P3 Performance Strategy - T Railways - Section a Pack

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CIMA P3

Performance Strategy

Section A Pack (2 x Section A questions & solutions)

T Railways

Question Paper



SECTION A 50 MARKS [You are advised to spend no longer than 90 minutes on this question.]

Question 1

Unseen case material

Health & Safety

The T Railways media office has recently received a number of enquiries from a national watchdog and other interested sources requesting information on recent injuries that have occurred to customers and staff of T Railways. The media office has informed the Chairman of T Railways that recent health and safety incidents and breaches may have been communicated to external sources by a whistleblower. T Railways were aware of the recent incidents but data and management information supporting Health and Safety KPIs were within agreed annual safety targets. A recent newspaper article has been published exposing the weak health and safety standards within T Railways. This article provided information on two of the recent incidents relating to members of the public and staff sustaining significant injuries within freight and passenger services respectively. The Regional Human Resources Director of T Railways confirmed that the details reported by the newspaper article were correct. The employee had not been trained in manual lifting techniques and had lifted a crate carelessly. He was not aware of the correct technique for lifting heavy goods as no training had been provided during his induction session. It was also advised that regular and routine health and safety checks are not being completed. The injury to a passenger related to an on-board food cart rolling backwards whilst the train was in motion resulting in the passenger sustaining broken toes. It is understood that a member of staff forgot to put the brake on the food cart whilst serving coffee to another passenger. The recent exposure of poor health and safety standards within T Railways has taken the Board of Directors by surprise as T Railways allocates a significant amount of resource to the monitoring and management of health and safety standards. The Health & Safety committee has made an urgent request to the T Railways HR Director for a report detailing the recent injuries to staff, including information on the health & safety training that is provided to new and existing T Railways employees. Further requirements include a back-up



of management information and data to support the last quarters KPIs relating to customer movement, customer non-movement and accidents/ injuries sustained by staff. Internal audit The Head of Internal Audit for T Railways is in the process of collating the annual audit plan for next year. She is aware of the Boards increasing interest in Health and Safety issues and intends to include an audit / assessment of the procedures and policies that have been adopted across TCL, TFR and TPTS subsidiaries. Feedback from internal auditors that are based within these subsidiaries suggests that some managers and staff are more receptive to supervision and management reviews than others.

T Railways currency risks

Some of T Railways sales are to customers and commercial entities in the Eurozone. T Railways freight services exports cargo to neighbouring countries, and sales to these regions accounts for approximately 45% of freight revenue. The vast majority of T Railways commercial entities insist on invoicing T Railways in their own local currency and it has proved virtually impossible for payments to be made in T$ (T Dollars). The board of T Railways has always refused to allocate any resource to the currency risks associated with operating across national borders. It has always absorbed minor fluctuations by taking a slightly larger or smaller profit on sales. Larger fluctuations from TFR have been passed on to TCL customers in the form of increased or decreased selling prices. Certain members of the board have always argued that other railway companies operating in and around the Eurozone are subject to the same currency risks and insisted that the market will always be forced to accept the impact of currency movements, in which case there is very little point in taking active steps to manage currency risks. Automatic ticketing project delays A decision was recently made to upgrade all the ticketing machines across all stations within T Railways operations and the work was completed by TPTS (T Property and Track Services). The decision to install automatic ticket machines was based on T Railways strategic objective to operate a cost effective service and after initial cost benefit analysis it was forecasted that automatic ticket barriers would reduce operating costs by T$22m per annum. The new ticket machines were also expected to deliver some benefit to customers by making it more efficient to purchase and board trains. This upgrade was implemented via a series of different projects all under the



guidance of one Project Manager to minimise on the number of contractors otherwise needed to oversee each project individually. There were significant delays with the installation and roll-out of the machines and both Customer and Freight Services experienced service disruptions due to station closures as a result of ticket machines not being ready within agreed timescales. Many customers also faced a number of ticketing errors during the initial roll-out of machines, and additional resource costs were incurred to ensure that the machines were installed correctly and operating effectively. The board has commissioned a post-implementation review of the new ticketing machine project.

End of unseen material



Required

(a) Identify the risks related to health and safety for T Railways and categorise those risks based on their impact and likelihood. An explanation on the categorisation should be provided.

(8 marks)

(b) Briefly explain the reasons why T Railways Health and Safety procedures may not have been followed by staff

(6 marks)

(c) Discuss the areas or factors that the Head of Internal Audit should consider when planning an audit to understand the extent to which all staff of T Railways are complying to internal health and safety standards, as specified by legislation

(12 marks)

(d) Evaluate the views of those Board Members who believe that there is no need to manage T Railways currency risks

(8 marks)

(e) Outline the benefits of conducting a Post Completion Review for T Railways. Also include a discussion of how the Post Completion Review could be selected and carried-out and very briefly outline potential learnings.

(10 marks)

(Total of 50 marks)

Solutions page 14-25



SECTION A 50 MARKS [You are advised to spend no longer than 90 minutes on this question.]

