Auditing-Ongoing Project 1

Auditing-Ongoing Project 1

2-63 Ford Motor Company and Toyota Motor Corporation

1a. Describe the history of Ford, its current business, operating sectors, and reportable segments.

Ford Motor Company, American automotive corporation founded in 1903 by Henry Ford and 11 associate investors. In 1919 the company was reincorporated, with Ford, his wife, Clara, and his son, Edsel, acquiring full ownership; they, their heirs, and the Ford Foundation (formed 1936) were sole stockholders until January 1956, when public sale of the common stock was first offered. The company manufactures passenger cars, trucks, and tractors as well as automotive parts and accessories. Headquarters are in Dearborn, Michigan, manufactures or distributes automobiles across six continents. The Company operates in two sectors: Automotive and Financial Services. Automotive sector includes North America, South America, Europe, Middle East & Africa, and Asia Pacific segments. Financial Services sector includes Ford Credit and Other Financial Services segments. Its vehicle brands include Ford, Ford-Lincoln and Lincoln. Other Financial Services includes a range of businesses, including holding companies and real estate-related activities. The Company has around 62 plants across the world. Through its wholly owned subsidiary Ford Motor Credit Company LLC, it provides automotive financing products to and through automotive dealers throughout the world.

Automotive Sector

The Company’s North America segment includes the sale of Ford and Lincoln vehicles, service parts, and accessories in North America (the United States, Canada, and Mexico). South America segment includes the sale of Ford vehicles, service parts, and accessories in South America. Europe segment includes the sale of Ford vehicles, components, service parts, and accessories in Europe, Turkey, and Russia. Middle East & Africa segment includes the sale of Ford and Lincoln brand vehicles and related service parts and accessories in the Middle East and Africa region. Asia Pacific segment includes the sale of Ford and Lincoln vehicles, service parts, and accessories in the Asia Pacific region. All of its vehicles, parts, and accessories are sold through distributors and dealers, of which are independently owned. The Company sells vehicles to its dealerships for sale to fleet customers, including commercial fleet customers, daily rental car companies, and governments. Ford also sells parts and accessories, primarily to its dealerships (which in turn sells these products to retail customers) and to authorized parts distributors (which in turn primarily sells these products to retailers). It also offers extended service contracts.

Financial Services Sector

The Company’s Financial Services sector includes its vehicle-related financing and leasing activities. The Company analyzes the results of its Financial Services sector through two segments: Ford Credit and Other Financial Services, which includes holding companies, real estate, and the financing of some Volvo vehicles in Europe. Major share of Ford Credit’s business consists of financing its vehicles and supporting its dealers.

The Company’s Ford Credit has a portfolio of finance receivables and leases, which it classifies into two portfolios: consumer and non-consumer. Finance receivables and leases in the consumer segment relate to products offered to individuals and to businesses that finance the acquisition of vehicles from dealers for personal and commercial use. The financing products include retail installment sale contracts for new and used vehicles, and leases for new vehicles to retail customers, government entities, daily rental car companies, and fleet customers. Finance receivables in the non-consumer segment relate primarily to products offered to automotive dealers. Non-Consumer Portfolio products include dealer financing, which includes wholesale loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing, as well as loans to dealers to finance working capital and improvements to dealership facilities, finance the purchase of dealership real estate, and finance other dealer programs and other financing, which is related to the sale of parts and accessories to dealers. Ford Credit operates its business in the United States and Canada through regional business centers. Ford Credit’s European operation is managed through its United Kingdom-based subsidiary, FCE Bank plc (FCE).

Operating sectors, Ford Motor Company manufactures and distributes automobiles worldwide. The company operates through two sectors, Automotive and Financial Services. The Automotive sector develops, manufactures, distributes, and services vehicles, parts, and accessories. It offers vehicles primarily under the Ford and Lincoln brand names. This sector markets and sells its products through distributors and dealers, as well as through dealerships to fleet customers, including commercial fleet customers, daily rental car companies, and governments. The Financial Services sector offers various automotive financing products to and through automotive dealers. It provides financing products, including retail installment sale contracts for new and used vehicles; and direct financing leases for new vehicles to retail customers, government entities, daily rental car companies, and fleet customers. This sector also offers wholesale loans to dealers to finance the purchase of vehicle inventory; and loans to dealers to finance working capital and improvement of dealership facilities, purchase dealership real estate, and other dealer vehicle programs.

