(Assessed By:Vanessa FetterZenab AlghasraSiyuan LiPatriese Richards) (This assessment was completed for the year 20132013Prospective Client Risk Assessment)

Con (Company Overview)

Industry:

The Four Seasons is a luxury hospitality company dedicated to satisfying the needs of their guest through friendliness, efficiency and world class hotel keeping. Company founder, Isadore Sharp, first opened the doors to the first Four Seasons hotel in 1961 in Toronto Canada later introducing first US Four Seasons branded hotel in 1979 on Pennsylvania Avenue in Washington DC. Today the Four Seasons have 96 hotels in 36 countries. In 1986 the Four Season went public on the Toronto Stock Exchange then on the New York Stock Exchange in 1997 and later returned to private ownership in 2007. Majority of the properties are operated under the Four Seasons name, but some are Regent hotels, which is another luxury hotel chain name.

Products:

Four Seasons is a service oriented company therefor they do not provide many products to consumers. They do however have four primary service divisions: rooms, food and beverage, spa and golf course. Service to guest is most important to the Four Seasons. This is the division of first contact for guests. When people think about hotel their first instinct will be to associate it with only rooms. However, it includes more than that. The room service team is in charge of reservations, concierge, housekeeping, laundry and telecommunications. At the Four Seasons they do everything necessary to ensure that the guests are happy and comfortable. Four Seasons is known for their award-winning reputation for quality cuisine. The Food and Beverage team is responsible for the exceptional quality of service provided in restaurants and lounges, the kitchen, catering, and banquets.

Corporate Strategy:

( Four Seasons Corporate Strategy Pillar) The Four Seasons’ corporate strategy is based on four pillars of its business platform: providing their guests with distinctive, exceptional service, focus on medium sized luxury hotels of exceptional quality, culture and concentrate on managing hotels instead of owning them. The Four Seasons policy ensures that all guests receive the same remarkable service therefore not allowing discrimination. Their aim is for both employees and guest to feel welcomed and respected. This is further achieved through their other three pillars. Having smaller hotels and focusing on managing them allows employees and managers to concentration more on guests and building relationships with them and each other. Isadore Sharp and his team developed a formal credo based on the Golden rule for Four Seasons: “We treat others – all others: customers, employees, partners, suppliers – as one would wish to be treated.” (fourseasons.com) This credo is the corner stone of the Four Seasons. These four pillars are what set the Four Seasons apart from their competitors. Their renowned service is respected and greatly appreciated by their clients allowing them to maintain their portion of the market share.

Raw Material:

Being a service providing company the Four Seasons does not have a significant amount of raw materials. Most of their raw material is utilized in the food and beverage division in order to provide their guests with quality food. These raw materials would include the ingredients necessary to prepare the meals.

Size:

The Four Seasons is relatively small when compared to some of their competitors. This is due to the fact that the Four Seasons focuses on medium size hotel instead of larger scale hotels. The table below compares Four Seasons with other Hotels in the Hospitality Industry for 2006, the year before Four Seasons went private.

Four Seasons and competitors Accounts for 2006 (in millions)

Account

Four Seasons

Marriott International Inc

Starwood Hotel and Resorts Worldwide

Hilton Hotels Corp

Revenue

253

12160

5979

8162

Net Income

50.3

608

1043

572

Total Assets

992

8588

9280

16418

Market Capitalization

3053.8

Stockholder’s Equity

648

2618

3008

3727

In 2006, Four Seasons earned revenue of over $253 million with a net income of more than $50 million. Their total assets were shy of $1 billion totaling approximately $992 million. Four Seasons market capitalization was 3.05 billion and their Shareholder’s equity was 648 million. The difference in stockholder’s equity and market capitalization shows that there is some flexibility with regards to Four Seasons. It shows that Four Seasons is expected to grow in the future. The market capitalization is about 5 times higher than book value giving investors assurance that their stock is worth more than it was bought for.

The Four Seasons has a very diverse work force with 33,742 employees worldwide. Quality service by Four Season is also extended to their employees. Below is a chart showing the benefits that are received by employees.

Four Seasons Employee Benefits

Four Seasons has held ranks over the years in various magazines. Some of them include FORTUNE magazine’s 100 Best Companies to Work For where they ranked #83 in 2013 and Great Place to Work Institute Canada – Best Workplaces 2012 they ranked #27 for companies that employ more than 1,000 people in Canada.

Company Location(s):

Four Seasons is headquartered in Toronto, Canada. The company has 96 other locations in 36 countries. Property locations include the United States, the Caribbean, Europe, the Middle East, and the Asia/Pacific region. Based on the company’s annual report, the company expects to open 13 new hotels with funds between 50-60 million in connection with obtaining new or enhancing existed management agreements. And below is a breakdown of the operating results by top locations of the company:

People with Close Association:

Isadore Sharp – Founder and chairman

Christopher W. Hart - President, Hotel Operations-Asia/Pacific

Christopher Norton - President, Hotel Operations-Europe/Middle East/Africa

Craig O. Reid - President, Hotel Operations-The Americas

Sarah Cohen - Secretary, Executive Vice President & General Counsel

John Davison - Treasurer, Executive Vice President & Chief Financial Officer

Susan Helstab - Executive Vice President, Marketing

Chris Hunsberger - Executive Vice President, Product & Innovation

Nick Mutton - Executive Vice President, Human Resources & Administration

Scott Woroch - Executive Vice President, Development

Associated Companies:

Cascade Investment is an American holding and investment company headquartered in Kirkland, Washington, United States. The company is controlled by Bill Gates and managed by Michael Larson.

Kingdom Holding Company is a public holding company headquartered in Kingdom Centre in Riyadh, Saudi Arabia. It is controlled by Prince Al-Waleed bin Talal, and is headquartered in the city of Riyadh. The company is publicly listed in the Saudi Stock Exchange, but only 6% of the shares are public, the remaining 94% are currently owned by Prince Alwaleed

Triples Holdings is owned by Isadore Sharp, the founder of Four Seasons. Sharp continues to own 5% of the company, following the acquisition of the brand and the subsequent privatization of the company.

Primary Customers and Customer Base:

The primary customers using the Four Seasons services are people who seek luxury. The customer base is varied, because the hotels are located in 36 different countries. Plus, the company has a strong customer relation management that continues to expand the company’s customer base. In 2013, Four Seasons Las Vegas was ranked as #1 on US News & World Report’s 2013 list of best hotels in Nevada. This recognition comes from the high customer satisfaction and the hotel’s advanced reputation of modern chic guest rooms.

Image:

The annual report tries to convey the idea of Four Seasons sustaining a great business model. The report attempts to give the user an image of luxury and great customer experience, while achieving high returns on investment in the long term. The company’s report is well organized and demonstrates Four Seasons high level of transparency. Covering almost every aspect of the company, the report starts with the business model and the financial statements, then goes on to describe the company’s portfolio and management of risk, and ends with the future predictions and potential threats of Four Seasons.

Segments and Contents of the 10-k:

To start off, the report describes the business of Four Seasons and then describes the objectives of the company, such as creating a unique customer experience while maintaining high growth and return on investment. The report also talks about the business model of the company by describing the management operations and the ownership operations. Included in Four Seasons’ business model are a financial and operational analysis as well as the hotel and resort operating results.

Another important segment of the 10-k is the balance sheet review and analysis that explains the company’s corporate strategy relating to investments, long-term receivables, investments in hotel partnerships and corporations, investments in management contracts, and fixed assets. In addition, the report discusses the liquidity of Four Seasons and other resources available through an explanation of contractual obligations and the convertible notes.

