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Fraudulent Reporting and Forensic Financial Analysis

Find a company (or other public entity) that has been the subject of a financial statement fraud in the last 3-5 years. Pull that company’s financial statements (and public announcements) for 3-5 years before the fraudulent financial statement. Perform an analysis (potentially a ratio analysis) as well as reading the notes, MD&A and announcements. Write a paper describing the fraud, the red flags for the fraud, and how you would approach the fraud examination.

Fraudulent Reporting and Forensic Financial Analysis

Airline Industry
The global airline industry has reported significant growth in the past 5 years. The revenue collected from the industry has been continually increasing since the year 2011 with the highest amounts being reported in the year 2016. The market value of the global airline industry is expected to rise from 569.5 billion dollars reported in the year 2016 to about 828 billion dollars in the year 2021 (Koumelis, 2017). A growth rate of 7.8% is thus expected, higher than the growth rate of 7.4% reported in the years between 2012 and 2016 (Koumelis, 2017). The growth rate of the sector is equally increasing, presenting a lucrative business opportunity for any company operating or desiring to enter the industry. Apart from the percentage growth rate and revenue, the significant growth of the worldwide aviation economy is also manifested by the higher number of passengers it serves. In the years between 2007 and 2011, the number of passengers grew by 2.6%, with higher growth rates being expected in the subsequent years. Since Americans accounts for most activities and outcome in the global airlines is it imperative that the industry analysis in the context of America region is undertaken.
America Aviation Sector Analysis
The American aviation sector has grown significantly in terms of market value and passengers since the year 2009. A higher growth rate was reported in the year 2011 with the industry registering a {} market value. The value is expected to grow further in the next years based on the increasing demands that are presented for the services offered. The geographical segmentation of the American aviation sector indicates that the United States of America has the largest share in the sector. The activities in the American airline industry is thus largely driven by the occurrences in the US aviation sector.
The constant growth of the US aviation sector presents the industry as a suitable hub for both new and existing businesses. The sector has continually grown since the year 2011, as indicated by the increasing number of passengers and revenue. More than 100 certified airlines operate in the industry covering about 11 million flights per year. The US aviation sector also carries more than a third of the world’s total air traffic presenting it as the largest hub for aviation business. The large size of the sector and the vast opportunities it presents for various business had made it attractive to both local and multinational corporations. As such, domestic and international companies operate in the sector presenting a stiff competition to all the players.
The major players in the domestic market include American airlines, Southwest airlines, Delta airlines, United airlines and Alaska airlines. Other international players that operates in the industry include Ryanair holdings, Japan airlines, Chinese airlines, China Eastern airlines, Deutsche Lufthansa, and Fly emirates. The presence of many players in the industry poses an intense competition and rivalry. This competition is further intensified by the fact that buyer switching cost is minimal, giving the consumers a higher bargaining power. Low flight carriers pose major threats to legacy carriers such as American Airlines, presenting the need for them to identify strategies that can be employed to improve their competitiveness in the global market.
American Airline
American Airline Company is an American based airline that offers both domestic and international flight services to customers. The organization has subsidiaries in various parts of the United States and also in other countries outside the USA. The company is regarded as one of the legacy carriers based on its market share and value it has commanded over the years. The company has continually performed better than most airlines that are either US based or international companies. However, the emergence of low flight carriers has presented significant challenges to the company. Apart from reduction in its market share, American Airline have also reported significant decline in its revenue. It is reported that the company recorded a revenue of $ 40990 million in the year 2015, a value that has since reduced significantly in the past 3 years by about 3.9%. The organization is facing stiff competition and loosing revenue due to the emergence of other players in the industry. To remain competitive and to continue leading in the sector, it is imperative that company revise its strategies to address the challenges and exploit other opportunities presented. The SWOT analysis of the company detailing its strengths, weaknesses, opportunities and threats is advanced below

