.68 in 2006. This indicates that the company is
in a better position in 2006 to meet its short term obligations than it was in the previous years.
The quick ratio is similar to the current ratio. However, it only includes assets that can be
liquidated quickly for immediate use. Four Seasons’ quick ratio also gradually increased over the
three year period going from 3.87 in 2004 to 4.23 in 2005 and 4.78 in 2006. If Four Seasons’
needed to pay its obligations immediately it had enough liquid assets to readily pay them. For
that three year span, Four Seasons had been in a very good position to meet its short term
obligation. This is evident from the table above as from 2004 to 2006 their liquidity ratios were
significantly greatly than 1 and increased over the years. When compared to its competitors
(Figure 1), Four Seasons’ liquidity ratios are tremendously higher in 2006. This shows that the
company holds a greater amount of liquid assets than their competitors and is in a better financial
position to pay off their short-term debt as it comes due.
33
Activity Ratios:
Activity ratios are used to measure a company’s ability to convert assets to sales or cash. They
determine how many days it takes a company to collect its receivables, sell inventory, and how it
uses its assets to generate revenue. In analyzing Four Seasons’ financial health we will compare
the asset turnover, accounts receivable turnover, and inventory turnover ratios.
The asset turnover ratio allows for measurement of the productivity of a company’s assets.
Meaning it tells the reader how efficiently the company is using its assets to stimulate sales and
earn revenue. Although Four Seasons overall asset turnover ratio is fairly low, it had a slight
increase in 2006 when compared to 2005 but decreased a great amount when compared to 2004.
This difference shows that the company has not been using their assets as efficiently in 2006 as
they were in 2004 to generate revenue.
0
2
4
6
5.68
1.31 0.74
4.78
0.52 0.31
current ratio quick ratio
34
The accounts receivable turnover measures how quickly a company collects money owed to
them. It calculates the average number of times cash is collected from debtors. Four Seasons’
accounts receivable turnover increased from 13.61 times in 2005 to 28.32 times in 2006. The
2006 increase was an overall increase throughout the three years. The increase is an indication
that Four Seasons was better able to collect money owed to them more times and in a shorter
period in 2006 when compared to previous years. This increase could have been caused by new
collection policies put in place by the company or incentives offered to debtors to pay quicker.
The inventory turnover ratio indicates the number of times that the inventory is used or sold in a
given period. The inventory turnover ratio for the Four Seasons declined dramatically each year
since 2004. In 2004 the ratio was 176.74 dropping to 37.76 by 2006. For a company in the hotel
industry this indicates a decrease in the occupancy of rooms for a given period. This is reflected
by Four Seasons’ ratio.
When compared with their competitors, Four Seasons had the lowest asset turnover ratio but
their accounts receivable turnover and inventory turnover were significantly higher. These ratios
indicate that Four Seasons do not use their assets as efficiently as their competitors but still
manage to turnover their inventory faster than them and have better procedures in place to collect
from their debtors. Therefore, overall it can be concluded that Four Seasons’ activity ratios are at
a good level when in comparison with others in the luxury hotel industry.
35
010203040
0.27 1.42 0.55
28.32
12.48 9.68
37.76
010.27
Asset Turnover Accounts Rec. TurnoverInventory Turnover
Profitability:
Profitability ratios measure a company’s ability to generate earnings and profit through sales,
investments, and assets. With profitability ratios, a higher value is more desirable as it reveals
that the profitability of the company is being managed effectively. Profitability ratios are most
meaningful when compared to ratios of the previous year or to the industry.
Return on assets (ROA) measures the amount of profit made by a company for every dollar of its
total assets. In 2004, Four Seasons had a ROA of 3.26% which is fairly good. In 2005 however,
they had a negative ROA of -2.87 which indicates that they spent more on assets than they made
36
from them. The negative return was converted back into a positive in 2006 when Four Seasons
had an ROA of 5.37% ensuring their financial data users that they were making a profit from
their assets. Return on Equity (ROE) and Return on Investments (ROI) are similar to ROA in
that they measure the returns received by the company on their equity and their investments
made. Bothe ROE and ROI fluctuated over the 2004 to 2006 period, with ROE falling in the
negatives in 2005. However, they both were at their highest in 2006 with ROE and ROI being
8.41% and 7.52% respectively. This shows that Four Seasons had about and 8% return on both
their investments and equity.