Question 2

Unseen case material

Out Time plc (OTP) has approached the government of T Country with an interest in purchasing the operations associated with T City-Link (TCL), T Freight Railways (TFR) and T Property and Track Services (TPTS). The organisation has made this enquiry on a strictly confidential basis. A representative of OTP has been requested to liaise with government officials to discuss the affairs of T Railways and assess the viability of purchasing the land and property owned and associated with running all of T Railways operations. If the representatives due diligence enquiries identify that the purchase for OTP is financially viable then discussions and formal letters of intent will be issued. Government representatives have raised concerns with senior officials as the OTP representative has focussed a significant amount of due diligence resource on the value of land and on establishing the lengths of leases for shops, cafes and car parks as well as requesting information on maintenance depots and the associated utilisation rates. Senior officials are concerned that OTP has no particular interest in the operational aspects of T Railways and is simply seeking to purchase cheap land that could be developed for significant financial gain. The government of T Country has called a meeting to discuss the possibility of selling T Railways to OTP. The government of T Country is currently facing tough economic conditions as a result of the recession. T countrys GDP has fallen over the last 6 month period and is facing a T$3.1bn deficit that has been carried forward from 2010 when the previous governmental regime was in power. The cabinet is due to meet to discuss the possibility of selling T Railways given the significant government budget shortfalls and the urgency for a cash injection to stimulate the economy of T Country.

IT system

T Railways existing accounting system is used to monitor the purchase of stock for rail carriages, materials and equipment used by TPTS and the collection of revenue at each station. The system is also responsible for other elements of income and expense. At present, all stock that is ordered for station shops, cafes and carriages is tracked using the barcode of the SKU (Stock Keeping Unit). When inventory



is received, a staff member is responsible for scanning the item to confirm receipt and to update inventory records. The data is sent electronically to T Railways stock management system. The point of sale (till) located at each station and on each passenger carriage also scans items when inventory is sold and this also triggers an automatic update of records. One area of inventory management that remains very labour-intensive is the physical counting of inventory that is necessary to identify any losses that may have occurred due to theft or damage. T Railways currently holds inventory in warehouses based in local maintenance depots which are used to replenish stock when needed. Each shop, cafe and carriage is required to complete manual spot checks on high value inventory such as electronic equipment (CDs and mobile phones) held by shops and on T Railways carriages. A manual reconciliation is completed between the stock held in the shops and paper records. Stock taking in this manner can take a considerable amount of time and must be checked by two members of staff to ensure accuracy. The Finance Director would like to introduce a new system for monitoring inventory within T Railways so that it will be based on package based barcodes. He has also proposed that high value items should be security tagged to prevent loss or theft at station shops. If the new inventory system is introduced the inventory counting process will ease and simplify the stock taking process for T Railways which will reduce the resource time spent on manually checking stock. The Finance Director would like to test the system in a handful of shops and carriages to assess whether the investment would be beneficial.

Security arrangements

Due to recent global events and the threat of security breaches (including possible terrorist attacks) T Railways has reviewed its security procedures across its rail infrastructure and in particular to high risk/ high volume stations. TPTS is responsible for the security of T Railways estates including warehouses, platforms and parking facilities. T Railways has a good track record of security as vehicle theft, loss of passenger luggage and crime across T Railways estates are low. The Head of Security for T Railways has recently been offered a lucrative security contract in the UAE and will be departing T Railways in three weeks time to start his new job. Due to recent global events and the threat of security breaches (including possible terrorist attacks) T Railways has taken this opportunity to review its security procedures across its rail infrastructure and high risk / high volume stations that could be the subject of security breaches.



The Board of T Railways is not keen on recruiting a new Head of Security and is considering assigning responsibility of security to the Head of Transport Sales & Service.

End of unseen material



Required (a) Discuss the different risks facing T Railways and provide brief

recommendations to manage these. (Note: Risk Mapping is not required and using it will not earn marks)

(8 marks)

(b) Explain why senior officials are interested and concerned over any

potential sale of T Railways to OTP. (The benefits and drawbacks of such a sale should be discussed)

(10 marks)

(c) (i) Evaluate the potential effectiveness of implementing a new

inventory system for the identification and prevention of fraud by staff.

(8 marks)

(ii) Explain and recommend specific tests that T Railways internal

audit department could perform to evaluate the effectiveness of the proposed inventory system during and just after implementation.

(Assume that the proposed IT system for Inventory Management will

be introduced) (14 marks)

(d) (i) Discuss the advantages and disadvantages of T Railways Head of

Sales and Service being directly responsible for the overall security of T Railway security.

(5 marks)

ii) Recommend by stating reasons, what background and experience a new Head of Security should possess.

(5 marks)

(Total of 50 marks)

Solutions page 26-End



Present value tables Present value of 1 i.e. (1 + r)n where r = interest rate, n = number of periods until payment or receipt.

Interest rates (r) Periods (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 .990 .980 .971 .962 .962 .943 .935 .926 .917 .909 2 .980 .961 .943 .925 .907 .890 .873 .857 .842 .826 3 .971 .942 .915 .889 .864 .840 .816 .794 .772 .751 4 .961 .924 .888 .855 .823 .792 .763 .735 .708 .683 5 .951 .906 .863 .822 .784 .747 .713 .681 .650 .621

6 .942 .888 .837 .790 .746 .705 .666 .630 .596 .564 7 .933 .871 .813 .760 .711 .665 .623 .583 .547 .513 8 .923 .853 .789 .731 .677 .627 .582 .540 .502 .467 9 .914 .837 .766 .703 .645 .592 .544 .500 .460 .424 10 .905 .820 .744 .676 .614 .558 .508 .463 .422 .386

11 .896 .804 .722 .650 .585 .527 .475 .429 .388 .350 12 .887 .788 .701 .625 .557 .497 .444 .397 .356 .319 13 .879 .773 .681 .601 .530 .469 .415 .368 .326 .290 14 .870 .758 .661 .577 .505 .442 .388 .340 .299 .263 15 .861 .743 .642 .555 .481 .417 .362 .315 .275 .239