America Airline SWOT Analysis
⦁ Customer loyalty program
⦁ Formation and existence of strong alliances
⦁ A strong operational network
⦁ Has a strong reputation for onboard entertainment
⦁ Has a large market share in the USA Weaknesses
⦁ Operates with a limited number of supplier
⦁ Presence of a high number of low cost carrier companies
⦁ Unfunded pension benefits for employees

⦁ Increasing growth of global tourism
⦁ Continuous growth of the US airline industry
⦁ Significant growth of the global air Freight Threats
⦁ Intense completion both in the global and domestic airline industry
⦁ Growing concern on security due to the rising cases of terrorism
⦁ Increasing costs of fuel
⦁ Government interventions
⦁ Strict environmental laws

American Airlines has an advantage of supporting a loyalty program which attracts many customers. The organization’s flyer program allows customers to earn credit, based on mileage that can be redeemed to acquire a free air ticket. The loyalty program has not only impacted positively on the organization’s clientele base but has also improved its brand strength. The strong alliances formed by American airlines are also a source of its strength in the industry. The company has in the past years formed a strong alliance base with international and domestic organizations to reach more customers and improve its performance. Bases such as Oneworld alliance arose following the alliance formed between American Airlines and other players such as British Airways, Cathay Pacific Airways, and Air Berlin. The strong alliance bases have enhanced the competitiveness of the organization. Also, the presence of a strong and wide operational network has provided an opportunity for more customers to be reached. American Airlines has more than 200 million customers boarding its flights every year. The airline was reported as the largest scheduled passenger airline in the year 2015 based on the many customers that it reached in the year.
American Airline is popularly known and preferred due to its onboard entertainment. Most customers appreciate the entertainment offered by the company, allowing it to attract more clients as well as improve its brand loyalty. The larger market share commanded by American Airline in USA has also contributed to its higher performance. The company has a significantly higher market share than most players in the industry. However, the said market share has been declining in the recent past, and as currently observed, Delta airlines has the largest share in the USA aviation market. Also, other players that mostly consist of international low cost carries have a significant share in the market presenting a vital challenge to Market Airlines.
Weaknesses and Threats
The number of low cost carriers in the US and internationally is rising intensifying the competition in the industry that is a significant challenge to American airlines. The limited suppliers in the industry have also enhanced the supply bargaining power, making it difficult for the organization to control the supply activities. American airlines depend on few suppliers for procurement of items such as aircraft engines, and other spare parts making them vulnerable to any mechanical problems.
The growing concerns on security and the intense competition are some of the threats that the company has to deal with. The rising cases of terror attacks and wars may affect the passenger traffic and consequently impact negatively on the performance of the company. Also, the strict environmental laws and the rising prices of fuel are major threats to the business. The company has to comply with every environmental law imposed in the various countries of its operation. American Airline also has to adhere to the changes in fuel price policies by the various governments in different countries that pose a major challenge to its operations.
Despite the weaknesses and the threats that American Airline faces, the organization can use its strengths to exploit the opportunities presented in the industry to enhance its competitiveness. Opportunities such as global growth of tourism and continuous growth of the airline industry give a vast opportunity for the company to capitalize on the demand presented. The organization can enhance its market share and revenue further by improving its strategic approach in reaching the customers and offering quality services.
Porters’ five forces analysis
Competitive Rivalry
The degree of rivalry in an industry affects the overall profitability of organizations operating in such a market. Concentration in a market is one of the major factors that contribute to intense rivalry in an industry. Price undercutting is another factors that intensifies the level of competition in an industry. Other factors that contribute to intense rivalry are fixed costs, excess capacity, high exit costs and low differentiations. The identified factors are evident in the aviation industry. The fixed costs of airline operation are high. This is because in any given flight, the costs of fuel, pilots, attendants and ground staff remains the same regardless of the number of passengers travelling. Maximization of load factors is thus the only sure way of ensuring that any airline benefits irrespective of the costs incurred. However, with the many players in the various routes covered it is near impossible for any airline to always operate on a full load capacity. Intense price competition, low differentiation and low switching costs amongst customers are factors witnessed in the US aviation sector that have further enhanced the competition rivalry in the industry. Since exit costs are high, players in the industry are left with the option of dealing with the intense competition and ensuring that they acquire a large market share. America airline is one of the oldest companies in the region, however, the intense competition currently evident in the industry is a major challenge that the organization must deal with if it is to remain competitive.