EBITDA (Earnings Before Income Tax, Depreciation and Amortization) tells us how the
business is performing before deducting expenses such as tax and depreciation. Four Seasons’
EBITDA also fluctuated for the years 2004 to 2006, with the highest earnings being in 2006.
From the ratios discussed thus far we can see that 2005 was not a good year for the Four
Seasons. However, they regained some strength in 2006. In 2006, Four Seasons had a profit
margin of 19.84. This means that for every $100 of sales $19.84 went into their net income. Four
Seasons’ price earnings ratio, dividend yield and earnings per share were extremely low in 2006.
This is mostly like due to the fact that the company decided to go private at the end of 2006.
Hotels ROA ROE ROI EBITD PE Dividen Earnings
37
A Ratio d Yield per share
Four Seasons 5.37 8.41 7.52 30.11 -
124.274
0.1213 1.36
Marriott
International
7.12 20.77 21.48 10.1 24.1861 1.25 1.77
Starwood Hotels
and Resort
9.6 25.38 11.19 18.67 21.8182 2.0032 2.92
When comparing the Four Seasons to their competitors, they fell below both Marriott and
Starwood Hotels by a great amount in almost every ratio. Their ROA was the only ratio that fell
somewhat close to the industry’s average, which was probably the result of the Four Seasons
being a medium sized company. Profitability wise, the Four Seasons does not seem to have been
doing well as a public company. Therefore, we believe that it was a good decision to take the
company private in 2007.
Coverage Ratios:
Coverage ratios are used to analyze a company’s ability to meet its long-term debt obligations
and pay its investors. They take into account the company’s various financing methods. There
are many ratios to calculate coverage; however, our focus is on debt to equity and book value per
share.
38
06
1218
0.42 0.7 0.88
17.34
6.72
14.09
Debt to equity book value per share
The debt to equity ratio indicates the proportion of an entity’s equity and debt used to finance its
assets. A high debt to equity ratio is not healthy for a company as it shows that the company is
too dependent on outside financing to fund their assets. Four Seasons had a relatively low debt
to equity ratio over the three year period from 2004 to 2006, which indicates their lack of
reliance on financing. Their book value per share fluctuated slightly over those three years but
was in the same number range. When compared to their competitors, Four Seasons had the
highest book value per share and the lowest debt to equity ratio, which put them in a strong
financial position in the industry.
Z-Score Analysis:
The Z-Score for non-manufacturing companies is a combination of four ratios used to determine
the risk of bankruptcy for a given company within the next two years. This was created by
Edward Altman in the 1960s. The Z- score has three zones of discrimination.
39
Four Seasons’ calculated z-score is 5.508. This calculation can be seen in below. This z-score
demonstrates that Four Season has a very low risk of going bankrupt within the next 2 years as it
is well within the safe zone parameter as defined by the zones of discrimination.
Z-Score Calculation for Four Seasons
Strategic Profit Model:
The Strategic Profit Model is used to analyze the financial performance of Four Seasons by
measuring its ROE and determining the reason for its increase in 2006. The model focuses on
the company’s profits and assets by breaking down the ROE into separate parts. This separation
2.6 or more"Safe Zone"
1.1 to 2.6"Grey Zone"
1.1 or less"Distress
Zone"
Zones of Discrimination
Formula Calculation Total
Working Capital/ Total Assets (359,131/991,967) *6.56 2.375
Retained Earnings / Total Assets (207,600/991,967) *3.26 0.682
EBIT / Total Assets (69,207/991,967) *6.72 0.469
Equity / Total Liabilities (648,475/343,492) * 1.05 1.982
Z-SCORE FOR FOUR SEASONS 5.508
40
makes the financials easier to read and track. Using the strategic profit model users of the
financial statements and the auditor can track exactly what caused the ROE to increase in 2006.
This is important because different decisions will be made based on whether the ROE increase
because of increased liabilities, causing the equity to be reduced proportionally, or an increase in
income caused by their equity. The strategic model for Four Seasons can be found below.