16 .853 .728 .623 .534 .458 .394 .339 .292 .252 .218

17 .844 .714 .605 .513 .436 .371 .317 .270 .231 .198

18 .836 .700 .587 .494 .416 .350 .296 .250 .212 .180

19 .828 .686 .570 .475 .396 .331 .277 .232 .194 .164

20 .820 .673 .554 .456 .377 .312 .258 .215 .178 .149

Interest rates (r) Periods (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1

.901 .893 .885 .877 .870 .862 .855 .847 .840 .833 2

.812 .797 .783 .769 .756 .743 .731 .718 .706 .694 3

.731 .712 .693 .675 .658 .641 .624 .609 .593 .579 4

.659 .636 .613 .592 .572 .552 .534 .516 .499 .482 5

.593 .567 .543 .519 .497 .476 .456 .437 .419 .402

6 .535 .507 .480 .456 .432 .410 .390 .370 .352 .335

7 .482 .452 .425 .400 .376 .354 .333 .314 .296 .279

8 .434 .404 .376 .351 .327 .305 .285 .266 .249 .233

9 .391 .361 .333 .308 .284 .263 .243 .225 .209 .194

10 .352 .322 .295 .270 .247 .227 .208 .191 .176 .162

11 .317 .287 .261 .237 .215 .195 .178 .162 .148 .135

12 .286 .257 .231 .208 .187 .168 .152 .137 .124 .112

13 .258 .229 .204 .182 .163 .145 .130 .116 .104 .093

14 .232 .205 .181 .160 .141 .125 .111 .099 .088 .078

15 .209 .183 .160 .140 .123 .108 .095 .084 .074 .065

16 .188 .163 .141 .123 .107 .093 .081 .071 .062 .054

17 .170 .146 .125 .108 .093 .080 .069 .060 .052 .045

18 .153 .130 .111 .095 .081 .069 .059 .051 .044 .038

19 .138 .116 .098 .083 .070 .060 .051 .043 .037 .031

20 .124 .104 .087 .073 .061 .051 .043 .037 .031 .026



Cumulative present value tables This table shows the Present Value of 1 per annum, Receivable or Payable at the end of each

year for n years r

)r1(1 n+.

Interest rates (r) Periods

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759

10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145

11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 8.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606

16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0685 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031

10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.968 4.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675

16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870



Formulae

Valuation Models

(i) Irredeemable preference share, paying a constant annual dividend, d, in perpetuity, where P0 is the ex-div value:

prefkdP =0

(ii) Ordinary (Equity) share, paying a constant annual dividend, d, in perpetuity, where P0 is the ex-div value:

ekdP =0

(iii) Ordinary (Equity) share, paying an annual dividend, d, growing in perpetuity at a constant rate, g, where P0 is the ex-div value:

[ ]gkgdP

gkdP

ee

+=

=

1or 00

10

(iv) Irredeemable (Undated) debt, paying annual after tax interest, i(1 t), in perpetuity, where P0 is the ex-interest value:

[ ]netdktiP = 10

or, without tax:

dkiP =0

(v) Future value of S, of a sum X, invested for n periods, compounded at r% interest: [ ]nrXS += 1

(vi) Present value of 1 payable or receivable in n years, discounted at r% per annum:

[ ] nrPV += 11

(vii) Present value of an annuity of 1 per annum, receivable or payable for n years, commencing in one year, discounted at r% per annum:

[ ]

+=

nrr

PV1

111

(viii) Present value of 1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per annum:

rPV 1=

(ix) Present value of 1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a constant rate of g% per annum, discounted at r% per annum:

grPV

=

1



Cost of Capital

(i) Cost of irredeemable preference capital, paying an annual dividend d in perpetuity, and having a current ex-div price P0:

0Pdk pref =

(ii) Cost of irredeemable debt capital, paying annual net interest i(1 t), and having a current ex-interest price P0:

[ ]0

netd Pt1ik =

(iii) Cost of ordinary (Equity) share capital, paying an annual dividend d in perpetuity, and having a current ex-div price P0:

0Pdke =

(iv) Cost of ordinary (Equity) share capital, having a current ex-div price, P0, having just paid a dividend, d0, with the dividend growing in perpetuity by a constant g% per annum:

[ ]g

Pgdkg

Pdk ee +

+=+=

0

0

0

1 1or

(v) Cost of ordinary (Equity) share capital, using the CAPM: fRmRfRek

+=

(vi) Weighted average cost of capital, k0:

++

+=

DE

Dd

DE

Eeg0 VV

Vk

VVV

kk



CIMA P3


Section A

Question 1

T Railways

Solution



Marking Scheme Part A Question 1 The following marking scheme is a marking guide to this question. Additional marks will be awarded for other relevant points and approaches as long as they address the specific requirements of the question.

Part (a) Maximum 8 marks

Up to 1/2 mark for each relevant risk identified Maximum of 2 marks in total Up to 2 marks for the categorisation of risks split between high impact and high likelihood Maximum of 6 marks in total

Part (b) Maximum 6 marks

Up to 2 marks for each well point made in relation to Health and Safety procedures.