Threat of new entrants
The threat of new companies entering the industry is low. The high investment costs required and the many regulations makes it difficult for new start-ups to access the sector. Also, marketing of any airline service require huge capital making it difficult for many entries. Other geopolitical factors such as terrorism, country regulations and other forms of insecurity also makes it difficult for entry of new players. As such, the threat arising from new entrants in the industry is minimal.
Threat of substitute goods
The threat from substitute goods and services is moderate in the airline industry. Many companies offer near similar services that are likely to meet the needs of a wide range of customers. Significant threats from substitute goods come from competing brands. Factors such as convenience, strong brand name, popularity, and technology strengths are the major factors that consumers look for when seeking the services from any airline. Since most brands currently are able to meet the thresholds demanded by most customers the threat from substitute services remains moderate. American airline has managed to accomplish most of the demands from customers, however, the threats from other players remain moderate for the company, since a significant number of players have equally met the desires of most customers.
Customers bargaining power
Customers in the current century have a higher bargaining power. The customers have vast knowledge and adequate information at their disposal to know the desirable features and quality of a product. Also, the switching cost is low in this industry further enhancing their bargaining power. Organizations operating in the airline industry are thus required to invest in convenience, quality and customer satisfaction to survive in the industry. Even though American airline have managed to moderate the customers bargaining power through its popularity and string brand name, the issue is still a threat to the organization, especially in the current times when customers only focus on prices. Some players have considered lowering their prices, offering discounts and loyalty to attract more customers. Price is a major concern for most customers
Bargaining power of supplier
A large number of suppliers cater for the supplies needs of American airline. However, only major suppliers that provide aircrafts and aircraft engines have a higher bargaining power. The other suppliers have very little or no bargaining power, since they are readily available. For American airline, the switching cost from one supplier to the next is low based on the strong brand name that the organization has built overtime. However, the organization has to deal with the high bargaining power that major suppliers like Boeing, Airbus, and Embraer presents. Analysis of the industry environment shows that rivalry and customer bargaining power are the major sources of fierce competition. As such, strategies to address the intense competition should focus on managing the identified two sources.
The Strength of Low cost carriers
A number of low cost airlines have emerged in the recent past, posing a significant challenge to legacy operators such as American airline. While exploring the effects of these low cost carriers, the current analysis is only limited to two companies, Southwest airlines and Ryanair that directly compete with American airline.
Southwest airline has reported a significant growth in number of passengers, market share and revenue in the past years. The organization’s business model has enabled it to perform better than the legacy carriers giving it an opportunity to expand its business operations. Managing a point-to-point service as opposed to a hub and having a strong fleet base are some of the strengths of the company that contributes to its success. Also, the organization has managed to significantly reduce its operational costs and consequently lower the flight prices, thus attracting more customers. Having a low turnaround time, saving on costs and eliminating large hubs are some of the approaches employed by the company to lower their operational costs. The implications are significant reduction in prices and consequently enhanced clientele base.
Southwest airlines have a vast opportunity to enhance its performance further. Expanding its network both globally and locally is one of the approach that can be employed by the company to improve its market share. As currently observed, the low cost carrier has a higher chance of enhancing its performance that reporting loses. The legacy carriers as thus faced with the challenge of ensuring that they remain competitive in the industry if they are to attain lead in the market.
