To: Jerome Roberts
From: Bob Regents
Date: 16th October 2021
Subject: Audit Management Letter
Hello, Mr. Roberts; I am responding to your previous letter regarding the concerns that the management at Corporate Sentry, Inc. has regarding the downsizing of the firm. First, the company should analyze the viability of all manufacturing options, such as shoring, offshoring, and outsourcing to a third-party vendor. Onshoring refers to the manufacture of alarm and security products within the U.S. The benefits of shoring include reduced lead time due to the localization of supply chains and reduced shipping costs. The reduction of lead time improves production since there is increased flexibility during market shifts, quicker replenishment of stock, thus avoiding customer loss due to stock-outs. In addition, onshoring leads to improved talent acquisition and retention in terms of intellectual property. However, shoring also increases labor costs due to the high wage rate in the U.S., thus reducing profit margins.
Offshoring refers to the outsourcing production process to distant countries such as China, India, or the Philippines. Offshoring benefits include reduced operational costs, increased flexibility, and tax incentives (Skaflen, 2021). The reduced operating costs occur due to decreased labor costs since the wage rate is low in overseas countries due to access to a large workforce. Offshoring also leads to increased business flexibility since reducing operational costs frees up capital used in the expansion. The company also increases its profit margins due to the financial incentives available such as few business regulations and tax holidays in the Philippines. However, offshoring also leads to production delays due to time zone differences and cultural discrepancies. The time zone difference between the parent company and the offshore ventures leads to communication gaps, thus affecting the decision-making process. In addition, cultural distinctions lead to misunderstandings that affect product deadlines. Outsourcing production to third-party vendors leads to lowered operation costs due to decreased overhead expenses, thus increasing the parent company’s profit margins. In addition, outsourcing enables access to skilled resources; therefore, quality control is assured and reduces the company risk since most of the risk is borne by the third-party vendor. However, third-party logistics also lead to the loss of managerial control, thus leading to inconsistent fiscal performance.
Consequently, the management should look at the different types of costs to ensure cost reduction. There are two types of costs to be considered; engineered costs and discretionary costs. Engineered cost is a type of cost that is directly linked to the output gained. Examples of engineered costs include utility costs, whereby an estimate can be made on the correct amount of costs expected to be incurred with a certain degree of certainty. Engineered costs vary with the level of output thus are critical to the business. Discretionary costs refer to costs that can be adjusted without disrupting the firm’s productivity captivity or operations in the short term. Discretionary costs do not change with capacity, and management can eliminate them and continue as a going concern. Discretionary costs are critical for a company keen on downsizing such as yours since they do not affect its production output. Costs such as advertising and training can be reduced substantially to allow for company restructuring.
Furthermore, Mr. Roberts should evaluate the viability of the manufacturing options in terms of cross-border regulations, import and export tariffs since they are affected by government policies such as taxes, which affect the product prices. Mr. Roberts should also consider the respective country’s exchange rates since they can drastically impact profit margins due to the change in cost in supplies. In addition, Mr. Roberts should consider immigration and employment laws since they vary depending on a country’s economic model.
As your auditor, there is a scope of engagement limited by our auditor-client relationship; thus, I cannot provide accounting and bookkeeping services related to financial statements presentation. Bookkeeping and financial information systems functions lie with the company being audited. However, our company can offer non-audit services such as advisory on tax considerations to ensure compliance with tax regulations.
Skaflen, K. (2021). The Pros and Cons of Outsourcing: Onshoring, Offshoring, and Nearshoring. Pixel506. https://pixel506.com/insights/the-pros-and-cons-of-outsourcing-onshoring-offshoring-and-nearshoring