Part (c) Maximum 12 marks

Up to 1 mark for identifying initial review of existing H & S procedures and internal v external considerations Up to 2 marks for the identification and example of low risk v low exposure areas Up to 2 marks for the identification and example of high risk v high exposure areas Up to 2 marks for establishing review of existing procedures, policies and raising shortfalls or gaps Up to 2 marks for referencing in spot checks Up 3 marks for beaches, reporting and resourcing

Part (d) Maximum 8 marks

Up to 2 marks for the discussion of T Railways currency risks Up to 2 marks for discussion on the boards decision to accept currency risks Up to 2 marks for discussion on the boards decision to manage currency risks Up to 2 marks for conclusion and opinion for or against

Part (e) Maximum of 10 marks

Up to 1 mark for explanation and purpose of post-completion audits Up to 2 marks for each well made point on benefits maximum of 4 marks in total Up to 2 marks for each well made point on relevant application of post-completion audits maximum of 4 marks in total Up to 1 mark for appropriate summary



Solution PART A Question 1

(a) Health and Safety

Legal action and compensation

T Railways may be exposed to the threat of legal action and be forced to pay compensation for injuries sustained to staff any customers. T Railways has employees who are responsible for overseeing and manoeuvring equipment and goods as part of their day to day activities therefore the likelihood of injury is high.

Misuse of equipment

These staff will most likely be expected to lift some items by hand, but there will also be mechanical equipment such as trolley-jacks and fork-lift trucks to assist with their duties. Any carelessness or poor practice on the part of an employee could lead to that employee being seriously injured or causing an injury to a colleague. The fact that such risks are very visible and obvious means that injuries are reasonably foreseeable and it would be very difficult for T Railways to dispute such liability. Health and safety matters can also lead to significant levels of future adverse publicity, adding to the media attention it has already faced. The fact that T Railways is nationalised may raise the public interest in the affairs of the subsidiaries, and adverse publicity will damage its reputation and the perception that public and other companies have of the organisation.

Adverse press and media exposure

Likelihood: The health and safety issues have already been reported widely in the press. The probability that this coverage will continue is high because there is a significant level of interest from both media and other external sources on publicly run services. The press frequently runs prominent stories on government run organisations as the effectiveness of management is of importance to a number of stakeholders including customers, suppliers, government and competitors. Impact: The impact of such reporting can be significant. For example, customers (both consumer and commercial) may choose not to use T Railways if there are health and safety concerns due to the threat or risk of injury, and in particular those risks relating to passenger train services.

Regulatory breach

Likelihood: There is a high probability that the rail regulator will investigate the recent whistle blowing claims and additional legislation may be



introduced to ensure that health and safety standards are maintained particularly in light of T Railways objective to introduce ramps for disabled customers in the near future. The rail regulator will be under pressure to announce that it is taking action to review the standards of T Railways. Impact: This will be significant. If the results of the investigation by the regulator clear T Railways of liability or any failings then it is unlikely that the press will publicise them to any great extent because such a finding is not particularly newsworthy. The public will not necessarily believe that T Railways services are deemed safe even if the findings do not identify any health and safety breeches.

Legal claims

Likelihood: There is arguably a high probability that T Railways will be subject to criminal or civil proceedings as a result possible neglect or failure to adhere to Health and Safety procedures or safe guarding passengers. There is unlikely to be sufficient evidence to prove criminal negligence and bring a case to court but an action to bring a civil action against the company for a minor injury could be pursued through a solicitor or claims company. Impact: Any legal action is likely to have a significant impact. If legal action is taken in either the criminal or the civil courts then T Railways reputation will be further damaged and the threat of privatisation or outsourcing may materialise.

Reputational damage on all T Railways services

Likelihood: The public are unlikely to associate this particular case with one of T Railways subsidiaries in isolation. Based on the nature of T Railways day-to-day operations and the constant threat of passenger safety, staff injury and regulatory oversight, it is highly likely that any incident will impact the reputation of T Railways, particularly in light of the recent media exposure and watchdog enquiry. Impact: This is expected to be significant as customers both public and commercial may be deterred from using the service when there is the threat of poor safety standards and risk of further injury.

(b) Health and Safety procedures

Additional resources required to complete checks

It can be difficult to encourage any member of staff to take health and safety seriously because that will usually involve additional resource or inconvenience in administering safety training or checks. For example, staff may not be willing to complete freight related safety checklists or platform



checks if there are more pressing train schedule deliverables and other KPIs to achieve.

Potential delays or disruption to operational activities

Employers often have to impose disciplinary procedures in order to ensure adherence to health and safety standards. Management may be tempted to overlook breaches in policies because health and safety can interfere with day to day operations. For example, if staff face restrictions on the lifting of heavy items until they have been trained to do so safely, then it may be necessary to slow or delay operating services until a trained member of staff can be found to replace an untrained employee.

Complexity of imposing standards

The practicality of imposing a standard Health and Safety policy across T Railways could also be quite cumbersome and perhaps overly complex, due to the various subsidiaries covering a range of different aspects from Building and Plant, through to Passenger Trip and Platform Hazards.

Conflict with financial objectives

The two financial strategic objectives of T Railways are to Cover its operating costs from the revenue it earns and Provide value for money, these two objectives may conflict with the adherence to Health and Safety procedures as department manager may have to incur expenditure on communicating the Health and Safety procedures to staff or updating Health and Safety manuals therefore incurring additional costs which will lead to reduced divisional profits.

No communication of Health & Safety procedures

T Railways management team(s) may not have cascaded the Health & Safety procedures to staff therefore staff working across the various T Railways subsidiaries are not aware of the procedures in place to protect or assist maintaining customer and employee safety standards that prevent injuries or accidents.

Risk appetite

The risk appetite of an organisation is fundamental to the level of perceived risk that it will take to achieve strategic objectives. T Railways is a nationalised organisation and should have a low risk appetite however, if individual subsidiaries of T Railways wish to achieve or exceed KPIs then they may spend less time checking platform safety or fire exits and concentrate on reducing train turnaround times.



