Members: Jeffrey Camiguing Junbert Salido BillyDos Mamainte III Mohammad Guiling Jasson Ringo Ario
In order for us, as auditors, to obtain sufficient understanding of our client, Pepsi Company, and its environment we must obtain knowledge about our entitys: I.) INDUSTRY, REGULATORY AND OTHER EXTERNAL FACTORS, INCLUDING FINANCIAL FRAMEWORK. INDUSTRY ANALYSIS PepsiCo is in the Food & Beverages market. This industry is saturated with huge no of players operating in it. In the soft drink industry the entry of new competitors depends on the barriers to entry that are present, and also the reaction from existing competitors that the entrant can expect. Industry analysts are projecting that the soft drink industry will grow by almost 4% over the next five years. Although there are numerous substitutes and alternatives, the savory snack and soft drink industry is going to be a large part of our economy for many more decades. Companies need to know these factors if they intend to operate with a competitive advantage in this industry, especially at a time when the economy is slumping. Major forces affecting the industry are economies of scale and barrier to entry. REGULATORY AND OTHER EXTERNAL FACTORS Political Influence The production distribution and use of many of PepsiCo product are subject to various Indian laws, such as the Food, Drug and Cosmetic Act, the Occupational Safety and Health Act. The various businesses of Pepsi are also subject to state, local and foreign laws. The international businesses are subject to the Government stability in the countries where PepsiCo is trying get into (underdeveloped markets). The Indian, state, local and foreign environmental laws and regulations. The businesses are also subject to de taxation policy in each country they are operating. They also have to comply with Indian, state, local and foreign environmental laws and regulations.
PEPSICO, INC. AUDIT COMMITTEE CHARTER (As amended, effective March 14, 2013) Independent Auditors 1. Appoint, compensate, retain, oversee the work of and terminate the Corporations independent auditors (taking into account the vote on shareholder ratification), which shall report directly to the Committee.
2. Exercise the Committees sole authority to approve all audit engagement fees and terms as well as permissible non-audit engagements with the independent auditors. 3. At least annually, consider the independence of the independent auditors, and obtain and review a report from such independent auditors describing (to assess the auditors independence) all relationships between the independent auditors and the Corporation or individuals in financial reporting oversight roles at the Corporation, that may reasonably be thought to bear on the independent auditors independence, and discuss with them the potential effects of any such relationships on independence. 4. At least annually, obtain and review a report by the independent auditors describing: the firms internal quality-control procedures; and any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues. 5. Review the audit plans and activities of the independent auditors and the coordination of their audit efforts.
6. Review and discuss with the independent auditors any audit problems or difficulties and managements response. 7. Establish and maintain hiring policies for employees or former employees of independent auditors.
Financial Reporting and Disclosure
8. Meet with management and the independent auditors to review and discuss the Corporations annual and quarterly financial statements, including management judgments and accounting estimates, significant new accounting policies, significant changes in accounting principles or their application, reviewing the Corporations specific disclosures under Managements Discussion and Analysis of Financial Condition and Results of Operations and managements certification of such statements. 9. Review regularly the independent auditors report submitted to the Committee regarding the Corporations critical accounting policies and practices, alternative treatments of financial information that have been discussed with management, and written communications between the Corporations management and the independent auditors.
10. Review with the independent auditors their reports on the annual and quarterly financial statements; discuss with the independent auditors and management their judgment as to the quality of the Corporations accounting policies, including the application of the Corporations accounting policies; and review and discuss with the independent auditors all other matters required to be communicated by the independent auditor to the Committee, including under Auditing Standard No. 16, as adopted by the Public Company Accounting Oversight Board.
11. Review and discuss earnings press releases, and review and discuss on a general basis the types of information disclosed in, and the types of presentations to be made for, earnings press releases, as well as financial information or earnings guidance provided to analysts and ratings agencies. 12. Review with management, the independent auditors and the senior-most Internal Auditor, the adequacy of the Corporations internal controls, disclosure processes and
13. Based on the Committees review and discussion, recommend to the Board that the annual financial statements be included in the Corporations Annual Report on Form 10-K. 14. Assist the Boards oversight of the Corporations compliance with respect to its financial reporting and disclosure processes, disclosure requirements and internal control systems. Review (A) major issues regarding accounting principles and financial statement presentations, including any significant changes in the Corporations selection or application of accounting principles, and major issues as to the adequacy of the Corporations internal controls and any special audit steps adopted in light of material control deficiencies; (B) analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements; and (C) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Corporation.
