Anderson nodded. “Very happy. Stellar work ethic. The auditors love her. She makes their job so easy and is always ready when they arrive. They sail through on time and on budget.
“Karen is also strategic. She adds value around the management table. Not just with numbers, ideas too. She’d be extremely difficult to replace.”
“Could she manipulate profits on her own?”
“I suppose she could,” he offered, scratching his head, “but it would have to be through something like a general journal entry. Something she could pull off with no one else’s help. Everything else is touched by multiple hands. She’d need partners to collude.”
“If she manipulated inventory with a general journal entry, she would only need your approval to do so, to protect herself. She would only need to collude with you, not several others. No one is going to challenge the two strongest executive members,” St. James retorted.
“Perhaps you’re right, Hamilton,” Anderson said calmly. “But I didn’t, and I think your investigation will prove that. I reviewed the year-end inventory adjustment and all its supporting documentation because of the size. Everything supported the adjustment down to the last penny.”
St. James nodded. “How much is Karen’s bonus?”
“$100,000.”
St. James stroked his chin. “Significant enough for a CFO pay grade.”
“CISI is generous to high performers,” Anderson said proudly.
“For inventory to be physically inflated, who would have to be involved?”
“Well, count teams number two to four in an average plant, three to six counters to a team. Two teams are assigned to freezers and the plant, and two to trawlers if more than two are tied up on count day; one team if there’s two or less.”
“Could a trawler captain manipulate a count?”
“No. They’re not involved after the trawlers tie up.”
“Are count teams bonused on profits?”
“No. Plant managers are the lowest level to receive profit bonuses. Below them there’s no point. Employees can’t significantly influence results.”
“Hmm. But employees might conspire with the plant manager if they were promised something,” St. James suggested.
Anderson nodded.
“Count teams deal only with pound quantities, right? Or would they price and extend costs too?” St. James asked.
“Just quantities. In-plant accountants use Excel to price, extend, and total plant inventory. Then the plant manager reviews everything. When he’s happy it’s accurate, he signs off and emails documentation to Karen’s group here at HQ.”
St. James wanted to be clear on this.
“So, the plant manager is always the last to see paperwork before it’s sent to Karen?”
“That’s right.”
St. James nodded. “Does Karen know I am here?”
“Yes, she does. I spoke with her this morning. She said you didn’t ask to see her but that she’d make herself available if you needed anything. Her office is two doors down on the left.”
“Great.”
St. James changed course.
“I’m told you objected to me being here before last week’s meeting. Said your people were too busy and I was too expensive. Is that true?”
“That’s exactly what I said, yes,” he replied, again without hesitation.
“Was that the real reason?”
“Actually, that was the reason. I know the board members think I’m stonewalling but you’ll find head count around here tight. Very little slack in anyone’s schedule. Taking time for an efficiency review is difficult at the best of times. And the budget is very tight, tighter than last year’s. It’ll be a squeaker to achieve even without your cost. It’d be different if we didn’t review expenses on our own. But we do, a couple times a year. But now that you’re on board you have my full and unconditional support. The silver lining is maybe putting my own mind at ease.”
Once again St. James changed direction.
“You explained to the board that the company exceeded profit by cutting expenses and landing extra inventory on the last day.”
“That’s correct.”
“They also said you kept repeating that explanation. Is that true?”
“That is also correct.”
“Care to explain why?”
“Board members have varying degrees of understanding when it comes to operations, inventory, and finance. I find myself explaining things more than once, in different ways, to reach everyone at their own level. Most are not financially literate. Then there’s the size of the adjustment. That added further communication challenges.”
St. James nodded and returned to his original line of questioning.
“Okay. What’s the bonus expectation of a plant manager?”
Anderson rubbed the back of his neck. “It ranges based on size of plant, as you would imagine. Can be anywhere from $30,000 to $50,000.”
“What is a manager’s base salary before bonus?”
“Again, it depends on plant size, but also on seniority and the individual’s scorecard assessment. Between $75,000 for small plants and $125,000 for larger ones.”
“So bonuses approximate forty per cent of normal salary? Is that the same for all plants, regardless of size?”
“That’s right.”
“Isn’t that counter-intuitive? Don’t larger plants have greater influence over profit?”
“Ah, yes they do,” said Anderson, “but smaller ones have more aggressive targets. We expect them to catch up to larger plants as soon as possible.”
“You mean smaller plant goals are more of a stretch?”
“Yes. Larger plants meet production targets more easily. They already process at maximum capacity. It’s not logical to stretch their production goals further. They couldn’t physically produce more unless the plant itself was expanded.” Anderson opened his hands in papal fashion. “And, of course, managers have no control over that. It’s a head-office decision.
“Bonuses for larger plants relate primarily to efficiency and quality of output. Operating at capacity means lower costs per pound. We tie their bonus to minimizing cost per pound, which, all else being equal, means greater profit.”
“Of course,” St. James agreed, “more pound throughput means less overhead cost per pound, and labour is more efficient … less downtime. I had a lengthy discussion with Marcel on that very point.”
“Overall strategy is to incentivize small plants to become larger in the shortest possible period of time,” Anderson said. “To reduce average production cost per pound. Improve margins. Maximize profit. Smaller plants usually have some excess capacity to absorb. More inefficient. When they reach higher production levels, bonus criteria shift from growth to production efficiency. That occurs as they approach the larger plant category.