(c) Internal Audit Planning

Initial assessment of current standards

The audit departments of the various subsidiaries should conduct an initial review of existing health and safety standards across T Railways to assess adherence to both internal and external legislative standards. For example, services, stations or areas of T Railways that have had no exposure or whistle blowing will not initially require as much attention as those services that have been exposed by the media.

Risk assessment of services

For areas and services of T Railways that are deemed low risk and low exposure for health and safety such as car parking at stations etc, it is advised that checks are incorporated as part of a routine audit visit. The audit team could discuss performance with the subsidiary management teams and review the log of reported health and safety incidents/ accidents and attempt to identify any trends or apparent issues. For areas and services of T Railways that are deemed high risk and high exposure for health and safety such as platform barriers, customer safety and carriage, a initial visit should be scheduled to ensure T Railways are adhering to internal and external legislative standards.

Obtain and review current procedure documentation

It is recommended that the auditors of T Railways are provided with all information relating to the existing health and safety procedures so that they can independently assess any gaps or shortfalls in current processes and policies. This should then be completed as soon as possible as a high priority.

Spot checks

Audit teams could then follow-up by making spot visits and checks on all subsidiaries during the course of the year. This will help to ensure that all relevant staff actually complete the necessary health and safety training, and are properly equipped to work in accordance with the applicable rules and legislation. If any variances or differences between agreed Health & Safety standards or procedures should be highlighted during the course of the year and escalated to the relevant subsidiary management teams for review and rectification or improvement.



Document enquiries and findings

Audit staff should be instructed to note any exceptions and record the names of those staff and managers that they have interviewed or assessed as part of the Health and Safety audit process. Full record must be produced and retained to ensure that a full end-to-end audit trail is present in the event that the Rail Regulator requests information / data on the actions or steps taken internally by T Railways

Identification and escalation of issues

Any breaches should be flagged in the report and senior management should make it clear that such breaches are unacceptable as this will expose T Railways to the risks in (a) above. For the breaches flagged in the report the Internal Audit team should provide recommendations or actions to stakeholders to ensure that future re-occurrence or weaknesses identified are improved. The Internal Audit team should closely monitor the progress and closure of recommendations and report to T Railways senior management team.

Resourcing

The Head of Internal audit will also need to consider and plan for the availability of his/her team do undertake the above activities effectively and efficiently. The Head of Internal audit should consider the prioritisation of activities and agree the scope and objective of the audit with key stakeholders before commencing the work.

Assess Health Safety Training across the organisation

It would be useful for T Railways Internal Audit team to provide an independent view on the level and consistency of Health and Safety training provided to staff across all three subsidiaries. The training provided should be consistent therefore any variances identified should be noted and reported.

Review recent Health and Safety report

T Railways audit team should review recent recorded Health & Safety incidents that have occurred and identify if there are any re-occurring trends that could be addressed to reduce the risk of future incidents. In addition, the audit could investigate what action has been taken to rectify the root causes of previous Health and Safety issues and assess whether the action taken is satisfactory and elements future re-occurrence.



(d) Currency risk

Settlement of passenger and freight services in T$

T Railways exposure to fluctuations in the receipt of sales and income from freight services across national borders is reduced by the fact that all passenger related services and the majority of freight contracts are settled in Country T$ currency. T Railways purchases diesel and electricity from suppliers in Country T.

Availability of goods and materials in the Euro zone

T Railways is a small land locked European country and is outside the eurozone, therefore it would be possible to source diesel, goods for passenger trains and materials for track or station upgrades from other countries if the cost of purchasing is beneficial to T Railways. The flexibility of supply to T Railways means that it should be able to switch to alternative suppliers for operational resources if costs increase. T Railways has also recently invested in electric trains to reduce the exposure to fluctuations in the oil market and diesel prices.

Industry exposure to movement in diesel prices

In addition, where ticket prices for Passenger or Freight are driven by the cost of diesel or electricity used to run these services, then T Railways competitors such as coach, vehicle or alternative travel companies will be subject to many of the same pressures and operating costs.

Purchase of derivatives by rivals

Futures can be used to fix prices in advance and competing freight rivals across the national borders where T Railways operates may have fixed their resource and material prices using derivatives. In that case there may be a risk that T Railway is uncompetitive for services that cross national borders.

Exposure to currency fluctuations

T Railways revenue is equally split between Consumer and Freight services and the increase in freight services could be a significant growth area to help it meet strategic objective of economic growth within country T. The exposure to fluctuations between T$ and the Euro will expose T Railways to the risk of both adverse and favourable financial risk and some hedging techniques might help to offset these.



Conclusion

Currency risk for T Railways does not seem to have the potential to be serious enough to threaten the continuation of the company but may be sufficiently material to impact profits and it is recommended that resources are allocated to mitigate T Railways exposure. T Railways directors should consider each of the possible outcomes impacting T Railways profitability and assess the overall exposure to achieving or exceeding strategic objectives.

(e) Post Completion Audits

Benefits of Post Completion Audits

Assessment of cost control

As T Railways has two main financial objectives, one to cover operating costs from revenue earned and the other to provide value for money, it would be useful for the post-completion audit review to assess cost expenditure and the allocation of costs across cost centres and utilisation of key resources such as project manager, business analysts or other resource used to complete the ticketing project. If the post-completion audit identifies projects that have exceeded budget, it is recommended that further detailed analysis, including manager interviews are completed to identify whether the overspend was the result of a genuine forecasting error, carelessness or a deliberate understatement in the initial authorisation and budgeting process.

