Evaluating Cost Reductions Is A Small Public Plastics Manufacturing Organization
PPC is a small public plastics manufacturing organization which. The organization first became a publicly listed organization three years ago, and has experienced a large impact of the recent recession. The organization has taken several steps within the past year to reduce costs. The question has arisen as to whether said cost reduction actions are an operation issue or a control deficiency, of if said cost reductions are a material weakness or a significant deficiency in the organization’s internal control.
PPC Cost Reductions As a result of the recent recession PPC’s revenues have shrunk $125 million. Such reductions in revenues have caused the organization to become minimally profitable. Moreover, the organization has hardly met the most important of its debt covenants. As a result, the CEO, John Slade, who possesses 22% of the company’s stock shares, engaged in several cost reduction efforts to bolster the company’s financial position.
Said reductions must be evaluated to determine their effect on internal controls. Internal controls have been defined by the Committee of Sponsoring Organizations of the Treadway Commission. As such, they are defined as “processes designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance” (Johnston, Gramling & Rittenberg, 2014. p. 75). Should cost reductions implemented by PPC impair the framework of internal controls; financial…