Another important segment of the annual report includes the cash flows which are portrayed through the investing activities in the hotel partnerships and corporations; the investing activities also discuss the long-term receivables and investment in management contracts. In addition the annual report briefly describes the financing activities and their effect on the company’s overall performance. The financial instruments are a large segment of the report as well. These financial instruments describe the foreign exchange forward contracts, currency, and interest rate swaps along with other financial instruments and fair value of financial instruments. Another segment is the off-balance sheet arrangements, which includes guarantees, commitments, and indemnities (Director and Officer Indemnification arrangements and other indemnification arrangements).

Moreover, future predictions took a part of this report by analyzing their future services, operating environment, openings, and management operations. Subsequent event is another important segment of the report; it talks about the acquisition by Cascade Investment and Kingdom Hotels International of Four Seasons to take the company private. This segment of the 10-k also talks about the interim operations, the termination of the acquisition agreement, and the impact of finalization of arrangement transaction (convertible senior notes, long-term incentive arrangements, cost options, other arrangements and agreement, and cost related to pending arrangement transactions). The portfolio of the company contains the various locations with Four Seasons properties, current projects under development or construction, and a three year review of the company’s performance. The report also describes the operating risks by analyzing the geopolitical, economic, and lodging industry conditions.

Other operating risks examined were competition, dependence on management agreements, dependence on property owners, and risk associated with expansion, growth and new construction. The 10-k analyzes investments in and advances to: managed and owned properties, debt rating risks, government regulations, political risks, insurance, legal proceedings, currency exposure, seasonality and/or quarterly predictability, and intellectual property. The risks associated with the Four Seasons branded residential business, and dependence on key employees is examined as well. Another important segment of the report is the accounting estimates, which discusses the recoverability of investments, fixed assets, retirement benefit plan, and income taxes. Recent Canadian accounting standards issued, but not yet adopted, contribute to a large portion of the report.

The 10-k describes the standards issued by Canadian Institute of Chartered Accountants (“CICA”) that are not yet adopted. Discussion of the controls, procedures, and Four Seasons’ disclosures is included. The annual report reviews management’s annual report on internal control over financial reporting, and changes in internal control over financial reporting. The last segments are summarized by explaining the reporting currency (C$), additional information, and endnotes.

Primary Cost Drivers:

The company’s primary cost driver is the income tax. This is mainly because of the increase in interest expense accrued relating to the currency and interest rate swap agreement the company entered into in the second quarter of 2005.

The company must also pay interest on long-term obligations. Other primary costs include administrative costs and reimbursed costs.

Research and Development:

Based on analysis, the company is attempting to expand and increase the number of Four Seasons locations worldwide, which would require a lot of research development. The company is planning to open 13 new hotels within the coming two years with funding between 50 and 60 million in connection with obtaining new or enhancing existing management agreements. In addition, the company developed a database and improved many of its information technology systems because the company is expecting a strong demand in the leisure travel, and the company is expecting increased average daily room rates, requiring even more research and development.

(Qualitative Information)

Key Economic Factors:Business Cycle

The tourism industry is a very sensitive industry. During good times, people will have more disposable income to spend on vacations and traveling, but they will cut off their expenditure during recessions, for instance the recession in 2008. Moreover, this industry is highly seasonal; it depends on timing preferences such as the school year’s Thanksgiving, Christmas, and Spring Break. This industry is also affected by the value of money. When the value of the currency is weaker in one country with a Four Seasons property, we expect to see more tourists flock to this country and this property because it is more economical to travel to this area. The graph above shows the correlation between employment in the given industries and the GDP. The higher the correlation between the two, the more sensitive the industry should be to the business cycle. Falling in the middle, the hotel industry is somewhat sensitive due to the seasonality of the industry.

Inflation

Inflation can be caused by the huge amounts of money spent by tourists. It leads to an increase in the prices of food, gas, etc. The Four Seasons Company is expecting an increased demand in the leisure tourism in the coming years that may drive inflation rates even higher. The industry is sensitive to inflation as well, because sometimes there will be a decrease in the number of tourists due to the increase in the hotel rooms rates. Recently in 2013, the Four Seasons Hotel Las Vegas was ranked #1 by the US News & World Report’s 2013 list of best hotels in Nevada, this recognition comes from the renovation of the guest rooms that are more chic and fancy. All of these are signs that the rooms rate at the hotel might increase causing the inflation rates to be higher.

International Competition

Four Seasons is very sensitive to international competition. With the company’s multiple locations worldwide, Four Seasons attracts competition from big names such as the Ritz-Carlton and Starwood. The industry itself is extremely sensitive to international competition because of the number of brands all over the world. In addition, for the most part, all of these brands are currently expanding into emerging markets, increasing the amount of competition the luxury hotel industry faces.

International Turmoil

Tourism is one of the most affected industries by International turmoil. With almost 90 different locations in 36 different countries all over the globe, Four Seasons could be heavily affected by the international turmoil. It is expected that branches located in the MENA (Middle East and North Africa) area would be highly affected due to the uprisings in that region especially in Egypt and Syria. Many of the people in these areas are cutting their traveling expenses. In addition, many people have lost their source of income, which results in a change in priorities including travel and tourism. Likewise, less people will be able or willing to travel into the region to stay at the hotels in this region. Four Seasons is also developing their brand in the Asian market. While the protests in China are not nearly as violent as in the Middle East, it is unknown to what extent these protests will elevate. If these uprisings become worse, people in the country would be unwilling to travel, thus not staying in the hotels, and business travelers would cut back on coming to China, also decreasing the hotel room demand in this market.

Technological Obsolescence

Technology is playing a huge role in almost every industry. The hotel industry, including Four Seasons, is highly affected by the technological obsolescence. The new advances in technology is used to enrich customers’ satisfaction and to gain more customers by offering unique technological features such as staying connected while abroad. In addition, because of the large customer base Four Seasons maintains around the world, technology is an important factor in keeping these customers. Companies are now using technologies such as the mobile Smartphone technology to enable faster communication with customers. Technology also helps hotels develop a better cost management system based on artificial intelligence technology. With better technology come other important issues, such as the security and privacy of the users utilizing in the hotel’s technology, which is the primary focus of this industry right now. However, statistics show a decrease in the spending on technology by the hospitality sector, falling behind other sectors.

Life Cycle:

The life cycle of Four Seasons is currently at its growth stage due to its intention of enhancing the value of its brand name (2006 Four Seasons Hotels and Resorts Annual Information form, 5). To add on, by comparing the company’s earnings per share of the year 2005 and 2006, it increases from 0.14 EPS to 0.36 EPS (First Quarter Report to Shareholders 2006, 2). Even though the company expanded its hotel brand to different areas, it is still aimed to expand more and gain more revenue from each new area. All the above considerations illustrate the company is currently a growing company, and should have a successful future path ahead.

Factors For Success:

The hotel industry is a highly competitive industry. In order for Four Seasons to be successful in this industry, it needs to be “strengthened by well-recognized and respected luxury brand name and [their] broad network of management contracts for luxury properties in strategic markets worldwide” (2006 Four Seasons Hotels and Resorts Annual Information form, 7). The first factor in establishing success involves the strengthening of the brand recognition. By increasing brand recognition, people will be able to distinguish Four Seasons from other hotels in the industry. Second, Four Seasons is focusing on their strategic relationships to expand their management operations (2006 Four Seasons Hotels and Resorts Annual Information form, 8). The strategic relationships are a major source for Four Seasons to obtain better financing for the different branches of its business. Furthermore, the global wide situation is important to Four Seasons as well. Since Four Seasons wants to expand their business into more areas and places, they need to be able to maintain their current outstanding global relationships and strategies. The company must also establish new and improved relationships within all other areas. In addition, promoting competent employees is an important factor in order for Four Seasons to be successful. According to the 2006 annual report, the reimbursement cost, which includes sales, advertising and marketing, increased by 15.6% compared to the previous year. Successful and proper promotions will add values to the brand’s reputation and increase market shares. With appropriate promotions, Four Seasons will be able to put more emphasis on their strengths in terms of a greater work lifestyle. The table below is retrieved from Four Seasons annual report, and it shows that the more expenses the company is generating, there actually will be more profitability for the company.

