Background: 2005 (FUELLHART and O’CONNOR, 2012). This shows that

Background:

Flight Centre Australia is the
largest travel retail in Australia and it is the biggest company in that market.
Headquartered on Queen Street in Brisbane, its portfolio including niche brands
features 1,300 businesses across Australia, with the company posting before-tax
profits of $349.2 million in June 2013. After
the success of top deck travel company Graham Turner founded this company in in
1981. Melbourne and Brisbane stores were opened in 1988 which were followed by
first stored opened in Sydney in 1981.In 1988 there were more than 50 Flight
Centre shopfronts across Australia now there are almost 700 Flight
Centre-branded shopfronts across Australia which are generating $2 billion in
revenue in collaboration with online booking. With such a massive business and
large revenue the company might be at the risk of financial misstatements thus,
we will be assessing that in this report. In the last couple of years the
profits of Flight Centre Australia has dropped a bit we will also be discussing
what might be the potential drivers, which led to that.

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Customers:

Flight Centre has been providing
excellent service to Australian customers from many years. Low airfares and a
multitude of social and economic factors have resulted in increased air travel.
The number of journeys taken by passengers each year has grown from approximately
642 million in 1980 to more than 3·4 billion in 2015(Grout et al., 2017). However
due to air travel being cheaper and affordable, airports are getting lots of
crowding, congestion, and slot limitations at international gateways in
high-ranked Australian cities which is very inconvenient thus people prefer to
travel from small airports. In 2010 numbers of people traveling from small
airports like Gold coast, Darwin had increased by more than 185% and more than
63% of this capacity went to Japan or Malaysia via LCCs Jetstar or AirAsia X,
airlines that had no substantial presence in 2005 (FUELLHART and O’CONNOR, 2012). This shows that customers
prefer to travel internationally from small airports while most of
international flights offered by Flight Centre are from major Australian cities
this could potentially decrease the revenue made by Flight Centre thus
encouraging manipulating of accounts to show higher profits. Flight Centre also
only offers services to major cities in other countries that also discourages
the customers and they end up booking flights directly through the airline or
from a competitor. There lowest guarantee offers also attract lots of customers
to book flights from them but that means they are also not making much profit
on those sales.
They also have a very loyal customer market which is the result of their
promotional campaigns such as giving gift cards are promotional merchandise
along with excellent customer service to their customers.

 

Suppliers:

Flight Centre are not just only an
air flight retail they also provide different services such as holiday, tours,
cruises, car hire and several other experiences along with accommodation for
their customers therefore their supplier market is enormous and transactions
with hundreds of businesses are carried every day which could result in
intentional or unintentional mistakes in the financial documents. This calls
for tough internal audits every few months so that there is no room for any
errors. The major suppliers of Flight Centre are airline companies, which
provide tickets at discount agent rates to them, but as we have come to see in
recent years that airlines themselves are losing money or financially
struggling. For example, in 2015 Tigerair sold 40% of its shares to Virgin
Australia, while Malaysian airline made a net loss of $110 million. In these
circumstances, it becomes difficult for companies that provide air retail
services to make much money. Directors might consider giving wrong numbers to
make their company look good so that the share price would not go down thus
pushing them into solvency (Tigerair
to sell stake in loss-making Australian arm, 2015).

Competitors:

With the Australian travel, business
expanding gradually as there are large number of international and domestic
flights everyday with thousands of people traveling. Across the globe, selected gateway cities often have
a disproportionate role in both international and domestic passenger movements.
These roles are often because of the underlying economic activity of these
places, especially their role as a location of major international and national
corporate activity. However, new airlines, new aircraft, and new markets are
emerging (FUELLHART and O’CONNOR, 2012). As the scope of air travel increases,
this gives rise to potential competitors for Flight Centre and as we know that,
there are already many popular competitors such as Booking.com, Wotif.com,
Webjet.com.au and Expedia.com.au are few famous ones. After Flight Centre
(12.6%) Booking.com (11.4%) is the second most famous used by holiday goers at
least once a year (Roy Morgan, 2018). These competitors pose a threat to the
monopoly of Flight Centre on the Australian retail travel market and they could
be the very reason that its net profit fell 4.7% for the year which raise concerns
for the future of this company. However, they must adopt and improvise if they
want not to be dominated by their competitors which are oversees giants and
starting to make a mark in Australian market. The competitive and technological
headwinds are real, and it will be interesting to see that how this retail
travel market will change its course. Given Flight Centre’s diversity of
operations, clean balance sheet, capable management, and continued investments
in technology, these are the reasons why overall business will continue to grow
profitability despite the challenges it’s facing (Roy Morgan, 2018).

Governance and regulations:

As Flight Centre is, an agent of all
the airlines it distributes tickets for therefore it cannot be in competition
with any of the airlines under Competition and Consumer Act. However, Flight
Centre was in violation of that act and lost case in 2015 against ACCC as high
court raises competition compliance risk for dual distribution models. There
are many other regulations by which if a company does not abide they can end up
paying large compensations, that can give them a financial setback and ruin
their identity as a corporation. Another one is Price discrimination occurs when like goods or services are
provided to different persons at different prices, the difference in price
being unrelated to the cost of providing the goods or services. (Hazledine,
2015). Common examples occur when discounts or concessions are given to
customers because whether they are frequent flyers or VIP customers, the
passengers might be able to sue the company if they could find a direct
relationship between this and their race, age or sexuality under different
sections of Discrimination Act. The merger policy is also a significant factor
to consider when making alliances with other travel retail agencies or airlines
up to a certain degree under the law (Hazledine, 2015). Thus it does not need
to be said that in all sort of markets companies really have to watch their
steps as anything might be in contrast to regulations and governance.

Detection Risk:

Detection
risk is the chance that an auditor will fail to find material misstatements that
exist in an entity’s financial statements. These misstatements may be due to
either fraud or error. Auditors make use of audit procedures to detect these
misstatements, but because of the nature of these procedures, some detection
risk will always exist (Moroney,
Campbell, Hamilton & Warren, 2015). For example, some of the time auditors
take a sample of a certain type of company transaction because examining every
transaction is impractical. Increasing the sample size can reduce detection
risk, but some risk will always remain. We can audit the whole company, but
that is very costly and requires a lot of time and effort. The alternative is
to use two different accounts and compare their transactions thus establishing
a comparative compliance. Detection of the underreporting of
tax is not a deterrent to such actions unless there is some negative
consequence because of the detection greater than the payment of the
underreported tax. A survey conducted gave the results Traditional tax theory
concludes that taxpayers comply with tax laws because of their fear that under
reporting of their tax will be detected by the taxing authority and they will
have to pay significant penalties as a result. This shows that the fear of
entities being detected is the main reason why fair financial reports are
formed. Only one third persons reporting compliance tax laws indicated they
believed the taxing authority could detect tax underreporting. In addition, a
third of those reporting noncompliance indicated they did not know whether the
taxing authority could detect their underreporting. Thus, for a significant
portion of the population, detection risk affected neither compliance nor
non-compliance (Farrar & Thorne, 2012). This shows that it is necessary to
minimize the detection risk when carrying on audits as the culprits are hoping
that their misstatement wouldn’t be detected by the authorities this emphasises
on the significance of conducting audits which will be free of detection risks
or any sort of risks for that matter.