Retrieved September 4, 2015 from http://corporate.ford.com/microsites/sustainability-report-2014-15/doc/sr14-form-10-k.pdf, http://www.reuters.com/finance/stocks/companyProfile?symbol=F.N,

1b. Describe the factors affecting Ford’s profitability and factors affecting the automotive industry in general ford’s 2014 10-k

Decline in industry sales volume, particularly in the United States, Europe, or China, due to financial crisis, recession, geopolitical events, or other factors. Because we, like other manufacturers, have a high proportion of relatively fixed structural costs, relatively small changes in industry sales volume can have a substantial effect on our cash flow and profitability. If industry vehicle sales were to decline to levels significantly below our planning assumption, particularly in the United States, Europe, or China, due to financial crisis, recession, geopolitical events, or other factors, such as occurred during 2008 and 2009, our financial condition and results of operations would be substantially adversely affected. For discussion of economic trends, see the “Overview” section of Item 7. Decline in Ford’s market share or failure to achieve growth. To maintain competitive economies of scale and grow our global market share, we must grow our market share in fast-growing newly developed and emerging markets, particularly in our Asia Pacific region and our Middle East & Africa region, as well as maintain or grow market share in mature markets. Our market share in certain growing markets, such as China, is lower than it is in our mature markets. A significant decline in our market share in mature markets or failure to achieve growth in newly developing or emerging markets, whether due to capacity constraints, competitive pressures, protectionist trade policies, or other factors, could have a substantial adverse effect on our financial condition and results of operations. Lower-than-anticipated market acceptance of Ford’s new or existing products.

Although we conduct extensive market research before launching new or refreshed vehicles, many factors both within and outside our control affect the success of new or existing products in the marketplace. Offering vehicles that customers want and value can mitigate the risks of increasing price competition and declining demand, but vehicles that are perceived to be less desirable (whether in terms of price, quality, styling, safety, overall value, fuel efficiency, or other attributes) can exacerbate these risks. For example, if a new model were to experience quality issues at the time of launch, the vehicle’s perceived quality could be affected even after the issues had been corrected, resulting in lower sales volumes, market share, and profitability. In addition, with increased consumer interconnectedness through the internet, social media, and other media, mere allegations relating to quality, safety, fuel efficiency, corporate social responsibility, or other key attributes can negatively impact our reputation or market acceptance of our products, even where such allegations prove to be inaccurate or unfounded. Market shift away from sales of larger, more profitable vehicles beyond Ford’s current planning assumption, particularly in the United States.

A shift in consumer preferences away from larger, more profitable vehicles at levels beyond our current planning assumption could result in an immediate and substantial adverse impact on our financial condition and results of operations. Although we have a balanced portfolio of small, medium, and large cars, utilities, and trucks with competitive fuel efficiency, a shift in consumer preferences away from sales of larger, more profitable vehicles at levels greater than our current planning assumption—whether because of spiking fuel prices, a decline in the construction industry, government actions or incentives, or other reasons—still could have a substantial adverse effect on our financial condition and results of operations. An increase in or continued volatility of fuel prices, or reduced availability of fuel. An increase in fuel prices, continued price volatility, or reduced availability of fuel, particularly in the United States, could result in weakening of demand for relatively more-profitable large cars, utilities, and trucks, while increasing demand for relatively less profitable small vehicles. Continuation or acceleration of such a trend beyond our current planning assumption, or volatility in demand across segments, could have a substantial adverse effect on our financial condition and results of operations. Continued or increased price competition resulting from industry excess capacity, currency fluctuations, or other factors.