Policy for Audit, Audit-Related and Non-Audit Services
To ensure objective auditing of our financial statements, PepsiCo has adopted specific guidelines regarding non-audit and tax services provided by an independent auditor.
PepsiCo policy with respect to the engagement of its Independent Auditor ("Auditor") to perform Audit, Audit Related, Tax and Other Non-Audit Services for PepsiCo and its consolidated subsidiaries.
PepsiCo and its Audit Committee are committed to ensuring the independence of the Auditor, both in appearance as well as in fact. Accordingly, significant attention is directed toward the appropriateness of the Auditor to perform services other than the audit. The following policy and guidelines have been adopted in this regard.
Statement of Policy
The Audit Committee will engage the Auditor for the audit of PepsiCo's consolidated financial statements, and other audit-related work as defined in this policy. The Auditor may only be engaged for Tax and other non-audit related work if those services enhance and support the attest function of the audit, or are an extension to the audit or audit related services .Annually the Global Lead Audit Partner will review with the Audit Committee the services the Auditor expects to provide in the coming year and the related fees. In addition, PepsiCo will provide the Audit Committee with a quarterly status for the Committee's pre-approval of any audit related, tax or other non-audit services that the Auditor has been asked to provide or may be asked to provide in the following quarter.
II. NATURE OF THE ENTITY, INCLUDING ENTITY'S SELECTION AND APPLICATION OF ACCOUNTING POLICIES NATURE OF THE BUSINESS PepsiCo is a leading global beverage, snack and Food Company. They manufacture or use contract manufacturers, market and sell a variety of salty, convenient, sweet and grain- based snacks, carbonated and non-carbonated beverages and foods in approximately 200 countries, with its largest operations in North America (United States and Canada), Mexico and the United Kingdom. PepsiCos commitment to sustainable growth, defined as Performance with Purpose, is focused on generating healthy financial returns while giving back to the communities it serves. This includes meeting consumer needs for a spectrum of convenient foods and beverages, reducing its impact on the environment through water, energy and packaging initiatives, and supporting its employees through a diverse and inclusive culture that recruits and retains world-class talent.
Their products are consumed over one billion times each day all over the world. The company have 22 billion dollar brands and over forty 250 million - 1 billion dollar brands in estimated annual retail sales. It have increased its annual dividend for 41 consecutive years and delivered cumulative cash returns of $53 billion over a ten year period.
ACCOUNTING POLICIES AND ITS APPLICATION
These policies may require management to make difficult and subjective judgments regarding uncertainties, and as a result, such estimates may significantly impact Companys financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. PepsiCos critical accounting policies arise in conjunction with the Following: Revenue recognition, Brand and goodwill valuations, Income tax expense and accruals Revenue Recognition PepsiCos products are sold for cash or on credit terms. The credit terms, which are established in accordance with local and industry practices, typically require payment within 30 to 90 days internationally, and may allow discounts for early payment. It recognizes revenue upon shipment or delivery to its customers based on written sales terms that do not allow for a right of return. However, its policy for DSD and chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly,
its policy for certain warehouse-distributed products is to replace damaged and out-of-date products. Based on the companys experience with this practice, it has reserved for anticipated damaged and out- of-date products
Brand and Goodwill Valuations PepsiCo sells products under a number of brand names, many of which were developed by PepsiCo. The brand development costs are expensed as incurred. There are other brands that PepsiCo has acquired. Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including brands, based on estimated fair value, with any remaining purchase price recorded as goodwill. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as
marketplace participants product life cycles market share consumer awareness brand history and future expansion expectations amount and timing of future cash flows the discount rate applied to the cash flows.
The company believes that a brand has an indefinite life if it has a history of strong revenue and cash flow performance, and we have the intent and ability to support the brand with marketplace spending for the foreseeable future. If these perpetual brand criteria are not met, brands are amortized over their expected useful lives, which generally range from five to 40 years.