Another important factor for Four Seasons to be successful is improving customer service. By providing exceptional customer service, customer satisfaction will be higher; thus, improving the likelihood for customers to rebook with Four Seasons in the future. Also with a quality customer service system, customers will be more likely to give positive feedback, which in turn will add value to the brand name. With all these factors being properly enacted, Four Seasons will become a more successful brand in the luxury hotel industry.

Accounting Considerations:

There should be many different accounting considerations for a company like Four Seasons. First of all, the management team prepares the financial statements, which is an extremely important and useful tool for third-party users. Four Seasons mentioned the new adoption of changes in accounting policies on non-monetary transactions and stated that this adoption “did not have a material impact on [their] consolidated Financial Statement” (First Quarter Report to Shareholders 2006, 16). Even though the financial statements are prepared correctly, the company should also consider the fact that it operates in different countries all over the world. For Four Seasons properties operating within the country, everything should be in compliance with CICA rules; however, for other companies that operate outside the country, IFRS must be taken into considerations while preparing the financial statements.

The chart above is the corporate chart provided in the annual report of Four Seasons; it shows the major branches the company wants to emphasis. The company is a diverse company and needs to meet the numerous accounting standards to comply with each single sector of Four Seasons.

Legal and Regulatory Concerns:

The legal matters that relate to Four Seasons include international business policies, foreign exchange issues, and political unrest. Different countries will enact different rules for operating businesses in their country. In order to have a successful business in other countries, Four Seasons must abide by their rules and legal procedures. Also, political unrest is a big concern for Four Seasons because of their expansion into new markets. For Four Seasons, they are aimed at not only enhancing their brand values inside the country, but also developing their hotel chain into other countries. To some extent, there is an existence of differences in terms of political affiliations among different countries. The company should try to be consistent with the political policies for different countries to avoid any possible political unrest. Political unrest may result in different consequences; such as, government publically objecting to the company, hence hurting Four Season’s good reputation.

One of the most important regulatory concerns for Four Seasons is insurance. The company’s management team “require[s] the hotels and resorts that [they] manage to be insured against property damage, business interruption and liability at the expense of the owner of the property” (2006 Four Seasons Hotels and Resorts Annual Information form, 21). The insurance issue is highly considered by Four Seasons; they need to be able to maintain their insurance coverage level in respect of property damages, interruptions, and liabilities. “If [they] were held liable for amounts exceeding the limits of [their] insurance coverage or for claims outside the scope of that coverage or if the indemnities were insufficient for any reason, including as a result of the owner’s or indemnitor’s financial condition, [their] business, results of operations and financial condition could be materially and adversely affected (2006 Four Seasons Hotels and Resorts Annual Information form, 21). Therefore, keeping the insurance coverage at a desirable level is essential for regulating and financing Four Seasons Company.

Social Concerns:

Being in a highly competitive industry, Four Seasons needs to consider several different social matters in order to increase performance in the industry. First, pricing strategies are extremely important and will affect the company’s operational and financial conditions. By setting price levels, the company sets the social classes of their consumers. As there is in any business there is a tradeoff between setting prices and the company’s reputation. With a higher price setting, Four Seasons indirectly chooses the upper social classes. Having prices at a larger level, consumers are expecting the company to provide a relatively superior quality of services.

The table above is sourced from the Four Seasons annual report. The table demonstrates that as the higher room rates, the revenues will be relatively increase as well. Also, as listed in the table, despite the fact that the prices are high, the percentage of occupancy continues to be high and consistent, which proves the sound reputation of Four Seasons and its brand.

Another social concern Four Seasons faces is the choices of the locations. For some places, there can be more population mobility than in other places. By building property in a location with more mobility there is a greater likelihood that the price and revenue will be fairly higher. In addition, with the population trend becoming older and older, people will have more time chances to travel. Having an aging group in the market tends to increase the occupancy of the hotels, and as a result, increase the revenue as well. More importantly, Four Seasons should focus on advertising their targets efficiently and effectively to extend the company’s customer base.

Primary Competitors:

Four Seasons is unable to “stack-up” to the top competitors in the luxury hotel industry. Sales of $30.86 million are about $1.08 billion off of Ritz-Carlton’s, the competitor Four Seasons is closest to in terms of sales. The other top two competitors are Starwood and Wyndham Worldwide

The Ritz-Carlton Hotel Company, L.L.C

The Ritz-Carlton based in the U.S. is in the luxury hotel industry and provides over 100 luxury properties in the world. These properties are usually rated among the best worldwide. The Ritz-Carlton owns approximately 15 time-share properties in addition to its luxury hotels. Marriott International did buy a large stake in the Ritz-Carlton in the 1990’s and now owns 99% of the stake in Ritz-Carlton. The Ritz-Carlton is part of the luxury segment at Marriott and is expanding, as is many other luxury hotels including Four Seasons. In Hong Kong, the Ritz-Carlton was opened in 2011 and claimed the title of the world’s tallest hotel. In 2012, Ritz-Carlton’s had sales of $1.1 billion and employed 38,000 people.

Starwood Hotels & Resorts Worldwide, Inc.

One of the largest hotel companies, Starwood is able to boast sales of $5.62 billion, employment of 171000 people, and a gross profit margin of 23.38% from 1000 properties. The company includes brands such as Sheraton and Westin. Starwood also operates approximately 15 time-share properties. The company’s current strategy is reducing investments in real estate and alters their attention to management and finance operations. Not to be left out, the company is also expanding its properties but focused on the Asian market, which includes a 44% growth in China specifically.

Wyndham Worldwide Corporation

With about 7,200 franchise hotels internationally, including the brands Days Inn and Super 8, and 4000 vacation rental properties and exchanges, Wyndham Worldwide is also one of the top hotel firms in the world. With the help of 32,500 employees, the company was able to obtain sales of $4.35 billion and a gross profit margin of 53.84%. These high numbers are result of vacation rentals and timeshares, which accounts for more than 80% of Wyndham Worldwide’s revenue. To expand its business, Wyndham Worldwide is taking a different route than other luxury hotels by acquiring vacation rentals through acquisitions.

Turnover of Personnel:

Four Seasons believes their “greatest asset, and the key to our success, is our people. The company’s statement rings true, which is best demonstrated by the fact Four Seasons did not institute any job cuts in its history until the recession. In 2009, the company did implement a 10% job cut, or approximately 400 of its employees, from its headquarters in Toronto, Canada. Despite this slight setback, the company was able to obtain the 83rd spot in Fortune’s 100 Best Companies to Work For. The company currently employs 306 new jobs per year, which is a 3% job growth. Overall, Four Seasons manages roughly 35000, about 23000 of those employees work outside the U.S. Women in the company’s workforce equal 46% and the minorities count for 63% of the employees. Four Seasons established a nondiscriminatory policy as well, which includes sexual orientation and offers same sex couples domestic partner benefits. The company also provides a compressed workweek and telecommuting options, which more than likely helps the Four Seasons retain its best employees. However, the company does not provide 100% healthcare, paid sabbaticals, or onsite child care. Since Canada provides universal healthcare, the lack of healthcare in Canada probably does not impact the employees; on the other hand, some of the other countries with Four Seasons establishments do not offer that luxury, so the lack of healthcare may have an impact on the personnel in those locations.