Similar situation is observed in the case of Ryanair that is also regarded as a major low-cost airline. Since its establishment in the year, 1985, the organization has reported a continuous growth of its clientele base from 5000 to 82000 in its first year of trading. Analysis of the organization’s strength shows that it drives its better performance from its distinctive business model. Ryanair airlines also focused on significant reduction of its operational costs to attract more customers through reduced flight prices. The company also has an opportunity of expanding its network to operate in the global market, indicating a possibility of further growth. The existence of the low-cost carriers and their unprecedented growth is a major challenge to American airline that is already struggling to maintain its position and market share in the industry.
Research Methodology
Research Design
The current study adopted an exploratory study design. According to () exploratory intends to explore a given issue without offering conclusive solution to the same. The research design is adopted in cases where the solution to the problem can only be provided in form of recommendations. Also, the design is suitable in ensuring the researcher have a clear understanding of the problem. Exploratory studies are mostly conducted in situations where insights on an ambiguous problem is desired. The current consultancy report aim at addressing the issue of intense competition from low-cost carriers. To define the problem and gain more insights on the same, an exploration of then issue is needed. The research design is also suitable in assisting in the generation of ideas and recommendations on how to address the problem or improve the situation. This justifies the adoption of an exploration study design in the current study.
Tools for conducting the study
Different tools can be adopted in conducting and exploratory study. Interviews, case studies, secondary information, focus groups are some of the data collection tools that can be employed in an exploratory study. The current study made use of secondary information to gain insights on the problem and to generate ideas on how the issue can be resolved. Through critical review of literature, the issue of intense rivalry was explored and an evaluation of the possible strategies to address the situation done. Secondary information is not only readily available, but also enables the researcher to gather more comprehensive information on the issue under investigation.
In order to identify and quantify the problem facing American airline, a market research was conducted to ascertain the extent of competition from low-budget carriers and the effects of the same on the performance and market share of the company. Articles, Newspapers and other relevant company reports were used to draw information on the issue of competition and to ascertain the impacts reported over time. Also, the documents were used in deriving information on the approaches that the company has put in place to address the situation. Academic journals and books containing materials on airline industry and the issue of low cost carriers were also used to avail comprehensive insights on the concern.
Both qualitative and quantitative data were obtained to address the research objectives. As such, content analysis, means and percentages were used in the analysis of the raw data collected. Content analysis was used in the analysis of the qualitative data while means and percentages were used in analyzing the numerical data drawn from the documents. The resulting findings were presented in form of narratives, tables and graphs. Based on the findings attained, further review of literature was done to identify and evaluate the probable solutions to the problem.
Findings and Discussions
Quantification of the problem
The competition of low cost airlines is purely based on prices. Following the deregulation of markets, increasing number of low cost carriers emerged posing a significant challenge to legacy airlines such as American airline.
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The effects of these low cost airlines on the operations and performance of America airline have been significant. Before the founding of Southwest airline, American airline commanded a lead in the US aviation market. However, with the emergence of the organization as well as other low cost carriers such as Ryanair, the company’s market share has significantly declined. The table below shows the changes in the market share of the company over the years.
Besides the reduction in the market share of the company, the impact of the low-cost airlines on the revenue of American airlines is also significant. The changes in the amount of revenue generated by the company have been attributed to the expansion of the low-cost airlines in the industry. Southwest airline for instance reported a higher amount of revenue that the company in the last three years. It is reported that American airline had a -8% revenue growth rate between the year 2003 a value that has slightly reduced over the years. However, the revenue growth rate of the company still remains lower than most players in the domestic market.
An analysis of American airline company financial reports also shows a decline in its profitability. It is evident that the company was highly profitable prior to the introduction of the low-cost airlines in the US domestic market. However, a continual reduction in the profitability of the company has been reported following the emergence of the players in the sector. It is evident from the analysis of the trends in market share, revenue and profitability that the company is susceptible to intense competition and rivalry from low-cost carriers in the US.

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