Income Tax Expense and Accruals
The annual tax rate is based on companys income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the company operates. Significant judgment is required in determining annual tax rate and in evaluating tax position. Deferred tax liabilities generally represent tax expense recognized in financial statements for which payment has been deferred, or expense for which the company has already taken a deduction in tax return but have not yet recognized as expense in the financial statements. In 2008, the annual tax rate was 26.8% compared to 25.9% in 2007.The tax rate in 2008 increased 0.9 percentage points primarily due to the absence of the tax benefits recognized in the prior year related to the favorable resolution of certain foreign tax matters, partially offset by lower taxes on foreign results in the current year.
AUDITORS PERSPECTIVE
Knowledge of the clients business and industry as well as its accounting policies are essential if the audit is to be carried out effectively and efficiently. The auditor should obtain a sufficient level of knowledge of the entitys business to identify and understand the events, transactions and practices that may have a significant effect on the financial statements.
As to the accounting policies of the PepsiCo, the auditor should have a wide knowledge and understanding for this matter since the company is using this critical accounting policies which requires a significant judgment of the management and might also have a significant effect on the audit process. Some of the companys accounting policies are based on their managements assumptions that would possibly have an effect on its financial statement. And by this, the auditor should be able to evaluate the reasonableness of the clients estimate in order for him to design appropriate audit procedures.
III.) OBJECTIVES AND STRATEGIES AND THE RELATED BUSINESS RISK THAT MAY RESULT IN A MATERIAL MISSTATEMENT OF THE FS OBJECTIVES AND STRATEGIES Objectives PepsiCo's company objectives are based on one question: "What exactly is it that enables the best consumer product companies to grow year in and year out?" Market positioning is one of the most important aspects of PepsiCo success. It has been a leader and gaining market share in each of its core businesses and strives to continue in recognizing under-marketed target regions throughout the world to continually gain market share from its competitors. The second aspect of PepsiCo's objectives deals with continuing is strong well- recognized consumer brand name domestically and internationally. Third the company strives to recognize good growth prospects and opportunities for new and alternative product development within each of its core businesses. PepsiCo's fourth objective is to globally diversify its portfolio. Finally, the last objective of PepsiCo is to be more productive and efficient through the competitive advantages of its product innovation capabilities, the company's streamlined patented manufacturing process, and the vast scale of the manufacturing and distribution system. Business Strategies 1.) International market expansion strategy through mergers and acquisitions - Mergers and acquisitions can offer the advantages of gaining access to competencies and infrastructure, reducing direct costs and overheads and achieving organic growth. Recently, PepsiCo has engaged in important mergers and acquisitions such as acquisition of juice and diary businesses Lebedyansky and Wimm-Bill-Dann in Russia, Lucky snacks and Mabel cookies in Brazil, and Dilexis cookies in Argentina.
2.) Formation of strategic alliances in global scale - Specifically, strategic partnerships have been formed with Tingyi in China in order to claim a share in growing beverage market in China. Moreover, formation of a joint-venture with Tata in India to enhance drinking water manufacturing capabilities, and initiation of strategic partnership with Almarai in Saudi Arabia can be mentioned to illustrate PepsiCos adoption of strategic alliances as an integral part of the corporate strategy. Important strategic alliances are formed by PepsiCo at home markets as well. Specifically, by forming a strategic alliance with Starbucks a global coffee house chain, PepsiCo has been able to claim its share from increasing energy drink market segment.