Ease of Entry:

Entering into the luxury hotel is a very difficult task. Without merging or acquiring a company already in the industry it is challenging to overcome the barriers. The properties are high-quality and therefore require a large amount of funding to build. In addition, to compete in the luxury hotel industry, it is increasingly becoming important to expand into the emerging markets such as India and China. To be able to enter into the luxury hotel industry in these countries creates even more barriers. For example, almost all international brands must form partnerships or joint ventures to be allowed to get their foot in these markets. These countries place many restrictions on foreign entities. For example India offers a lower tax for domestic businesses compared to foreign firm. It would be advantageous for hotels to pair up with domestic business owners to be able to receive this lower tax. Other barriers include corruption in the political system of different countries and an inability to find a competent work staff in smaller cities. Although it is challenging to enter into the luxury hotel field, the revenues that are associated with this industry provides an incentive for companies to join, maintain, and expand their brands internationally.

Agenda:

Four Seasons is looking to expand their brand by building five to seven properties per year. The company is looking to erect many of these buildings in the Middle East and Asia. Despite the fact that the company already has one property in India, it wants to build at least three more by the year 2015. While those regions are Four Seasons main locations for expansion, the company also built two new properties in the U.S. in 2010. Previously, Four Seasons had wanted to create a luxury ship, they were unable to come up with enough money to finance the project. The company’s current agenda does seem somewhat realistic with the improving economy and boost of consumer confidence since the recession. The U.S. market is steady; however, the international market, which is where Four Seasons is looking at for expansion, is inconsistent. Even though the world market is bumpy, room pricing has increased 4.2% and occupancy statistics increased 2.5%. In addition, the room demand is at an all-time high in 2012 with an increase of 3%. The 2013 projection is an increase as well, albeit in single digit rates. The industry overall improved with RevPAR (revenue per available room) increased 6.8% in 2012 and a prediction of moderation in 2013. Four Seasons plan to expand into India over the next two to three years does face problems. For instance, other hotel companies have trouble retaining staff. Employees are jumping from one hotel to the next in search of the best short-term benefits. Besides the labor retention problem, current hotels are dealing with labor shortage issues as well. The number of job openings is much larger than the number of qualified applicants.

Integrity:

Once a public company, Four Seasons became a private company again in 2007. With a worth of $4 billion, Bill Gates’ company, Cascade Investment, and Saudi Prince Alwaleed Bin Talal’s Kingdom Hotels bought 95% of the company with the other 5% owned by the founder and chairman Isadore Sharp. Sharp stated that by going private the company is able to “protect the integrity of the brand.” According to Four Seasons website, the company believes it will “succeed when every decision is based on a clear understanding of and belief in what we do, and when we couple this conviction with sound financial planning” and that it “demonstrate our beliefs most meaningfully in the way we treat each other and by the example we set for one another.” These statements provided by Four Seasons sets the tone for the company and attest to the type of culture it wants to maintain, which includes integrity in its day-to-day operations.

In addition to its stated principles, the company proves their integrity through their goals of supporting sustainability, aiding in community building, and advancing cancer research. Four Seasons enables sustainability by attempting to preserve the environment through hosting programs and passing on knowledge and planting trees around the world. The company also gives charitable donations, volunteers, and participates in community events. Four seasons helps build communities by offering poverty relief, mentors, and support of local orphanages. Lastly, the company also supports cancer research by fundraising, volunteering, and the Terry Fox Run. Terry Fox had lost a leg to cancer but still wanted to run across Canada to raise awareness and funds for cancer. Once Isadore Sharp heard this story, he donated money, asked for more support from corporations and has since established the Terry Fox Run held every year in September.

While Four Seasons beliefs and values state that they work with integrity, the projects the company is involved with outside of its luxury hotel business helps establish credibility to management’s integrity.

Porter’s Five Forces Model:

Michael Porter created the Five Forces Model to use as a tool to understand the overall competitiveness of a market and its profitability. However, the model does not designate the profitability of each firm. The Five Forces Model was Porter’s reaction to the SWOT Analysis.

While the SWOT Analysis had four components, Porter’s framework has five that includes external sources and internal threats. Stated below are the five forces in relation to Four Seasons.

Potential Entrants:

The threat of new entrants is relatively low. The ease of entry into the luxury hotel is very difficult, which means the likelihood of new competitors attempting to hedge their way into this industry is small. A large amount of funds is needed to compete in this industry. The funds are required to start the brand and to expand it. A smaller hotel brand being acquired by a company with a budget that would allow the smaller hotel to extend their brand into the luxury hotel industry would be a more plausible threat of a new entrant. During the recession, very few mergers and acquisitions were taking place, and thus this option of threat is also limited.

Bargaining Power of Suppliers:

The luxury hotel industry’s main resource needed to provide to its customers is a competent employee. Therefore, the bargaining power of suppliers is somewhat strong depending on the area of location. For Four Seasons, in Canada, the bargaining power of suppliers is not high. Likewise, the suppliers to the brand’s properties in the U.S. face a low bargaining power because the unemployment rate is high and many qualified personnel are looking for work. However, in India, the number of adequate employees is a problem many hotels have to deal with. Therefore, the bargaining power of suppliers in this area is high. Overall, the location of the Four Seasons hotel determines the bargaining power of suppliers.

Bargaining Power of Buyers:

The hotel guests, or buyers, have a high bargaining power due to the number of competitors in the industry. Although it is difficult to enter the luxury hotel industry, there is competition amongst the top brands. With the all the different brands vying for the top spot, the hotels aim to win over the buyers, thus giving the buyers the power. In addition, during the recession, consumers traveled less causing a negative impact on the hotels. With the upturn in the economy, the consumers are starting to regain their confidence and vacation again. The luxury hotels have to draw these consumers back in.

Threat of Substitutes:

The threat of substitutes is medium. These consumers can stay at luxury hotels or stay at the next best thing, upper scale hotels and upscale hotels. The upper scale and upscale industries provide substitution to the luxury hotels; however, with the economy improving it is more likely that consumers will continue to pay to stay in the luxury hotels. In addition, with the uptick in the economy, more consumers have been staying in luxury hotels as demonstrated by the increase in room demand in 2012.

Rivalry:

The competition in the luxury industry is relatively high. With mergers and acquisitions of the top luxury brands, there is an increase in the amount of money being spent on current properties and on the expansion for more establishments. It is critical that brands are expanding into the emerging markets, such as China, to keep up with the competition. Also, it is important that the brands customize their products in these new emerging markets to set themselves apart.

Accounting and Governance Risk:

The Accounting and Governance Risk (AGR) is a rating used to measure the statistical reliance and transparency of a company’s financial statements and governance practices. Developed by Audit Integrity, AGR attempts to identify factors that are associated with fraud and quantifies the possible risks for third party users, such as the stakeholders. To quantify these risks, Audit Integrity analyzes hundreds of metrics to find certain factors that could lead to the discovery of fraud in a public company. Since Four Seasons went private in 2007, there has not be an audit accounting and governance risk on this company because they do not file financial statements and do not have shareholders that would rely on this type of information.

(Financial Health)

Company health:

A company’s financial health can be analyzed using various techniques and metrics. In assessing Four Season’s financial health, ratios analysis is one technique that allows us to compare the company’s performance in the present year to that of previous years. This will enable us to determine if the company is performing more profitably and is in a better position to meet its obligations now, than in the past. A comparison of ratios for the years 2004, 2005 and 2006 will be done to analyze the company’s performance. A company’s strengths and weaknesses can also be identified by comparing its ratios for a given year to those of its industry or close competitors in the same year. Therefore for 2006 we compared Four Season’s ratios to other companies in the same industry. These comparisons are done using Liquidity Ratios, Activity Ratios, Profitability Ratios, and Coverage Ratios.