253,425
173,304
556,179 362,295
6,096
253,425
0.27 435,788 67,397
991,967
8.41 8.41 5.37
80,121
50,287
19.84
253,425 173,304
Inventory
Accts Rec.Current Assets
SalesAsset
Turnover
FixedAssets
Total Assets
The Strategic Profit Model
÷
Other CurrentAssets
÷
Net Profit
Net ProfitMargin
Sales Total Expenses
Gross MarginSales
Cost OfGoods Sold
Return onAssets
Net Prof itTotal
Assets
xx
FinancialLeverage
Total AssetsNet Worth x
=
Return OnNet Worth
41
Sources and Value of Capital:
In 2006, Four Seasons had long term debt of over $266 million. In addition, they had long term
debt that was due within one year of about $2 million. Four Seasons uses some of its debt to
invest in management contracts and hotel partnerships and corporations. These investments will
help Four Season to pay off its debt in the future.
Four Seasons also sold stock as a source of capital. In 2006, they had over $287 million stock
outstanding with an earnings per share of 1.36. However, in 2007, Four Season became a private
company. They also issued convertible notes in the amount of about $36 million. These bonds
can be later converted into limited voting shares on a one for one basis. In 2006, Four Seasons
also received proceeds of $36.3 million relating to the exercise of options by employees to
purchase 746,310 Limited Voting Shares.
Capital Market Place and Four Seasons:
Due to the fact that Four Seasons went private in 2006 there is not much capital market data on
the company. However, in 2006 Four Seasons had stock outstanding of about $287 million. They
paid dividends of $0.11 per share in 2006 and had an EPS of 1.36.
Four Season’s Financial Direction:
Based on Four Seasons’ financials for 2006, overall they seem to be heading in a positive
direction financially. Four Seasons’ revenue has increased from $251,725,000 in 2005 to
$253,425,000 in 2006. Although this is not a great increase, it shows that the company is
growing. In addition, the majority of Four Seasons profitability, liquidity and activity ratios
indicate that the company has improved in 2006 when compared to other years. Four Seasons
42
took its company private in 2006, reducing the information available to the public on its
financials. Therefore, information about their stock could not be found. However their EPS in
2006 was 1.36, which was around the average for other companies in the same industry. Four
Seasons has also become more technologically innovative by joining social networks, improving
their website and providing their customers with more access to the company through the use of
technology. This move allowed them to increase their revenue by 200% in 2011. Four Seasons
has received unqualified opinions from their auditors KPMG for the three year period that was
covered in this assessment. Therefore, it can be said that Four Seasons’ financial records are up
to standard but there is still some risk associated with the company, such as as the change of
status from public to private will bring changes.
Quality of earnings Analysis:
Quality of earnings is defined as “ [the] earnings [that] are attributed to aspects of the company's
business, as opposed to external forces” (Investor Words). It is also a word that helps to
“distinguish between earnings associated with the company's primary operations versus those
generated from financing and investing” (Business Dictionary). The Investor Words defines the
high quality of earnings as a change in earnings derived from a decrease in production costs or
an increase in sales; whereas the low quality of earnings is regarded as the increase in earnings is
based on the outside sources. Given these criteria, Four Seasons, by the year of 2006, qualifies
the standards for high quality of earnings.
43
By comparing the two years net earnings from the above consolidate statement of operations;
year 2006 almost triples the net earnings of year 2005. This huge increase in earnings is driven
by the great increase in the hotel and food services provided by Four Seasons.
The overall hospitality industry in 2006 is actually experiencing its high quality of earnings.
44
This table is exhibits value of the percentage change from 1999 for a typical North American
hotel. From the table, it is really clear that the percentage changes are positive since 2004 to
2006. In order to make more precise decision about the overall industry quality of earnings, all
different regions around the world need to take into considerations.
The above table better summarizes the worldwide percentage changes from 2000 to 2010. It is
not difficult to figure out that the percentage changes are positive in 2006 regardless of the
locations. Therefore, the conclusion can be drawn that the hospitality industry possesses a high
quality of earnings, so do Four Seasons hotel as individuals.
Auditor’s report:
KPMG LLP has been the auditor hired by the Four Seasons every year until 2006, when the
company went private. KPMG LLP is known as one of the “big four” accounting firms around
the world. By having such a prestigious accounting firm providing the audit report, it increases
the reliability, which leads to confidence from the stockholders and third parties towards Four
45
Seasons Hotels. Based on the consolidated statements that Four Seasons provided to the auditor,
the auditor from KPMG LLP concluded that “In [their] opinion, these consolidated financial
statements present fairly, in all material respects” (Consolidated Financial Statements Four
Seasons Hotels Inc., 4) for the year 2005 and year 2006. What KPMG LLP means by the
statement above, is that the auditor is issuing an unqualified opinion and providing a reasonable
assurance that the financial statements are free from material misstatement. The full auditor’s
report is attached in the Appendix.