3.) Focus on emerging markets - The share of net revenues from developing and emerging markets such as China, India, and Russia have been increased from 24% in 2006 to 35% in 2012 (Annual Report, 2012) through mergers and acquisitions as discussed above, as well as, on the basis of formation of direct subsidiaries. Moreover, PepsiCo CEO Indra Nooyi has publicly expressed commitments to further increase the level of presence of the company in emerging markets. 4.) Focus on organisational culture - Organisational culture can be defined as the collection of words, actions, thoughts, and stuff that clarifies and reinforces what a company truly values and the nature of organisational culture directly impacts its performance in short-term and long-term perspectives. PepsiCo CEO Indra Nooyi is widely believed to be an unconventional corporate leader for a good reason. It has been noted that shes been known to walk the halls at Pepsi barefoot, sometimes even singing along the way (Sheetz-Runkle, 2010, p.112) and this fact communicates her willingness to embrace her differences with positive implications on employee morale and organisational culture. 5.) Focus on increasing core organic revenue - Core organic revenue can be explained as a type of revenue that is achieved through increasing the volume of production and sales. PepsiCo core organic revenues were increased by 5% during 2012 (Annual Report, 2012) and the company strategic level management is committed to further increase the levels of core organic revenues through maintaining high quality standards and applying effective marketing strategy. BUSINESS RISKS As an international and widely popular corporation, Pepsi has many risks as a business but only some are notable for the purpose of material misstatements for the audit:
Demand for Pepsi products may be adversely affected by changes in consumer preferences and tastes or if it will unable to innovate or market their products effectively. Financial performance could suffer if the company will be unable to compete effectively. Any damage to the reputation could have a material adverse effect on the companys business, financial condition and results of operations. Trade consolidation or the loss of any key customer could adversely affect financial performance. A portion of the workforce belongs to unions. Failure to successfully renew collective bargaining agreements, or strikes or work stoppages could cause the business to suffer. AUDITORS PERSPECTIVE:
Given the objective to earn profits, and the different kinds of strategies that mainly deals with the attraction of the masses to its product, Pepsi Co. is generally a corporation that wants many customers for its products, not like other corporations that deals with luxury, specialization, or even concentration to certain markets for thriving. As an auditor, the audit will deal with a manufacturing corporation that has many products but still has its congruent characteristics to make it simpler for the audit engagement.
In relation to FS misstatements, the business risks are researched upon. Given the facts above, the business risk mainly revolves around the entitys brand name and its financial performance. With this in mind, material misstatements will most probably root from negligent recording of accounts because of the wide array of customers and fraudulent manipulation of numbers to protect its brand name, employee relations, and shareholder satisfaction.
IV.) MEASUREMENT AND REVIEW OF THE ENTITY'S PERFORMANCE
PepsiCo Achieves 2013 Financial Targets and Announces Increase of 35% in Cash Returns to Shareholders for 2014 PURCHASE, N.Y., Feb. 13, 2014 /PRNewswire/ -- PepsiCo, Inc. (NYSE: PEP) today reported its fourth-quarter and full-year 2013 results and announced a substantial increase in its targeted shareholder cash returns for 2014 and an extension of its $1 billion annual productivity savings targets through 2019. The company also announced 2014 financial targets that are consistent with its long-term goals. Source: http://live.pepsico.com/live/pressrelease/PepsiCo-Achieves-2013-Financial-Targets-and-Announces-Increase-of-35-in-Cash-Ret02132014
According to the article mentioned above, the PepsiCo achieves its Financial Targets for the year 2013. Therefore the risk of the management to take action in improving the business performance or to misstate the financial statements is low.
Comparisons of an entitys performance with that of competitors. Direct Competitor Comparison
KO = The Coca-Cola Company DPS = Dr Pepper Snapple Group, Inc. COMPANYS CREDIT RATINGS
Our borrowing costs and access to capital and credit markets may be adversely affected by a downgrade or potential downgrade of our credit ratings. We expect to maintain Tier 1 commercial paper access which we believe will ensure appropriate financial flexibility and ready access to global credit markets at favorable interest rates. Any downgrade of our credit ratings by a credit rating agency, especially any downgrade to below investment grade, whether as a result of our actions or factors which are beyond our control, could increase our future borrowing costs and impair our ability to access capital and credit markets on terms commercially acceptable to us, or at all. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper market with the same flexibility that we have experienced historically, and therefore require us to rely more heavily on more expensive types of debt financing. Our borrowing costs and access to the commercial paper market could also be adversely affected if a credit rating agency announces that our ratings are under review for a potential downgrade. See also Our Liquidity and Capital Resources contained in Item 7. Source: http://www.pepsico.com/Assets/Download/PEP_Annual_Report_2013.pdf The article above show that there is a tendency that the credit line of the company will be affected by their potential downgrade of credit ratings. This again increases that risk that there will be biases upon preparing the financial statements.