Ratio Analysis

Liquidity Ratios:

Liquidity ratios measure the ability of a company to meet its short term debt obligations as they are due. It shows the capability of current assets to be converted into cash when needed. Generally, the higher the liquidity ratio, the better the position the company is in to meet its obligations. A liquidity ratio of 1 or higher displays the company’s ability to fully meet their short term obligations. The two liquidity ratios analyzed are the current ratio and quick ratio.

The current ratio indicates a company’s ability to meet its short term debt obligations over the next 12 months. Four Seasons’ current ratio increased at a steady rate over the three year period growing from 4.87 in 2004 to 5.4 in 2005, then 5.68 in 2006. This indicates that the company is in a better position in 2006 to meet its short term obligations than it was in the previous years. The quick ratio is similar to the current ratio. However, it only includes assets that can be liquidated quickly for immediate use. Four Seasons’ quick ratio also gradually increased over the three year period going from 3.87 in 2004 to 4.23 in 2005 and 4.78 in 2006. If Four Seasons’ needed to pay its obligations immediately it had enough liquid assets to readily pay them. For that three year span, Four Seasons had been in a very good position to meet its short term obligation. This is evident from the table above as from 2004 to 2006 their liquidity ratios were significantly greatly than 1 and increased over the years. When compared to its competitors (Figure 1), Four Seasons’ liquidity ratios are tremendously higher in 2006. This shows that the company holds a greater amount of liquid assets than their competitors and is in a better financial position to pay off their short-term debt as it comes due.

Activity Ratios:

Activity ratios are used to measure a company’s ability to convert assets to sales or cash. They determine how many days it takes a company to collect its receivables, sell inventory, and how it uses its assets to generate revenue. In analyzing Four Seasons’ financial health we will compare the asset turnover, accounts receivable turnover, and inventory turnover ratios.

The asset turnover ratio allows for measurement of the productivity of a company’s assets. Meaning it tells the reader how efficiently the company is using its assets to stimulate sales and earn revenue.  Although Four Seasons overall asset turnover ratio is fairly low, it had a slight increase in 2006 when compared to 2005 but decreased a great amount when compared to 2004. This difference shows that the company has not been using their assets as efficiently in 2006 as they were in 2004 to generate revenue.

The accounts receivable turnover measures how quickly a company collects money owed to them. It calculates the average number of times cash is collected from debtors. Four Seasons’ accounts receivable turnover increased from 13.61 times in 2005 to 28.32 times in 2006. The 2006 increase was an overall increase throughout the three years. The increase is an indication that Four Seasons was better able to collect money owed to them more times and in a shorter period in 2006 when compared to previous years. This increase could have been caused by new collection policies put in place by the company or incentives offered to debtors to pay quicker.

The inventory turnover ratio indicates the number of times that the inventory is used or sold in a given period. The inventory turnover ratio for the Four Seasons declined dramatically each year since 2004. In 2004 the ratio was 176.74 dropping to 37.76 by 2006. For a company in the hotel industry this indicates a decrease in the occupancy of rooms for a given period. This is reflected by Four Seasons’ ratio.

When compared with their competitors, Four Seasons had the lowest asset turnover ratio but their accounts receivable turnover and inventory turnover were significantly higher. These ratios indicate that Four Seasons do not use their assets as efficiently as their competitors but still manage to turnover their inventory faster than them and have better procedures in place to collect from their debtors. Therefore, overall it can be concluded that Four Seasons’ activity ratios are at a good level when in comparison with others in the luxury hotel industry.

Profitability:

Profitability ratios measure a company’s ability to generate earnings and profit through sales, investments, and assets. With profitability ratios, a higher value is more desirable as it reveals that the profitability of the company is being managed effectively. Profitability ratios are most meaningful when compared to ratios of the previous year or to the industry.

Return on assets (ROA) measures the amount of profit made by a company for every dollar of its total assets. In 2004, Four Seasons had a ROA of 3.26% which is fairly good. In 2005 however, they had a negative ROA of -2.87 which indicates that they spent more on assets than they made from them. The negative return was converted back into a positive in 2006 when Four Seasons had an ROA of 5.37% ensuring their financial data users that they were making a profit from their assets. Return on Equity (ROE) and Return on Investments (ROI) are similar to ROA in that they measure the returns received by the company on their equity and their investments made. Bothe ROE and ROI fluctuated over the 2004 to 2006 period, with ROE falling in the negatives in 2005. However, they both were at their highest in 2006 with ROE and ROI being 8.41% and 7.52% respectively. This shows that Four Seasons had about and 8% return on both their investments and equity.

EBITDA (Earnings Before Income Tax, Depreciation and Amortization) tells us how the business is performing before deducting expenses such as tax and depreciation. Four Seasons’ EBITDA also fluctuated for the years 2004 to 2006, with the highest earnings being in 2006. From the ratios discussed thus far we can see that 2005 was not a good year for the Four Seasons. However, they regained some strength in 2006. In 2006, Four Seasons had a profit margin of 19.84. This means that for every $100 of sales $19.84 went into their net income. Four Seasons’ price earnings ratio, dividend yield and earnings per share were extremely low in 2006. This is mostly like due to the fact that the company decided to go private at the end of 2006.

Hotels

ROA

ROE

ROI

EBITDA

PE Ratio

Dividend Yield

Earnings per share

Four Seasons

5.37

8.41

7.52

30.11

-124.274

0.1213

1.36

Marriott International

7.12

20.77

21.48

10.1

24.1861

1.25

1.77

Starwood Hotels and Resort

9.6

25.38

11.19

18.67

21.8182

2.0032

2.92

When comparing the Four Seasons to their competitors, they fell below both Marriott and Starwood Hotels by a great amount in almost every ratio. Their ROA was the only ratio that fell somewhat close to the industry’s average, which was probably the result of the Four Seasons being a medium sized company. Profitability wise, the Four Seasons does not seem to have been doing well as a public company. Therefore, we believe that it was a good decision to take the company private in 2007.

Coverage Ratios:

Coverage ratios are used to analyze a company’s ability to meet its long-term debt obligations and pay its investors. They take into account the company’s various financing methods. There are many ratios to calculate coverage; however, our focus is on debt to equity and book value per share.

The debt to equity ratio indicates the proportion of an entity’s equity and debt used to finance its assets. A high debt to equity ratio is not healthy for a company as it shows that the company is too dependent on outside financing to fund their assets. Four Seasons had a relatively low debt to equity ratio over the three year period from 2004 to 2006, which indicates their lack of reliance on financing. Their book value per share fluctuated slightly over those three years but was in the same number range. When compared to their competitors, Four Seasons had the highest book value per share and the lowest debt to equity ratio, which put them in a strong financial position in the industry.

Z-Score Analysis:

The Z-Score for non-manufacturing companies is a combination of four ratios used to determine the risk of bankruptcy for a given company within the next two years. This was created by Edward Altman in the 1960s. The Z- score has three zones of discrimination.

(Zones of Discrimination)

Four Seasons’ calculated z-score is 5.508. This calculation can be seen in below. This z-score demonstrates that Four Season has a very low risk of going bankrupt within the next 2 years as it is well within the safe zone parameter as defined by the zones of discrimination.