The global automotive industry is intensely competitive, with manufacturing capacity far exceeding current demand. According to the January 2015 report issued by IHS Automotive, the global automotive industry is estimated to have had excess capacity of about 29 million units in 2014. Industry overcapacity has resulted in many manufacturers offering marketing incentives on vehicles in an attempt to maintain and grow market share; these incentives historically have included a combination of subsidized financing or leasing programs, price rebates, and other incentives. As a result, we are not necessarily able to set our prices to offset higher costs of marketing incentives, commodity or other cost increases, or the impact of adverse currency fluctuations, including pricing advantages foreign competitors may have because of their weaker home market currencies. Continuation of or increased excess capacity could have a substantial adverse effect on our financial condition and results of operations.

Retrieved September 4, 2015 from http://corporate.ford.com/microsites/sustainability-report-2014-15/doc/sr14-form-10-k.pdf

1c. Compare the nature of Ford’s history, business sectors, and reportable segment to those of Toyota.

Toyota Motor Corporation is a limited liability, joint-stock company incorporated under the Commercial Code of Japan and continues to exist under the Companies Act. Toyota commenced operations in 1933 as the automobile division of Toyota Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd.). Toyota became a separate company on August 28, 1937. In 1982, the Toyota Motor Company and Toyota Motor Sales merged into one company, the Toyota Motor Corporation of today. As of March 31, 2014, Toyota operated through 542 consolidated subsidiaries (including variable interest entities) and 203 affiliated companies, of which 54 companies were accounted for through the equity method.

Automotive Operations: Looking at conditions in the automotive market, trends mainly in the United States were firm. Certain emerging markets, on the other hand, showed signs of slowing down. Against this backdrop, Toyota aggressively introduced new products in Japan and successfully expanded sales thanks to the efforts of dealers nationwide. Outside Japan, the Company boosted vehicle sales in North America, Europe, and other regions. Since introducing the world’s first mass-produced car under the Prius brand name in December 1997, Toyota has placed considerable emphasis on promoting the widespread use of hybrid vehicles. With sales having passed the four million mark in April 2012, demand continued to gather momentum and, within the relatively short space of approximately nine months, we saw cumulative hybrid sales of five million break through the six million mark in January 2014. Thus, we can confidently say that hybrid vehicles have now achieved full-fledged market penetration.

Financial Services Operations: Toyota’s financial services operations are primarily handled by Toyota Financial Services Corporation (TFS), which has overall control of financial services subsidiaries worldwide. TFS provides financial services primarily for vehicle purchases and leases to approximately 9.6 million customers in 35 countries and regions worldwide. During the period under review, we continued with last year’s efforts to strengthen regional strategies by enhancing our relationships with distributors through the provision of financial products and services meeting various national and regional customer characteristics. TFS continued to broaden its connections with customers in Japan, responding to their needs by offering ready access to sound financial services such as credit cards and housing loans in addition to automotive financing. On the global front, the Toyota Group is aggressively expanding its business in emerging markets. In January 2013, the Company established Toyota Motor Leasing (China) Co., Ltd., which opened its doors for business in April 2013. In the same month, Toyota established the financial services company, Toyota Financial Services Kazakhstan MFO LLP, which commenced business in January 2014. In such major markets as Europe and the United States, TFS aims to ensure stable earnings by working to secure margins and achieve thorough low-cost operations with consideration for vehicle sales support and the balancing of business risks. To respond to dramatic changes in the business environment, TFS will strengthen group wide compliance and risk management structures while focusing on enhancements to its business platform, such as IT platform development and human resource cultivation in management.

The North American region is one of Toyota’s most significant markets. While the automotive market struggled in the aftermath of the financial crisis beginning in 2008, Toyota has since reorganized its production structure and made improvements to its product lineup. In addition, Toyota is actively working to promote increased local operations independence in North America, in accordance with the Toyota Global Vision, announced in 2011. In the North American region, of which the U.S. is the center, Toyota has a wide product lineup (excluding large trucks and buses), and sold 2,529 thousand vehicles on a consolidated basis in fiscal 2014. This represents approximately 28% of Toyota’s total unit sales on a consolidated basis. The U.S., in particular, is the largest market in the North American region, accounting for 89% of the retail sales of Toyota in such region. Sales figures for fiscal 2014 were 102.5% of those in the previous fiscal year. Toyota commenced sales of the first-generation Prius hybrid model in North America in 2000. The Prius became Toyota’s bestselling model behind the Corolla and Camry, having gained particular support among 18 customers concerned with the environment. Toyota introduced the first hybrid model under the Lexus brand, the RX400h, and the Highlander hybrid in 2005.