PEPSI-COLA PRODUCTS PHILIPPINES ALLOTS P3.5 BILLION FOR 2014 EXPANSION Pepsi-Cola Products Philippines Inc. is spending P3.5 billion this year to expand capacity and distribution as a way of maintaining double-digit growth, a company official said Tuesday. Bulk of the capital expenditure is dedicated to grow production capacity, president Partho Chakrabati told reporters at a briefing in Makati City."We'd like to have a 20 percent manufacturing headroom annually," he said, adding he did not have total capacity numbers on hand. Last year, the company earmarked over P4 billion in capex, of which 60 percent was allotted to complete the installation of three new line facilities in Rosario, La Union, Muntinlupa and Davao.Chakrabati said they also added a new line facility in Sto.Tomas, Batangas company's largest manufacturing plant. "So this is where we largely spent the money in the expansion plan," he said. This year, Chakrabati said he is confident of maintaining double-digit growth in sales and profits. "We had a terrific year and I am quite optimistic. We have all our programs in place," he said, declining to give out the full year numbers, citing Philippine Stock Exchange and Securities and Exchange Commission disclosure rules. In the first nine months of 2013, the company grew income by 12 percent to P780.7 million from P696 million on the back of a 17 percent jump in gross revenues to P19.4 billion."We got hit in one island plant in Tanauan, which is a large part of our volume but we sustained a double-digit growth generally," Chakrabati said, referring to the the damage to its plant caused by Typhoon Yolanda last November. He also noted the beverage industry "did not spike much" despite the mid-term elections last May. "Normally, a year after the election tends to be a little lower and I dont think that will happen in 2014," Chakrabati noted. "In 2014, we will have good economic growth and the beverage industry is expected to grow in line with the 6 to 7 percent GDP growth and we hope to do better than that," he added. Pepsi-Cola Products Philippines is a licensed bottler of PepsiCo Inc. and Pepsi Lipton International Limited in the Philippines, manufacturing beverages under brands such as Pepsi-Cola, 7Up, Mountain Dew, Mirinda, Mug, Gatorade, Lipton, Tropicana/Twister, Propel and Sting. VS, GMA News The article above tells us that the PepsiCo is planning to expand in the year 2014. In line with the Issue of credit risk, the company might have biases in preparing the Financial statements for them to acquire credit from various institution to fund their ambitious expansion for the year 2014.
V.) INTERNAL CONTROL Changes in Internal Control over financial reporting Official Statement of PepsiCo: During our fourth fiscal quarter of 2013, we continued migrating certain of our financial processing systems to an enterprise-wide systems solution. These systems implementations are part of our on-going global business transformation initiative, and we plan to continue implementing such systems throughout other parts of our businesses over the course of the next few years. Moreover, we continue to integrate our WBD business, which was acquired in 2011. In connection with these implementations and integration, and resulting business process changes, we continue to enhance the design and documentation of our internal control over financial reporting processes to maintain suitable controls over our financial reporting. Except as described above, there were no changes in our internal control over financial reporting during our fourth fiscal quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
PEPSI CO. INTERNAL CONTROL PROCEDURES
The Pepsi Co. has many shareholders that they have to answer too when certain things just do not seem to add up. They have different teams of management to oversee every area of operation and to make sure the company is running effectively and gaining the best profit possible. Like other companies over the last few years they have had their ups and downs in certain areas. Though in 2011 they came up with a new operating model that would help simplify the process, make faster decisions, reduce costs, and get products to the market faster.
Pepsi is motivated by the shareholder value and does everything possible to make sure that happens. They do this by maintaining and growing in key markets, looking for other ways to grow, and keeping a close eye on capital investments to insure the shareholders a return on their investments. Pepsi has many teams that work together in the beverage and snack departments to research and make sure that the proper choices are made and they can continue to grow in every aspect of the company whether it is in the United States or in one of the many other countries that they have companies in. The shareholders have a lot to do with a companies success because if they are not happy then a company knows that they have to make changes, even if it means management changes.
DISCLOSURE AND ANNUAL REPORT OF PEPSICO REGARDING THEIR INTERNAL CONTROL (a) Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of the end of the period
covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Executive Vice President and Chief Financial Officer, to allow timely decisions regarding required disclosure. (b) Managements Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Executive Vice President and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control Integrated Framework (1992) by the Committee of Sponsoring Organizations of the Tread way Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 28, 2013.Attestation Report of the Registered Public Accounting Firm. KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.
Code of Corporate Governance As Issued by Bangladesh Securities Exchange Commission in 2006 and Subsequent Modifications To Highlight Measures Aimed at Better Financial Management