Perceptions:
The following table summarizes the high and low price and volumes of trading of the Limited
Voting Shares on the NYSE in each of the periods mostly in the years 2005 and 2006. In Four
Seasons, “[e]ach Limited Voting Share entitle[s] the holder to one vote,” (Four Seasons Hotels
Inc. Notice of Special Meeting of Shareholders, 56) in order to maintain the voting level. Also,
another major power holders of Limited Voting Shares possess is that, “[they] are entitled, voting
separately as a class, to elect two members of FSHI's Board annually,” (Four Seasons Hotels Inc.
Notice of Special Meeting of Shareholders, 56).
Analyst Report
46
According to table below, the prices for Four Seasons stock decreases during 2005, while the
volume fluctuates greatly; and the price goes back up in 2006 to around $80. After year 2005,
the stock price increases steadily until the date of the report. From this numerical evidence that
we observe from the table, it seems like stockholders should hold the stocks or buy the stocks;
likewise, according to an analyst recommendation in 2007, the analysts rated it at #3, which
suggests stockholders to hold the investment.
47
The Analyst rating has increased the rating since 2003 when it had been rated at a level 5, which
is a “strong sell”, by S&P (Zacks Issues Sell Recommendations On Four Seasons). By
comparison of these two different recommendations, Four Seasons is making process in terms of
their performances.
Material types of transactions:
There are many different types of transactions Four Seasons Hotel and Retorts takes part in
throughout the entire course of its business. Certain types of transactions are considered more
important than the other types. For Four Seasons, there are four material types of transactions
when doing working in the luxury hotel industry.
Intial Assessment of Four Seasons
48
The first, and arguably the most important type, is the expenditures on real estate and
expansions. Since Four Seasons is a hotel-based company, it needs land and buildings to keep
the business running; therefore, the purchasing and selling of land property, as well as any
necessary remodeling, will be considered a major type of transaction.
Another material type of transaction is its food services. As a business in the luxury hotel
industry, Four Seasons needs to provide a reputable level of food services in order to sustain its
reputation as a high-end hotel chain. Also, the expenses for raw materials’ prices become a
relatively major portion of the transactions involving its food services.
The third material type of transactions is the guests’ room arrangement. There will be hundreds
of thousands reservations coming in every single day, so it becomes extremely essential to
arrange the appropriate room for each individual customer that matches with their requirements.
Failing to record these transactions properly could result in lost customers, meaning lost revenue.
Finally, the last material type of transaction is salaries and wages expenditures for all level of
employees and executives. Even though the individual payroll amount is not significant, the
total amount of more than thirty thousand employees drives the expenses up. Therefore, the
expense of paying all those employees is another material type of transaction.
Transaction cycles involved:
In order to achieve the goals of efficiency and profitability for a company, the accounting cycle
49
plays a tremendous role. The accounting cycle is made up of different transaction cycles, which
break down into five transaction cycles, including the Financial Cycle, Expenditure Cycle,
Payroll Cycle, Conversion Cycle and Revenue Cycle. Each type of business within the company
can be traced to specific transaction cycles for the purpose of effectiveness. All the different
transaction cycles need to be integrated in a proper way in order to ensure that Four Seasons can
operate smoothly.
The starting point of the actual business is the Financial Cycle, which consists of the initial
funding and the start-up costs for opening the business. Since the Four Seasons is not a newly
started business, this cycle is less important in comparison to the other four cycles. Once the
Financial Cycle procures the capital, the Expenditure Cycle comes to place.
The Expenditure Cycle involves the budget expenses for the company, which is critical to Four
Seasons because the material types of transactions for Four Seasons are food, purchasing, and
land acquiring, all expenses. As soon as the capital is obtained, the firm will hire professionals
to help with the firm’s operations.
As stated above, in material type of transactions, the payroll cycle is in fact a large cycle that
company needs to focus its attention on. The payroll cycle focuses on the actual expenses for
each individual employees and executives, and it is actually a sub-cycle of the expenditure cycle
that we talked above.