Z-Score Calculation for Four Seasons

Formula

Calculation

Total

Working Capital/ Total Assets

(359,131/991,967) *6.56

2.375

Retained Earnings / Total Assets 

(207,600/991,967) *3.26

0.682

EBIT / Total Assets 

(69,207/991,967) *6.72

0.469

Equity / Total Liabilities 

(648,475/343,492) * 1.05

1.982

Z-SCORE FOR FOUR SEASONS

5.508

Strategic Profit Model:

The Strategic Profit Model is used to analyze the financial performance of Four Seasons by measuring its ROE and determining the reason for its increase in 2006. The model focuses on the company’s profits and assets by breaking down the ROE into separate parts. This separation makes the financials easier to read and track. Using the strategic profit model users of the financial statements and the auditor can track exactly what caused the ROE to increase in 2006. This is important because different decisions will be made based on whether the ROE increase because of increased liabilities, causing the equity to be reduced proportionally, or an increase in income caused by their equity. The strategic model for Four Seasons can be found below.

Sources and Value of Capital:

In 2006, Four Seasons had long term debt of over $266 million. In addition, they had long term debt that was due within one year of about $2 million. Four Seasons uses some of its debt to invest in management contracts and hotel partnerships and corporations. These investments will help Four Season to pay off its debt in the future.

Four Seasons also sold stock as a source of capital. In 2006, they had over $287 million stock outstanding with an earnings per share of 1.36. However, in 2007, Four Season became a private company. They also issued convertible notes in the amount of about $36 million. These bonds can be later converted into limited voting shares on a one for one basis. In 2006, Four Seasons also received proceeds of $36.3 million relating to the exercise of options by employees to purchase 746,310 Limited Voting Shares.

Capital Market Place and Four Seasons:

Due to the fact that Four Seasons went private in 2006 there is not much capital market data on the company. However, in 2006 Four Seasons had stock outstanding of about $287 million. They paid dividends of $0.11 per share in 2006 and had an EPS of 1.36.

Four Season’s Financial Direction:

Based on Four Seasons’ financials for 2006, overall they seem to be heading in a positive direction financially. Four Seasons’ revenue has increased from $251,725,000 in 2005 to $253,425,000 in 2006. Although this is not a great increase, it shows that the company is growing. In addition, the majority of Four Seasons profitability, liquidity and activity ratios indicate that the company has improved in 2006 when compared to other years. Four Seasons took its company private in 2006, reducing the information available to the public on its financials. Therefore, information about their stock could not be found. However their EPS in 2006 was 1.36, which was around the average for other companies in the same industry. Four Seasons has also become more technologically innovative by joining social networks, improving their website and providing their customers with more access to the company through the use of technology. This move allowed them to increase their revenue by 200% in 2011. Four Seasons has received unqualified opinions from their auditors KPMG for the three year period that was covered in this assessment. Therefore, it can be said that Four Seasons’ financial records are up to standard but there is still some risk associated with the company, such as as the change of status from public to private will bring changes.

Quality of earnings Analysis:

Quality of earnings is defined as “ [the] earnings [that] are attributed to aspects of the company's business, as opposed to external forces” (Investor Words). It is also a word that helps to “distinguish between earnings associated with the company's primary operations versus those generated from financing and investing” (Business Dictionary). The Investor Words defines the high quality of earnings as a change in earnings derived from a decrease in production costs or an increase in sales; whereas the low quality of earnings is regarded as the increase in earnings is based on the outside sources. Given these criteria, Four Seasons, by the year of 2006, qualifies the standards for high quality of earnings.

By comparing the two years net earnings from the above consolidate statement of operations; year 2006 almost triples the net earnings of year 2005. This huge increase in earnings is driven by the great increase in the hotel and food services provided by Four Seasons.

The overall hospitality industry in 2006 is actually experiencing its high quality of earnings.

This table is exhibits value of the percentage change from 1999 for a typical North American hotel. From the table, it is really clear that the percentage changes are positive since 2004 to 2006. In order to make more precise decision about the overall industry quality of earnings, all different regions around the world need to take into considerations.

The above table better summarizes the worldwide percentage changes from 2000 to 2010. It is not difficult to figure out that the percentage changes are positive in 2006 regardless of the locations. Therefore, the conclusion can be drawn that the hospitality industry possesses a high quality of earnings, so do Four Seasons hotel as individuals.

Auditor’s report:

KPMG LLP has been the auditor hired by the Four Seasons every year until 2006, when the company went private. KPMG LLP is known as one of the “big four” accounting firms around the world. By having such a prestigious accounting firm providing the audit report, it increases the reliability, which leads to confidence from the stockholders and third parties towards Four Seasons Hotels. Based on the consolidated statements that Four Seasons provided to the auditor, the auditor from KPMG LLP concluded that “In [their] opinion, these consolidated financial statements present fairly, in all material respects” (Consolidated Financial Statements Four Seasons Hotels Inc., 4) for the year 2005 and year 2006. What KPMG LLP means by the statement above, is that the auditor is issuing an unqualified opinion and providing a reasonable assurance that the financial statements are free from material misstatement. The full auditor’s report is attached in the Appendix.

(Analyst Report)

Perceptions:

The following table summarizes the high and low price and volumes of trading of the Limited Voting Shares on the NYSE in each of the periods mostly in the years 2005 and 2006. In Four Seasons, “[e]ach Limited Voting Share entitle[s] the holder to one vote,” (Four Seasons Hotels Inc. Notice of Special Meeting of Shareholders, 56) in order to maintain the voting level. Also, another major power holders of Limited Voting Shares possess is that, “[they] are entitled, voting separately as a class, to elect two members of FSHI's Board annually,” (Four Seasons Hotels Inc. Notice of Special Meeting of Shareholders, 56).

According to table below, the prices for Four Seasons stock decreases during 2005, while the volume fluctuates greatly; and the price goes back up in 2006 to around $80. After year 2005, the stock price increases steadily until the date of the report. From this numerical evidence that we observe from the table, it seems like stockholders should hold the stocks or buy the stocks; likewise, according to an analyst recommendation in 2007, the analysts rated it at #3, which suggests stockholders to hold the investment.

The Analyst rating has increased the rating since 2003 when it had been rated at a level 5, which is a “strong sell”, by S&P (Zacks Issues Sell Recommendations On Four Seasons). By comparison of these two different recommendations, Four Seasons is making process in terms of their performances.

(Intial Assessment of Four Seasons)

Material types of transactions:

There are many different types of transactions Four Seasons Hotel and Retorts takes part in throughout the entire course of its business. Certain types of transactions are considered more important than the other types. For Four Seasons, there are four material types of transactions when doing working in the luxury hotel industry.

The first, and arguably the most important type, is the expenditures on real estate and expansions. Since Four Seasons is a hotel-based company, it needs land and buildings to keep the business running; therefore, the purchasing and selling of land property, as well as any necessary remodeling, will be considered a major type of transaction.

Another material type of transaction is its food services. As a business in the luxury hotel industry, Four Seasons needs to provide a reputable level of food services in order to sustain its reputation as a high-end hotel chain. Also, the expenses for raw materials’ prices become a relatively major portion of the transactions involving its food services.

The third material type of transactions is the guests’ room arrangement. There will be hundreds of thousands reservations coming in every single day, so it becomes extremely essential to arrange the appropriate room for each individual customer that matches with their requirements. Failing to record these transactions properly could result in lost customers, meaning lost revenue.

Finally, the last material type of transaction is salaries and wages expenditures for all level of employees and executives. Even though the individual payroll amount is not significant, the total amount of more than thirty thousand employees drives the expenses up. Therefore, the expense of paying all those employees is another material type of transaction.

Transaction cycles involved:

In order to achieve the goals of efficiency and profitability for a company, the accounting cycle plays a tremendous role. The accounting cycle is made up of different transaction cycles, which break down into five transaction cycles, including the Financial Cycle, Expenditure Cycle, Payroll Cycle, Conversion Cycle and Revenue Cycle. Each type of business within the company can be traced to specific transaction cycles for the purpose of effectiveness. All the different transaction cycles need to be integrated in a proper way in order to ensure that Four Seasons can operate smoothly.