Realisation of business case / objectives

A cost-benefit assessment would also be a useful measure for management to identify whether operating costs have been reduced since the new ticketing machines were launched, as this was the basis of the authorisation and completion of the project

Allocation of expenditure

Another area of focus should be the recorded expenditure that should have been charged to the project. T Railways subsidiary management teams may apportion operating costs to projects in order to ease the pressures on their own budgets and therefore improve their own operating profit margins. The charges made to the ticketing project account, should be reviewed carefully and compared to the initial project documentation, requirements and budgeted costs.



If the post-completion audit identifies projects that have exceeded budget, it is recommended that further detailed analysis, including manager interviews are completed to identify whether the overspend was the result of a genuine forecasting error, carelessness or a deliberate understatement in the initial authorisation and budgeting process

Selection of Post Completion Audits

Project selection and review should take account of the size of the project and also the risks attached. For T Railways it would be useful to understand why there were delays with the new ticketing machines and identify exactly why the installation exceeded timescales for roll out.

High value projects

Typically, post-completion audits should focus on high value projects or activities that have exceeded budget and/or have experienced missed deadlines and delays in delivery so the organisation may learn from previous error and improve future working practices or processes particularly around project management

Focus on delays

Given the fact that T Railways experienced significant delays with the installation and machine failures it is advised that the post-implementation review should focus on resource management, delivery of key requirements (i.e. project gateways and project plans). Focus should also be directed to the testing process used on ticketing machines prior to launch (i.e. live testing of ticket purchase and customer ticket access point in all stations).

Ticketing Project

The ticketing project recently completed will allow the internal audit department to look at the whole project, beginning with the requirements gathering phase through to roll out and allocated costs/ spend. The post-implementation review will also allow the board to review whether or not stakeholder requirements have been implemented in line with expectations.

How Post Completion Audit should be carried out

T Railways could delegate the task of post-implementation audits to the internal audit department as this would ensure that an independent and unbiased review of costs, project management and delivery is completed by those that have the most experience in doing so.

Assessment of current projects to avoid previous errors / mistakes

T Railways should consider the review of existing projects that are in progress and to see if there are any significant failings with the applied



project methodology for the ticketing project. Any findings should be escalated to management teams to ensure that the same errors are not repeated for ongoing or live projects. The internal audit department should also consider the selection of projects at different stages of the implementation process.

Lessons Learnt

Following the completion and exposure of the recent ticking machine project, T Railways management team may be concerned about the potential for negative findings on any future post-completion audits of new projects. There may be a concern that any more errors or shortfalls could harm Managements longer term career prospects.

Feedback to managers

Any significant project is open to the risk that unforeseen problems will result in additional costs, particularly in resource overspend. If the post-completion audit process is viewed as holding managers accountable for unavoidable variances then managers may be put off from presenting ideas and requesting future funding to improve the longer term performance and service for customers.

T Railways must be careful to ensure that the post-completion audit process does not create such an effect by ensuring that they are conducted properly and the results used correctly. For example, the auditors should discuss any findings and recommendations with the managers responsible before they submit their findings. That means that managers will not view the audit as a negative process that could lead to poor performance reviews or reputational damage for the manager.

Engagement with key stakeholders

It would also improve the post-completion audit process if senior managers or managing directors for each T Railways subsidiary take care to discuss any concerns with the stakeholders of the report, particularly the project sponsor and the main project manager.

Understanding cost allocation

If a Project overspend was found, then project managers would be able to review the findings and provide supporting commentary and explanation. For example, some of these costs may be deemed to be unforeseeable and beyond the control of the project team.

Summary

For the post-completion review to be beneficial to the business, senior management should ensure that a fair and measured response is applied to any issues that the audits uncover. It is perfectly acceptable to take



remedial or even disciplinary action where warranted, but it should not be an automatic response to any overspend



.

CIMA P3


Section A

Question 2

T Railways

Solution



Marking Scheme - Question 2 The following marking scheme is a marking guide to this question. Additional marks will be awarded for other relevant points and approaches as long as they address the specific requirements of the question.

Part (a) Maximum 8 marks

1 mark for each clear explanation of risk type/ category Up to 2 further marks for each very well made point

Part (b) Maximum 10 marks

Up to 2 marks for each well point made and discussed Advantages of Sale maximum of 5 marks in total Disadvantages of Sale maximum of 5 marks in total

Part (c)(i) Maximum 8 marks

Up to 2 marks for each well point made Must include discussion around stock oversight and stock control

Part (c)(ii) Maximum 14 marks

Up to 14 marks for explanation of each audit test that could be performed Accuracy/ Discrepancies - Up to 2 marks Training and development Up to 2 marks Management Information - Up to 2 marks Volume Testing Up to 2 marks User Requirements - Up to 2 marks System Documentation Up to 2 marks

Part (d) (i) Maximum 5 marks

Up to 2 marks for each relevant problem if identified and explained very well (Alternatively 1 mark for each reasonably well explained point - up to 5 marks in total)

Part (d) (ii) Maximum 5 marks

Up to 2 points for each well made point Must make reference to skills and required experienced



Solution Question 2

Part (a)

Operational risks

Failure to implement inventory system

Operational risks are those that relate to the undertaking of day to day business - for example the breakdown of trains, or loss of stock through fraud or theft. T Railways is exposed to the risk that the new inventory system will not be delivered within scope or budget. If the project is not delivered on time then operational resources committed to delivering and rolling out the changes, including learning and training of staff, will be taken away from day to day activates which could impact service levels and operational performance.