The next key cycle is the Conversion Cycle, which is comprised of the Expenditure Cycle and
50
the Payroll Cycle. Most accounting transactions occur during this period and that makes this
cycle more distinctive compared to the others. The last cycle is the Revenue Cycle, which can
only be generated upon the completion of the Conversion Cycle.
There are a large number of transactions existing during the business course for Revenue Cycle.
For Four Seasons, the major source of revenue comes from the hotel reservations and the food
services. It is vital that Four Seasons makes sure that the revenue is fairly stated in its financial
statements. Among all of the five different transaction cycles, it is apparent that each one needs
to play in their suitable ways to allow the company to continue to move properly into the future.
Audit Risk (Audit Risk=f [DR, ICR, IR]):
A desired audit risk, which is a qualitative judgment, is a function of detection risk, internal
control risk and inherent risk. Detection risk is the risk that the auditor will conclude that no
material errors are present when in fact there are. Internal control risk is Probability of loss
arising from the tendency of internal control systems to lose their effectiveness over time. And
the inherent risk is defined as the probability of loss arising out of circumstances or existing in an
environment, in the absence of any action to control or modify the circumstances.
Since the audit risk is subjective, it is extremely important for the client acceptance consideration
to avoid providing a wrong opinion of the financial statements. If the auditor issues a false
opinion based on the inappropriate audit risk, the third party will not be reasonably assured that
the financial statements are free of material misstatement and could result in possible legal
51
liabilities. While considering the audit risk, it is also important to consider the low-risk areas as
well as the high-risk areas.
High-risk Areas:
Since Four Seasons Hotels and Resorts Company is a worldwide hotel company, one of the
biggest challenges and risks is the varying political policies in each of the different countries that
have a Four Seasons Hotel. Each country will have different government policies of varying
degrees that may limit the company’s continuous development in that country. For example, the
government may force Four Seasons to pay additional taxes to operate, which will result in a
higher price to operate in that country. The increase in price of their services means the actual
profit in that country will be diminished. Therefore, government policies need to be taken into
consideration as an inherent risk by Four Seasons before expanding into new countries.
Another potential high-risk area is the dependence of the management team and employees,
which falls into the category of internal control risk. Four Seasons employees more than thirty
thousand employees in Vancouver, Canada alone. It is certainly critical for them to make the
appropriate hiring decisions. The background check for each individual employee is necessary
to ensure that they will perform on behalf of the company and have no prior history that would
hinder their work. For example, if one employee has a theft record, it is more likely for him to
steal from the company, which will lead to employee fraud. Another instance would be if the
management team colludes with each other to overcome internal control, then management fraud
exists. It is harder for internal control to detect management fraud than the misappropriation of
assets. In addition, management fraud is much more material than the employee fraud and can
52
result in irrevocable disasters for the company.
Also, the economic condition is considered as a high-risk area. If the economic condition
decreases dramatically, like during the Great Recession, Four Seasons must pay more to get the
materials that they need. The corresponding prices will increase for customers as well. This may
result in the low sales and low revenues during the downtime of the economy. Therefore, Four
Seasons should predict ahead for possible economic downturns and prepare for any
miscellaneous situations that may occur.
Low Risk Areas:
Risk associated with expansion, growth, and new construction has the potential to be low-risk
areas. Mentioned in the annual report of the year 2006, the financing for new construction
provides a significant risk to Four Seasons. As a result of the risk, a low-risk area arises from
changes or concessions required by regulatory authorities. These requirements could involve
additional costs and delays; prevent completion of construction, or opening of a project.
In addition, the political risk of owning and managing luxury hotels in 31 different countries is
another low-risk area. The risk includes the company having difficulty enforcing contractual
rights related to its assets if due process of law is not respected.
Currency exposure is another low-risk area, especially since Four Seasons shifted from reporting
all the financial statements using the Canadian dollar and adopted the US dollar in 2005. By
switching currencies, reporting, using the U.S. Dollar will minimize the currency fluctuations
related to the majority of the U.S. Dollar management fee revenues.
53
The seasonality and/or quarterly predictability of the demand is an additional example of low-
risk area for the Four Seasons. Since the demand is usually lower in December through March in
contrast to the remainder of the year, it may lead to a negative impact on the company’s yearly
performance; however, this unfavorable impact is generally offset by an increase in travel to
resorts during that quarter and may be increased as the portfolio of resort properties managed by
the company increase.