The starting point of the actual business is the Financial Cycle, which consists of the initial funding and the start-up costs for opening the business. Since the Four Seasons is not a newly started business, this cycle is less important in comparison to the other four cycles. Once the Financial Cycle procures the capital, the Expenditure Cycle comes to place.

The Expenditure Cycle involves the budget expenses for the company, which is critical to Four Seasons because the material types of transactions for Four Seasons are food, purchasing, and land acquiring, all expenses. As soon as the capital is obtained, the firm will hire professionals to help with the firm’s operations.

As stated above, in material type of transactions, the payroll cycle is in fact a large cycle that company needs to focus its attention on. The payroll cycle focuses on the actual expenses for each individual employees and executives, and it is actually a sub-cycle of the expenditure cycle that we talked above.

The next key cycle is the Conversion Cycle, which is comprised of the Expenditure Cycle and the Payroll Cycle. Most accounting transactions occur during this period and that makes this cycle more distinctive compared to the others. The last cycle is the Revenue Cycle, which can only be generated upon the completion of the Conversion Cycle.

There are a large number of transactions existing during the business course for Revenue Cycle. For Four Seasons, the major source of revenue comes from the hotel reservations and the food services. It is vital that Four Seasons makes sure that the revenue is fairly stated in its financial statements. Among all of the five different transaction cycles, it is apparent that each one needs to play in their suitable ways to allow the company to continue to move properly into the future.

Audit Risk (Audit Risk=f [DR, ICR, IR]):

A desired audit risk, which is a qualitative judgment, is a function of detection risk, internal control risk and inherent risk. Detection risk is the risk that the auditor will conclude that no material errors are present when in fact there are. Internal control risk is Probability of loss arising from the tendency of internal control systems to lose their effectiveness over time. And the inherent risk is defined as the probability of loss arising out of circumstances or existing in an environment, in the absence of any action to control or modify the circumstances.

Since the audit risk is subjective, it is extremely important for the client acceptance consideration to avoid providing a wrong opinion of the financial statements. If the auditor issues a false opinion based on the inappropriate audit risk, the third party will not be reasonably assured that the financial statements are free of material misstatement and could result in possible legal liabilities. While considering the audit risk, it is also important to consider the low-risk areas as well as the high-risk areas.

High-risk Areas:

Since Four Seasons Hotels and Resorts Company is a worldwide hotel company, one of the biggest challenges and risks is the varying political policies in each of the different countries that have a Four Seasons Hotel. Each country will have different government policies of varying degrees that may limit the company’s continuous development in that country. For example, the government may force Four Seasons to pay additional taxes to operate, which will result in a higher price to operate in that country. The increase in price of their services means the actual profit in that country will be diminished. Therefore, government policies need to be taken into consideration as an inherent risk by Four Seasons before expanding into new countries.

Another potential high-risk area is the dependence of the management team and employees, which falls into the category of internal control risk. Four Seasons employees more than thirty thousand employees in Vancouver, Canada alone. It is certainly critical for them to make the appropriate hiring decisions. The background check for each individual employee is necessary to ensure that they will perform on behalf of the company and have no prior history that would hinder their work. For example, if one employee has a theft record, it is more likely for him to steal from the company, which will lead to employee fraud. Another instance would be if the management team colludes with each other to overcome internal control, then management fraud exists. It is harder for internal control to detect management fraud than the misappropriation of assets. In addition, management fraud is much more material than the employee fraud and can result in irrevocable disasters for the company.

Also, the economic condition is considered as a high-risk area. If the economic condition decreases dramatically, like during the Great Recession, Four Seasons must pay more to get the materials that they need. The corresponding prices will increase for customers as well. This may result in the low sales and low revenues during the downtime of the economy. Therefore, Four Seasons should predict ahead for possible economic downturns and prepare for any miscellaneous situations that may occur.

Low Risk Areas:

Risk associated with expansion, growth, and new construction has the potential to be low-risk areas. Mentioned in the annual report of the year 2006, the financing for new construction provides a significant risk to Four Seasons. As a result of the risk, a low-risk area arises from changes or concessions required by regulatory authorities. These requirements could involve additional costs and delays; prevent completion of construction, or opening of a project.

In addition, the political risk of owning and managing luxury hotels in 31 different countries is another low-risk area. The risk includes the company having difficulty enforcing contractual rights related to its assets if due process of law is not respected.

Currency exposure is another low-risk area, especially since Four Seasons shifted from reporting all the financial statements using the Canadian dollar and adopted the US dollar in 2005. By switching currencies, reporting, using the U.S. Dollar will minimize the currency fluctuations related to the majority of the U.S. Dollar management fee revenues.

The seasonality and/or quarterly predictability of the demand is an additional example of low-risk area for the Four Seasons. Since the demand is usually lower in December through March in contrast to the remainder of the year, it may lead to a negative impact on the company’s yearly performance; however, this unfavorable impact is generally offset by an increase in travel to resorts during that quarter and may be increased as the portfolio of resort properties managed by the company increase.

Integrity Issues:

The disclosure of controls and procedures in the annual report of the year 2006 indicates that the management must establish and maintain adequate internal control over financial reporting for Four Seasons Hotels Inc. The company’s management has used criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the effectiveness of the company’s internal control over financial reporting. Stated in the report, KPMG LLP has audited the consolidated financial statements and issued a report on management’s assessment of the effectiveness of the internal control. With the favorable opinion given by KPMG LLP on previous annual reports on Four Seasons’ internal controls leads us to believe that the company’s management and audit committee will have a “better” pitch for the audit proposal. Moreover, the annual report mentions that there have been no changes in the internal control that have materially affected the internal control system.

Despite an adequate internal control system, on February 12, 2007, Four Seasons entered into a definitive acquisition agreement that involved three companies. One company, the Kingdom Hotels International, is owned by a royal prince (Alwaleed Bin Talal Bin Abdulaziz Alsaud and his family), which may cause integrity issues due to the politics and the way ruling families in other countries, such as Saudi Arabia, control their businesses and investments. Possible outcomes are the inability to gather sufficient information and limitations imposed by the ruling families on the auditing process.

In addition, the company made headlines in the U.S. in 2009 following a Four Seasons scandal when the hotel staff prevented the owners of Four Seasons to enter the hotel premises in San Diego, USA. The prior issues between Four Seasons’ employees and owners cause our team to raise concern about the affect of the efficiency and appropriateness of the internal control system within the company.

Client Selection Decision:

Based on the annual report of the year 2006, we find that it is appropriate to select this client. With an increase in revenue by 2% between the years 2005 and 2006, we feel comfortable taking on client that can pay its obligations. Despite high costs in contrast to the income generated, the company shows signs of improvement. Moreover, Four Seasons has been named by the Fortune Magazine as one of the best 100 companies to work for, ranking 83rd, the 13th year in a row. To go along with the improved financial aspect of the company, our assessment of the internal control of Four Seasons provided to be sufficient. Since we believe that the company has a good internal control system, there is a greater likelihood that we will be able to assign low internal control risk and low inherent risk to the Four Seasons, which will make the auditing process more effective and efficient, and of course, profitable.

The graph above shows the increase in the revenues from the year 2005 to the year 2006 by 2%.

Geographical Areas:

Four Seasons headquarters is located in Canada and our team will conduct most of the audit work there. Four Seasons has 89 other branches in 36 other countries including the United States, the Caribbean, Europe, Middle East, and Asia/Pacific. It is appropriate to have our team travel to the areas with the most branches in a common region, such as the United States and the Middle East areas, to gather evidence to conduct an audit.