Recommendation

It is recommended that regular project updates are reported to T Railways management and project deliverables are closely monitored through Gantt charts and any slippage between the project plan/ charter is identified and resolved to avoid project slippage.

Financial risks

Adverse interest rate or currency movements

Financial risks are those that relate to financing the business (such as changing interest rates) and undertaking financial transactions (such as exchange rate risk between T$ and other currencies).

T Country has its own domestic currency (T$) but is located within the eurozone and T Railways is therefore exposed to adverse movements in the Euro. For example if TPTS purchases materials or specialist equipment from bordering countries and if T$ weakens against the Euro or other currencies before payment is settled, then T Railways will effectively incur an increase in purchase costs and reduced profits.

Recommendation

T Railways could mitigate the exposure to financial risk through forward exchange rate contracts if the expenditure of materials or goods from suppliers in the eurozone can be planned for and if it is sufficiently large to warrant doing so.



Compliance / Regulatory risks

Compliance/ Regulatory risks are those that relate to breaches in legislation or law and for T Railways this is likely to focus around health and safety issues in particular. T Railways is now regulated by the rail regulator and is therefore subject to an independent review that determines if services are provided in a safe and efficient manner. Failure to recruit or employ an appropriate individual that is responsible for the security across T Railways estate may lead to potential breaches in security and threats to passenger safety.

Recommendation

It is recommended that T Railways appoints a security specialist with relevant experience and knowledge to oversee and manage the security across T Railways estates therefore reducing the likelihood of a security breach which could seriously affect the health and safety of employees and passengers, and the safe transport of cargo.

Part (b)

Sale of T Railways

The government of T Country should evaluate the advantages and disadvantages of selling T Railways to OTP. The government must act in the best interest of key stakeholders and for T Railways these will be staff, customers and other organisations involved in delivering its products and services.

Advantages

Injection of cash into T economy

The potential sale of T Railways will have financial benefit to T Country as the proceeds from the sale of the three subsidiaries could be used to stimulate the struggling economy. The proceeds could be invested in small businesses or the construction industry that may lead to an increase in public spending which in turn may help GDP grow.

Reduction in overheads

T Railways currently has a direct reporting line into the Ministry of Transport. This arrangement allows sufficient oversight and governance of T Railways by the government but requires government time and resource to administer the relationship.



For example, there is an annual meeting attended by government officials to review and approve T Railways financial statements. If T Railways subsidiaries were sold to OTP then the ongoing costs associated with the preparation and approval of annual accounts would not be incurred by government and could instead be allocated to other government projects/ needs.

Disadvantages

Staff redundancy

There is the distinct risk that the sale of T Railways may lead to possible station closures, reduction in maintenance depots and staff redundancies as OTP would seek to run T Railways for profit. OTP would achieve this by reviewing and closing the lowest revenue generating stations, consolidating maintenance depots or increasing the rent on cafes or shops currently operating within T Railways estate.

Rise in unemployment

If there are staff redundancies as a result of the sale of T Railways then the government will incur costs associated with redundancy and making benefit payments whilst also increasing unemployment in Country T which would reflect poorly on the governments reputation and commitment on creating and sustaining jobs, and could damage its level of national support by voters and the public.

Impact on public services

The sale of T Railways may realise current governments fear that the privatisation of T Railways would result in a number of different organisations being responsible for various elements of the infrastructure, estate, customer service and maintenance of the railway system. If OTP are allowed to purchase T Railways then there is a risk that both passenger and freight train services standards will slip and reduce the reliability and service to the public (consumers of T Railways within T Country).

Road Congestion and Carbon Emissions

One of T Countrys main strategic objectives is to reduce road congestion and to reduce carbon emissions (of motor vehicles) by increasing the use of public transport, particularly rail for both private and business consumers. If OTP fail to maintain service levels or improve existing performance/ utilisation of operations then this strategic objective will fail.



Part (c)(i) Inventory system

Stock Oversight

The proposed inventory system within T Railways will allow the Finance Director to oversee the inventory and stock taking process to lower the risk of stock shortages within shops, cafes or carriages by automatic identification and prompting/ creation of new orders. This will also enable tighter financial control as there will be greater consistency in how orders are place and authorised.

Staff resource - time and activities

An automated inventory system should provide more accurate and reliable information to allow more resource to be spent on front line day-to-day activities such as servicing customers by reducing the time needed for administration in completing spot checks and inventory reconciliations.

At present, there is a risk that shop, cafe or carriage managers may overstate stock takes to hide any possible stock shortages. Stock shortages may arise from theft by staff members or by intentional overstatement of stock to avoid the likelihood of investigation from management and any possible disciplinary action.

Inventory control and monitoring

The proposed inventory system would also enable monitoring and tracking of stock and inventory held in warehouses so that the Finance Director could better assess the overall value and volume of stock held at any given time. This would prove useful when assessing potential internal theft as well as underlying stock trends for each cafe, shop and carriage. Any discrepancies with inventory records could then be identified immediately and investigated.

Reliability of Tagged products

If tags could be easily removed by either customers or staff then this would drastically compromise the ability of the stock management system to combat theft and add value. Many items might not be recorded as sold within the inventory system and this type of theft / loss might only be identified through a manual stock take.



This type of reconciliation will be time consuming and detract from the investment in the inventory upgrade but might be necessary if tags can be easily tampered with. However, if the tags are deemed to be reasonably secure and fit for purpose then manual/physical reconciliations may only be needed on a quarterly or bi-annual basis rather than every week/ month.