Integrity Issues:
The disclosure of controls and procedures in the annual report of the year 2006 indicates that the
management must establish and maintain adequate internal control over financial reporting for
Four Seasons Hotels Inc. The company’s management has used criteria set forth by Committee
of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the
effectiveness of the company’s internal control over financial reporting. Stated in the report,
KPMG LLP has audited the consolidated financial statements and issued a report on
management’s assessment of the effectiveness of the internal control. With the favorable
opinion given by KPMG LLP on previous annual reports on Four Seasons’ internal controls
leads us to believe that the company’s management and audit committee will have a “better”
pitch for the audit proposal. Moreover, the annual report mentions that there have been no
changes in the internal control that have materially affected the internal control system.
Despite an adequate internal control system, on February 12, 2007, Four Seasons entered into a
definitive acquisition agreement that involved three companies. One company, the Kingdom
Hotels International, is owned by a royal prince (Alwaleed Bin Talal Bin Abdulaziz Alsaud and
his family), which may cause integrity issues due to the politics and the way ruling families in
other countries, such as Saudi Arabia, control their businesses and investments. Possible
54
outcomes are the inability to gather sufficient information and limitations imposed by the ruling
families on the auditing process.
In addition, the company made headlines in the U.S. in 2009 following a Four Seasons scandal
when the hotel staff prevented the owners of Four Seasons to enter the hotel premises in San
Diego, USA. The prior issues between Four Seasons’ employees and owners cause our team to
raise concern about the affect of the efficiency and appropriateness of the internal control system
within the company.
Client Selection Decision:
Based on the annual report of the year 2006, we find that it is appropriate to select this client.
With an increase in revenue by 2% between the years 2005 and 2006, we feel comfortable taking
on client that can pay its obligations. Despite high costs in contrast to the income generated, the
company shows signs of improvement. Moreover, Four Seasons has been named by the Fortune
Magazine as one of the best 100 companies to work for, ranking 83rd, the 13th year in a row. To
go along with the improved financial aspect of the company, our assessment of the internal
control of Four Seasons provided to be sufficient. Since we believe that the company has a good
internal control system, there is a greater likelihood that we will be able to assign low internal
control risk and low inherent risk to the Four Seasons, which will make the auditing process
more effective and efficient, and of course, profitable.
55
The graph above shows the increase in the revenues from the year 2005 to the year 2006 by 2%.
Geographical Areas:
Four Seasons headquarters is located in Canada and our team will conduct most of the audit
work there. Four Seasons has 89 other branches in 36 other countries including the United States,
the Caribbean, Europe, Middle East, and Asia/Pacific. It is appropriate to have our team travel to
the areas with the most branches in a common region, such as the United States and the Middle
East areas, to gather evidence to conduct an audit.
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External Control Limitations:
The Sarbanes-Oxley section 404 requires auditors to not only give an opinion on the financial
statements, but also to give an opinion on the effectiveness of the internal control of the client.
This standard has a direct impact on our external control abilities. If the company does not
possess an adequate internal control environment, then the external evidence we gather on the
Four Seasons could possibly be insufficient.
Internal Auditors (AU 322):
According to AU Standard 322, internal auditors should provide, “analyses, evaluations,
assurances, recommendations, and other information to the entity’s management and those
charged with governance.” Using the framework provided in AU Standard 322 appendix which
is shown below, we were able to determine whether or not it was acceptable for us to use the
internal auditor’s work. After consideration of Four Seasons and their internal auditors using the
figure below, using professional judgment, we decided it would be efficient and appropriate to
use the work provided by the internal auditor’s with acceptable and reasonable supporting
evidence.
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58
Framework provided in AU Standard 322.
Outside Specialists (AU 336):
In compliance with AU Standard 336, guidance to using a specialist in performing an audit in
accordance with generally accepted auditing standards is provided. A specialist possess, “special
skill or knowledge in a particular field other than accounting or auditing.” Due to Four Seasons
industry, there is a need for a specialist expertise in asset valuation. It is vital that there is
validity in the evidence used to perform substantive test to evaluate material financial and using
a specialist to ensure that the depreciation and fixed assets are stated correctly and in accordance
to generally accepted auditing standards. In addition, the amount attributed to management
contracts may need to be looked over by a specialist to assure the contracts are valid.