Toyota is seeking to further increase sales through the introduction of the new IS model in 2013. Toyota is continuing to revise its production in North America in response to changes in market conditions. Toyota discontinued the joint production of the Tundra in its Indiana and Texas plants, and designated the Texas plant as the sole production facility for the Tundra in November 2008. Also in November 2008, Toyota’s Kentucky plant commenced production of the new Venza model, and a decision was made to commence production of the Lexus ES350 for sale in the North America market starting by summer of 2015. At the Indiana plant, local production of the Highlander began in October 2009 and in November 2013, Toyota increased production capacity at the plant to coincide with the shift to the next generation model. Toyota also increased production capacity of auto parts at its automatic transmission plant in West Virginia in January 2014, and increased production capacity of engine plants in Kentucky and Alabama in August 2013 and January 2014, respectively, to meet the expanded production capacities of vehicles in the U.S. The Woodstock plant in Canada commenced production of the RAV4 in November 2008 and the production capacity at the Woodstock plant increased from 150 to 200 thousand units per year in January 2013. Also, Toyota commenced production of the RX450h hybrid model at its Cambridge plant in April 2014.

Retrieved September 4, 2015 from http://www.toyota-global.com/investors/ir_library/annual/pdf/2014/ar14_e.pdf

3d. Why does independence matter to shareholders?

We are witnessing a change in sentiment about independent director involvement in engagement meetings with shareholders. These interactions help to:

Establish respect and understanding;

Create a culture of no surprises; and

Assess the quality and independence of directors by permitting shareholders the opportunity to learn how key board functions are managed and overseen.

To facilitate these interactions, we call on the independent directors of U.S. companies to develop suitable strategies that address their responsibility to communicate with shareholders.

Companies with significant governance concerns are increasingly recognizing the value of their independent directors engaging with shareholders. We are encouraged that some independent directors are actively seeking input from their shareholders to pre-emptively manage situations, while others are interested in understanding shareholder views on certain matters. However, such practices are by no means universal, with communication often occurring unilaterally through press statements and proxy disclosures rather than in face-to-face exchanges with shareholders. We advocate for independent director meetings with shareholders to become a routine part of a board’s approach to outreach with its shareholders, rather than only in exceptional circumstances or in times of crisis.

The time is now to communicate the information that we, as shareholders, seek from directors, and to recognize the benefits that such direct communication brings to both parties. The responsibility to ensure proper oversight by independent directors, and for shareholders to understand that oversight, requires appropriate resources to support these activities and an integrated approach in which governance matters are addressed as routinely as financial and

Why is dialogue between shareholders and independent directors necessary?

Effective boards are comprised of highly skilled and motivated directors who collectively safeguard the interests of shareholders and other stakeholders. Whilst proxy statements and other disclosures are helpful, they typically do not reflect the careful deliberations that boards undertake, and which long-term engaged shareholders want to understand.

Establish respect and understanding:

One major benefit to direct dialogue between shareholders and independent directors is that it increases understanding between both parties. Mutual trust, respect and understanding can be the foundation of robust discussions. Once established, this understanding can lead to shareholders being willing to more easily accept outcomes that, in the short term, depart from good governance practices because they understand the long term aims of the board. A constructive relationship between shareholders and companies will be mutually beneficial in both less demanding times and in challenging times.

Understandably companies do not want to hear from shareholders only in times of distress. However equally, shareholders do not wish to be contacted by directors only when the company is in crisis and needs shareholder support.

Create a culture of no surprises:

Effective engagement practices build goodwill and can eliminate the risk that surprises between shareholders, companies and their boards will occur. Engagement gives both parties the opportunity to give, and receive, timely and relevant information. For boards, this could pertain to changes contemplated with regards to compensation or board processes. Shareholders engage across many sectors and markets, and are therefore in possession of information that independent directors should avail themselves of.