Part (c)(ii) Internal audit tests

Audit Methodology

T Railways audit department could review the outputs from the test samples that are completed at part of the testing phases. The testing will be completed across a range of shop, cafes and carriages to allow any errors or discrepancies (during the testing phase) to be logged and reported. An end-to-end assessment of the overall stock records generated (starting at the commencement of the testing phase through to completion and review) should clearly show what items have been sold and provide T Railways with the assurance that system processes are accurate and can be relied upon.

Discrepancy of records output

If any discrepancies are identified as part of the audit then these should be immediately escalated and resolved to ensure that any overstatements or inaccurate inventory counts are resolved and do not pose a long term risk to T Railways. The most common error could relate to double counting of inventory items which would create duplicate system records and overstate inventory records therefore resulting in inaccurate reporting and potential stock shortages.

Adequacy of training provided to staff

The audit should also check to see whether the training and knowledge of those staff responsible for operating the new system is adequate or not. This should include staff from Warehousing, Finance Department and other front line operations such as Sales. The internal audit team should interview staff that have experienced the new system and obtain feedback. The feedback should ideally be constructive and improve the internal processes so that T Railways becomes more efficient and effective.

Output of management information



In order to achieve real benefit from the inventory system, relevant output will be required within the management information and reports that are used by T Railways management team. Without this, T Railways will have the functional ability to monitor and control stock levels but no effective utilisation or process to actually do so in practice. The audit should seek to assess the accuracy, completeness and appropriateness of the management information reports generated at the time of the testing and identify whether the suite of data is accurate and if all requirements have been met as initially specified by key stakeholders.

Volume testing

Once the new inventory system is rolled out to all areas of T Railways there could be system issues such as an inability to cope with high volume orders across the organisation. The audit should seek to provide assurance to the Finance Director that there will be no stability and scale issues during the wider launch that follows volume testing. The volume testing could be completed by scanning a number of items into inventory and at points of sale at a predetermined time, say 10am, and then checking that all records are processed correctly. Volume testing is an industry standard practice and should be completed as part of any IT system implementation.

User requirements

One area of the audit could focus on the delivery of requirements for key stakeholders to ensure that all business requirements from Finance, Operations, T Railways Board and IT are considered and satisfied. The inventory system implementation should have a pre-defined set of business requirements and the audit could compare the deliverables of the inventory system against the original requirement.

Escalation of identified issues

If there are any gaps or shortfalls between the initial requirements and what has been delivered then the audit team should flag this with senior managers for immediate review and resolution.

Systems documentation

Adequate documentation should be available and checked to ensure that it sufficiently supports users (both operational and technical) as a reference tool. There should also be a process to ensure that this documentation is maintained and regularly updated so that key knowledge on reporting and resolution of issue management/ errors is not lost in the event that individuals with system knowledge are unavailable.



Part (d)(i)

Conflicts of Interest

An overlap of these areas would likely involve conflicting interests across Sales/Services and the security needs of T Railways. The Head of Sales and Service may reduce the level of resources allocated to security to increase the number of passengers served at ticket sales or reduce waiting times at shops and cafes in order to increase sales revenue. T Railways must ensure that it acts in the best interest of customers and being a nationalised entity, the level of public interest in the operations and governance of T Railways will often be high. The conflict between security and service levels could compromise the reputation and ethical position of the nationalised service.

Organisational structure and reporting

In order to resolve the conflict of interest it may be more effective for the Head of Sales and Service to report directly into T Railways Board. This line and level of reporting will ensure that Directors are engaged with security matters and that senior management have sufficient oversight to balance sales interests with customer safety and security. The Board has a duty of care and responsibility to maintain the interests and safety of all stakeholders.

Operational activities

The main advantage of allocating the responsibility for security to the Head of Sales and Service is that he will already understand the day-to-day activities for running stations, shops, cafes, carriages and platforms.

Customer confidence

The Head of Sales and Service could use the responsibility of security to increase the visibility of patrols and policing across T Railways which could increase customer confidence and result in increased passenger numbers especially on major event days such as football matches. This could also help reduce the motor vehicle traffic and congestion in T Country. The Head of Operations will better understand where, when and how to make station announcements to safely get passengers through any bottle-necks in Terminals during severe delays or at peak times.

Co-ordination of T Railways resource



The Head of Sales and Service will have the advantage of overseeing the resourcing for all areas of T Railways operational activities and so be able to re-allocate staff resources across areas/gaps within security or operations at different times to minimise any disruptions to service, maintenance or passenger safety.

Peak and Off Peak Train times

The Head of Sales and Service could better align security resources to match peak or quiet times as relevant to ensure a suitable level of security is in place at all times.

Part (d)(ii)

Specialist attributes and experience

The Head of Security for T Railways will most likely have to seek applicants from outside T Railways as there may not be individuals that have specific and relevant experience for the role. The recruitment process should ensure that applicants are sought with relevant experience of security oversight and management of similar size organisations that have high customer volumes.

Knowledge of security risks

It is anticipated that the role will have to oversee the security of stations, shops, maintenance depots and warehouses therefore experience of a similar scale and an understanding of the associated risks should be specified on the job advert.

Awareness of public sector

T Railways should seek to identify an individual that has previous experience of working within the public sector or for other nationalised services. The overall objectives of a public service differ from those of a private organisation and this could be a challenge for the new Head of Security as T Railways has to operate on a cost effective basis and provide value for money.

Summary

The successful candidate will have to balance limited resources whilst ensuring an adequate level of security within T Railways with the added exposure or experience of working within the public sector. The successful candidate will ideally have good knowledge and management skills to ensure that appropriate tasks or duties are delegated when required.



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