Our team will ensure that the specialist has the professional certification or recognition in their
field, a reputation and standing in the views of peers, and the skill in the type work under
consideration. While we will allow the work of a specialist or specialists, our team will know
the scope of the specialists work, assure the specialist is independent, and know the methods
used to comply with AU Standard 336.
Specific Areas of Audit Expertise (AU 311):
The AU Standard 311 begins with the first standard of field work, “The auditor must adequately
plan the work and must properly supervise any assistants.” Before forming an overall audit
strategy to audit the Four Seasons, it is important to draft an engagement letter. Once the
engagement letter is agreed upon, an experienced team including partners, senior managers, and
fewer entry-level staff will begin the audit planning of our new client. Due to the inexperience
59
with Four Seasons, we determined that to produce reasonable assurance that our opinion on the
financial statements is correct; we must select members with more familiarity to conduct this
audit.
Audit Opinion:
After performing the audit and evaluating the company, including Four Seasons’ internal control,
we believe that an unqualified opinion would be appropriate for Four Seasons’ fiscal year 2012-
2013. By issuing an unqualified, our team is giving reasonable assurance that the Four Seasons
is free from any material misstatements in their financial statements. In addition to the
unqualified opinion regarding the financial statements, we will also release a report on internal
control over financial reporting.
When Four Seasons was public, the years prior to 2007, KPMP LLP had given the luxury hotel
an unqualified opinion for five consecutive years leading up to Four Seasons privatization. By
issuing an unqualified opinion, KPMG LLP ensured that the following conditions had been met:
all statements (balance sheet, income statement, statement of retained earnings, and statement of
cash flows) are included in the financial statements, the three general standards have been
followed throughout the entire engagement, sufficient appropriate evidence has been
accumulated and the auditor has conducted the engagement in a manner that enables him or her
to conclude the three standards of field work have been met, the financial statements are
presented in accordance with U.S. generally accepted accounting principles including adequate
disclosures in the footnotes and other parts of the financial statements, and there are no
circumstances requiring the addition of an explanatory paragraph or modification of the wording
60
of the report. With Four Seasons receiving unqualified opinions previously and its continued
financial stability; we believe that an unqualified opinion should be issued in the annual report.
Implications of Sarbanes-Oxley (404):
Following the major corporate and accounting scandals, such as Enron and Tyco International,
Congress reacted by enacting the Sarbanes-Oxley Act in 2002. The act was passed to help
restore confidence in corporations. SOX led to the formation of the Public Company Accounting
Oversight Board (PCAOB) in addition to other requirements, for instance Section 302 that
requires management’s quarterly certification of their financial results.
One of the most significant outcomes of the act is Section 404. This section mandates that
management make include the effectiveness of its internal control in the annual report, which the
auditor evaluates and reviews as internal control on financial reporting. The auditor then issues
an opinion on the company’s internal control along with the opinion given on the financial
statements.
The cost of evaluating the effectiveness of the company’s internal control is high, but necessary
in order to maintain and demonstrate a sound internal control environment. To document and
continually test the internal controls is costly but in long run beneficial. Without proper internal
controls in place, Four Seasons could lose a significant amount of money due to the
misappropriation of assets. Having good internal controls in place dissuades employees from
participating in employee fraud. While internal control helps alleviate employee fraud, it does
not have a huge impact on deterring management fraud. With the pressure on maintaining sound
internal control, Four Seasons went private to allow a high level of internal control within the
company to continue.
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Client Business Risk Matrix
Poor Staff Members
Guest Behavior
New Construction
Political Risks
Poor economic conditions
Data privacy (hotel users)
Terrorism (in North
America/Europe region)
Litigation Proceedings
Branding
Unfavorable government policies
The above matrix is used to assess the risk assumed by the Four Seasons that could potentially
have an impact on their financial statements. On the horizontal axis, the significance of each risk
on Four Seasons’ financial statements is identified as high or low. Since Four Seasons is a
worldwide establishment, the risk significance of political risks is present in some areas the Four
Seasons is located in could have a substantial impact on their financial statements. The vertical
axis is the probability that a certain risk will occur. While the political risks have a high
High
Low
Low High
Significance
Probability
62
significant risk on the financial statements, it also has a high probability of occurring due to the
large number and vastly different countries Four Seasons has built and operates hotels in.
The auditor’s consideration of the internal audit function in an audit of financial statements.