External Control Limitations:

The Sarbanes-Oxley section 404 requires auditors to not only give an opinion on the financial statements, but also to give an opinion on the effectiveness of the internal control of the client. This standard has a direct impact on our external control abilities. If the company does not possess an adequate internal control environment, then the external evidence we gather on the Four Seasons could possibly be insufficient.

Internal Auditors (AU 322):

According to AU Standard 322, internal auditors should provide, “analyses, evaluations, assurances, recommendations, and other information to the entity’s management and those charged with governance.” Using the framework provided in AU Standard 322 appendix which is shown below, we were able to determine whether or not it was acceptable for us to use the internal auditor’s work. After consideration of Four Seasons and their internal auditors using the figure below, using professional judgment, we decided it would be efficient and appropriate to use the work provided by the internal auditor’s with acceptable and reasonable supporting evidence.

Framework provided in AU Standard 322.

Outside Specialists (AU 336):

In compliance with AU Standard 336, guidance to using a specialist in performing an audit in accordance with generally accepted auditing standards is provided. A specialist possess, “special skill or knowledge in a particular field other than accounting or auditing.” Due to Four Seasons industry, there is a need for a specialist expertise in asset valuation. It is vital that there is validity in the evidence used to perform substantive test to evaluate material financial and using a specialist to ensure that the depreciation and fixed assets are stated correctly and in accordance to generally accepted auditing standards. In addition, the amount attributed to management contracts may need to be looked over by a specialist to assure the contracts are valid.

Our team will ensure that the specialist has the professional certification or recognition in their field, a reputation and standing in the views of peers, and the skill in the type work under consideration. While we will allow the work of a specialist or specialists, our team will know the scope of the specialists work, assure the specialist is independent, and know the methods used to comply with AU Standard 336.

Specific Areas of Audit Expertise (AU 311):

The AU Standard 311 begins with the first standard of field work, “The auditor must adequately plan the work and must properly supervise any assistants.” Before forming an overall audit strategy to audit the Four Seasons, it is important to draft an engagement letter. Once the engagement letter is agreed upon, an experienced team including partners, senior managers, and fewer entry-level staff will begin the audit planning of our new client. Due to the inexperience with Four Seasons, we determined that to produce reasonable assurance that our opinion on the financial statements is correct; we must select members with more familiarity to conduct this audit.

Audit Opinion:

After performing the audit and evaluating the company, including Four Seasons’ internal control, we believe that an unqualified opinion would be appropriate for Four Seasons’ fiscal year 2012-2013. By issuing an unqualified, our team is giving reasonable assurance that the Four Seasons is free from any material misstatements in their financial statements. In addition to the unqualified opinion regarding the financial statements, we will also release a report on internal control over financial reporting.

When Four Seasons was public, the years prior to 2007, KPMP LLP had given the luxury hotel an unqualified opinion for five consecutive years leading up to Four Seasons privatization. By issuing an unqualified opinion, KPMG LLP ensured that the following conditions had been met: all statements (balance sheet, income statement, statement of retained earnings, and statement of cash flows) are included in the financial statements, the three general standards have been followed throughout the entire engagement, sufficient appropriate evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude the three standards of field work have been met, the financial statements are presented in accordance with U.S. generally accepted accounting principles including adequate disclosures in the footnotes and other parts of the financial statements, and there are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report. With Four Seasons receiving unqualified opinions previously and its continued financial stability; we believe that an unqualified opinion should be issued in the annual report.

Implications of Sarbanes-Oxley (404):

Following the major corporate and accounting scandals, such as Enron and Tyco International, Congress reacted by enacting the Sarbanes-Oxley Act in 2002. The act was passed to help restore confidence in corporations. SOX led to the formation of the Public Company Accounting Oversight Board (PCAOB) in addition to other requirements, for instance Section 302 that requires management’s quarterly certification of their financial results.

One of the most significant outcomes of the act is Section 404. This section mandates that management make include the effectiveness of its internal control in the annual report, which the auditor evaluates and reviews as internal control on financial reporting. The auditor then issues an opinion on the company’s internal control along with the opinion given on the financial statements.

The cost of evaluating the effectiveness of the company’s internal control is high, but necessary in order to maintain and demonstrate a sound internal control environment. To document and continually test the internal controls is costly but in long run beneficial. Without proper internal controls in place, Four Seasons could lose a significant amount of money due to the misappropriation of assets. Having good internal controls in place dissuades employees from participating in employee fraud. While internal control helps alleviate employee fraud, it does not have a huge impact on deterring management fraud. With the pressure on maintaining sound internal control, Four Seasons went private to allow a high level of internal control within the company to continue.

Client Business Risk Matrix

· (High) (Probability )Poor Staff Members

· Guest Behavior

· New Construction

· Political Risks

· Poor economic conditions

· Data privacy (hotel users)

· (Low)Terrorism (in North America/Europe region)

· Litigation Proceedings

· Branding

· Unfavorable government policies

(High) (Low)

(Significance )

The above matrix is used to assess the risk assumed by the Four Seasons that could potentially have an impact on their financial statements. On the horizontal axis, the significance of each risk on Four Seasons’ financial statements is identified as high or low. Since Four Seasons is a worldwide establishment, the risk significance of political risks is present in some areas the Four Seasons is located in could have a substantial impact on their financial statements. The vertical axis is the probability that a certain risk will occur. While the political risks have a high significant risk on the financial statements, it also has a high probability of occurring due to the large number and vastly different countries Four Seasons has built and operates hotels in.

(References)

The auditor’s consideration of the internal audit function in an audit of financial statements. (n.d.). Retrieved April 9, 2013, from http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00322.pdf

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Planning and supervision. (n.d.). Retrieved April 9, 2013, from http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00311.pdf

Sarbanes-Oxley act (SOX) 404. (n.d.). Retrieved April 9, 2013, from http://ssae16.com/SSAE16_SOX404.html

Using the work of a specialist. (n.d.). Retrieved April 9, 2013, from http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00336.pdf

Seasons Inc.. (2006, March 31). First Quarter 2006 Report to Shareholders. Four Season Inc.. retrieved February 24, 2013, from www.1.fourseasons.com/pdfs/press/quarterly_reports/Q106_Report_to_Shareholders.pdf

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Advancing cancer research. (n.d.). Retrieved from http://livingvalues.fourseasons.com/?cat=5#

Building communities. (n.d.). Retrieved from http://livingvalues.fourseasons.com/?cat=8#

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(Appendix)

Appendix A: Auditors Report

Appendix B - Team Organization

Budget

Initially, we estimate the time that we needed to devote to the preliminary part is ten hours for each team member. However, as we went through the preliminary part, we found that we underestimated our time schedules. Then more time is put towards the second part of the project. Upon the completion of the project, we figured the accumulated time that we put on our project is approximately thirty hours for each of the four team members.

Leadership

We did not intentionally choose our team leader, but Vanessa turned out doing more work than the rest of us. Even though each team member is responsible for making sure the division of work is fair and equal, she always the one who assigned us the sections that we need to focus on. In addition, she put time to review and edit our writings when we finished, and put comments for us to revise the work.

Coordination

At the very first meeting, we agreed on an implied contract that every single of us in the team would take our responsibilities and work together effectively and efficiently. After careful consideration, each team member chose the sections that they are interested in, and equalize the work. We had our work assigned during the mid January for the preliminary project. After the completion of the first portion, we split up the second part of the project. The reason why we did not form a formal contract was because we felt accountability to each other, and knows that each of us will take our own responsibilities, so there is no need to form a formal contract.

Norms

Throughout the semester, our team meets consistently to ensure everybody took baby steps for the project. During the meetings, some specific norms were resulted from the expected behaviors. The first norm that we found essential to keep the group coherent was finishing the work by the assigned date and meeting the team on time. We had the initial meeting to setup the responsibilities that we need to follow, which