For shareholders, it is important to understand the companies in which they are invested. This understanding extends beyond relying on the relationships between financial analysts or portfolio managers and company management. Shareholders need to understand how companies are governed and how boards see and fulfil their responsibilities.

In our experience, meetings with independent directors are often illuminating on situations that have appeared to be contrary to our interests as shareholders. Upon understanding the board’s deliberations, it has, at times, become apparent that shareholders’ interests are being well served and that support for the board is warranted. In such cases, it is not in the board’s interest to remain silent on significant governance matters and for them to assume that the proxy circular provides sufficient explanation.

The benefits: more effective boards and more informed shareholders

A major benefit to both shareholders and independent directors is the opportunity for an exchange of dialogue that is unfiltered. Boards must be cognisant of shareholder sentiment about various issues, including expectations on governance structures and procedures. Equally, shareholders must be aware of the nuanced processes that underpin the decisions reached by boards, as well as having a perspective on the tenor of discussions at board level.

Engagement is a two way process and pro-active companies reach out to shareholders in addition to shareholders reaching out to companies. Voting, in itself, can be a blunt instrument and engagement is critical to enhance the voting process, to make it more meaningful and representative of the views of shareholders.

Retrieved September 4, 2015 from http://corpgov.law.harvard.edu/2013/04/24/a-call-on-u-s-independent-directors-to-develop-shareholder-engagement-strategies/

Assess the quality and independence of directors:

Shareholders seek assurance that the independent directors understand their role in overseeing management. Anecdotal evidence on how this takes place provides useful insights into boardroom dynamics and helps to test the character of independent directors as shareholder representatives. Engagement between directors and shareholders is the only way in which this assessment can take place and is integral in ensuring that shareholders make informed vote decisions concerning director elections. In situations where independence is a concern, it is the duty of shareholders to engage with the independent directors and verify the effectiveness of their oversight. This is most obvious where the Chairman of the board and the Chief Executive Officer positions are shared by the same individual

4a. Describe Ford’s audit committee and its duties?

Board Committee Functions

Audit Committee

Selects the independent registered public accounting firm to audit Ford’s books and records, subject to shareholder ratification, and determines the compensation of the independent registered public accounting firm.

At least annually, reviews a report by the independent registered public accounting firm describing: internal quality control procedures, any issues raised by an internal or peer quality control review, any issues raised by a governmental or professional authority investigation in the past five years and any steps taken to deal with such issues, and (to assess the independence of the independent registered public accounting firm) all relationships between the independent registered public accounting firm and the Company.

Consults with the independent registered public accounting firm, reviews and approves the scope of their audit, and reviews their independence and performance. Also, annually approves of categories of services to be performed by the independent registered public accounting firm and reviews and, if appropriate, approves in advance any new proposed engagement greater than $250,000.

Reviews internal controls, accounting practices, and financial reporting, including the results of the annual audit and the review of the interim financial statements with management and the independent registered public accounting firm.

Reviews activities, organization structure, and qualifications of the General Auditor’s Office, and participates in the appointment, dismissal, evaluation, and the determination of the compensation of the General Auditor.

Discusses earnings releases and guidance provided to the public and rating agencies.

Reviews, at least annually, policies with respect to risk assessment and risk management.

Reviews, with the Office of the General Counsel, any legal or regulatory matter that could have a significant impact on the financial statements.

As appropriate, obtains advice and assistance from outside legal, accounting or other advisors.

Prepares an annual report of the Audit Committee to be included in the Company’s proxy statement.

Assesses annually the adequacy of the Audit Committee Charter.

Reports to the Board of Directors about these matters

Retrieved September 4, 2014 from http://www.sec.gov/Archives/edgar/data/37996/000104746914003150/a2218659zdef14a.htm#Board_meetings_comp

http://www.sec.gov/Archives/edgar/data/37996/000104746914003150/a2218659zdef14a.htm