(n.d.). Retrieved April 9, 2013, from
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Appendix A: Auditors Report
Appendix
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Appendix B - Team Organization
BudgetInitially, we estimate the time that we needed to devote to the preliminary part is ten hours for each team member. However, as we went through the preliminary part, we found that we underestimated our time schedules. Then more time is put towards the second part of the project. Upon the completion of the project, we figured the accumulated time that we put on our project is approximately thirty hours for each of the four team members.
LeadershipWe did not intentionally choose our team leader, but Vanessa turned out doing more work than the rest of us. Even though each team member is responsible for making sure the division of work is fair and equal, she always the one who assigned us the sections that we need to focus on. In addition, she put time to review and edit our writings when we finished, and put comments for us to revise the work.
CoordinationAt the very first meeting, we agreed on an implied contract that every single of us in the team would take our responsibilities and work together effectively and efficiently. After careful consideration, each team member chose the sections that they are interested in, and equalize the work. We had our work assigned during the mid January for the preliminary project. After the completion of the first portion, we split up the second part of the project. The reason why we did not form a formal contract was because we felt accountability to each other, and knows that each of us will take our own responsibilities, so there is no need to form a formal contract.
NormsThroughout the semester, our team meets consistently to ensure everybody took baby steps for the project. During the meetings, some specific norms were resulted from the expected behaviors. The first norm that we found essential to keep the group coherent was finishing the work by the assigned date and meeting the team on time. We had the initial meeting to setup the responsibilities that we need to follow, which include this norm. Being supportive for each other as a team in a positive manner was also an important norm. This norm started when we first chose the Four Seasons Hotels and Resorts for future endeavors in favor of Patrises. However, since Four Seasons went private since 2007, the valuable information that we could find was limited. We figured out that we needed to pull the important information and shared them to the whole team, so exchanging and sharing vital information becomes a critical norm for our team. Finally, we also kept really effective communications via phones and emails, we even created the group chat through our phones and group emails to better communicate with each other in time.
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Conflicts There is no major conflict among the team members as a whole due to the effective communications. However, since three of the four team members live off-campus, it is not easy to arrange the place and time for us to meet. We then consent to meet during the day when we all on campus. Another key conflict was that there are three international students in the team, who do know have English as their first languages; therefore, it is a little bit hard to communicate clearly and the writing techniques were not guaranteed. This resulted more work for Vanessa to check out our writings and to provide valuable feedbacks and comments. These minor conflicts did not influence the overall performance of the team as a whole.
Contributions Grade Allocations
Name Grade
Zainab Alghasra 100%
Vanessa Fetter 100%
Siyuan Li (Jo) 100%
Patrises Richards 100%
Instruction The initial impression about this project was it was really time consuming, and it seemed like there were tons of steps to follow. However, as we took baby steps to break down the project in detail, we were amazed how this impossible project was much easier than we thought. Despite of the feasibility, the project itself was still time consuming, especially for us since finding the appropriate information was hard for a private company. Also, by us doing this project on a private company, we do not recommend other groups to try again. Also, breaking down the project into more parts to be handed in will be helpful because we can get feedbacks on each part, and also we will be forced to spread the project work evenly in the semester instead of doing it at the last minute. Another suggestion that we believe is essential is that providing the actual grades to our preliminary project instead of just check marks will allow us have a better understanding about where we stand.
Other team functions
After not doing the extremely important table that we were asked to do for the first exam, we realized it was significant to do all the teamwork required together. Since then, we did all the teamwork; we draw the flowchart and explaining our reasons to each other the team members. In addition, we studied together for the second exam, and got everyone ready for it. During the class lecture period, we always
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helped each other with the questions raised in class as well as the homework problems. By working together as a team and individuals, we improved our time management skills as well.
Proposal The written proposal is loaded with much important information, so in order for clients to accept the engagement, we need to properly select and arrange the information so that it is clear, understandable, and reasonable. Also the written proposal should be free of grammar and spelling mistakes for clients to believe that we take this engagement seriously. In order to leave a great impression for our clients, we need to present the reasonable assurance, through our well-trained stuff, based on the information we have on hand. Most importantly, we should clearly list our auditing price as $ 1 million only, as opposed to their current auditing fee of over $1.5 million. In addition to the well-written proposal, we also need to practice the oral presentation skills to convey the information while presenting to further impress the clients.
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Appendix C: Financial Statements for Four Season