“Bonuses are generous, but managers earn them, believe me.”
St. James nodded. “I’m sure they do. How can smaller plants physically catch up to the volume and productivity of larger ones? You don’t measure large plants by growth because they’re constrained by size. Isn’t it the same for small plants? They have even greater restrictions. And the managers don’t control plant size any more than the managers of large plants do.”
“When a smaller plant’s production hits maximum capacity and remains there for three consecutive years, we pay the manager an extra $20,000 per year and budget the plant for expansion. So, managers are financially motivated to drive production past physical capacity as quickly as possible, and to sustain it for three years. That’s how small plants get to join the big boys club. It’s a status thing as well as promising a financial reward.”
“Why three years? Why not one or two?”
“One year at capacity could be an extraordinary catch year, an aberration. Two might be a coincidence. Three years provides greater confidence in sustainability. We must have confidence that the greater volumes will continue. Plant expansions are very expensi
ve: if we decide to expand too soon, volumes may revert back to their lower, historical levels. Then we have even greater excess capacity, an expanded plant with no additional product to pay for it.”
St. James nodded. “I see.”
He wanted to understand the motives at every level. “What about larger plants? Aren’t they encouraged to grow too?”
“Of course. It’s just when plants reach a certain size, they also reach catch limitations within acceptable distances from the plant.”
“You mean so the timespan between landing and processing catch doesn’t erode its quality?” St. James interpreted.
“Close,” Anderson conceded. “Trawlers have freezing capacity, so fish can be preserved for some time. But time and handling erode quality even with freezing, albeit at a slower pace, so there’s a maximum time between fish coming out of the water and fillets coming off the production line beyond which quality wanes. If that wasn’t so, we could have the world’s largest processing plant in one location and trawlers travelling months to catch fish.”
“Makes sense.” St. James continued. “Which plants are smaller?”
“Lagos, Portugal is the smallest. It’s a canning plant. Processes about three million pounds annually. Next is Tampa with about five to nine million. Then it jumps to Boston with about fifty million pounds.”
“How well do you know the lifestyles of plant managers?” St. James said.
“Not very well. Don’t know anything about their personal lives. But someone in Karen’s group visits each plant quarterly. They would have a better idea.”
“Which is the largest plant?”
“Plymouth processes ninety-five million pounds a year. Portsmouth, eighty-seven million.”
“US plants? Massachusetts and New Hampshire?”
“Great Britain.”
“Oh. Those centres are relatively close together, are they not?”
“About 170 miles. Three-and-a-half-hour drive.”
“Is that close enough for the plants to help each other with production?”
“Not by road. Fish loses freshness quickly, as I said earlier, and road travel causes more bruising.”
“By sea?”
“142 miles. When trawlers are close to the plants they radio for instructions on where to land.”
“Wouldn’t the bonus plan discourage that kind of cooperation? They’d be shifting profit away from their own plant by diverting catch to another.”
“True for everywhere but Great Britain: the managers of Plymouth and Portsmouth are brothers.”
St. James felt his brow furrow.
Chapter 32
“Interesting. They actually help each other?” St. James said incredulously.
“Most unusual,” Anderson said, shaking his head. “But I have to admit I like it. The team spirit, I mean. Wish we had more of it.”
St. James nodded. “I take it from the website that Henry Jenkins is the chief operating officer?”
“That’s correct.”
St. James made some notes. “I’ll want to meet him at some point.”
“Absolutely. Just let me know and I’ll arrange it.”
“I think that should do it for now, Anderson. Could I trouble you to introduce me to Karen?”
“My pleasure. We’ll go down to her office.” Anderson’s face clouded over. “A word of caution.”
St. James pulled back. “What?”
“She’s quite stressed these days. Her husband’s company is struggling financially. Think he’s about to lose it. And they just bought a house a few months ago, a couple of blocks from Nelson.”
St. James considered this for a moment. “Thanks for the tip. I’ll tread lightly.”
Karen Van Hoyt was tall, about six feet, St. James guessed, her red hair worn in a tight bun like a schoolmarm’s. Attractive, but in an odd sort of way; maybe the high cheekbones accounted for that.
Anderson introduced them and left them immediately.
They shook hands, and St. James sat in one of the two guest chairs.
Unlike Anderson’s, Karen’s office was filled with modern furniture and a number of family pictures hanging from light-blue walls.
“Delighted to finally meet you, Hamilton,” she offered, her smile less pronounced than Anderson’s. “Heard great things about you from Al Dunlop.”
“Al and I go back a ways. He’s a good man.”
“He is indeed. Now, how can I be of help?”
St. James leaned back in the chair looking serious.
Van Hoyt wore a dark-blue blouse and matching skirt. A long gold necklace dangled from her neck, and matching earrings completed the look of a highly professional lady.
“I am just getting into things so for now just a couple of questions. No doubt there’ll be more later on.” He pulled the pad from his attaché case once again.
“Curious about the inventory adjustment last fiscal year-end.”
Van Hoyt nodded. “The $95 million?”
“Yes.”
“It’s important to know how the adjustment breaks down. That is, where the $95 million originated. Then, if you like, we can chat about reasons for each location,” she explained.
St. James nodded but said nothing.
Van Hoyt pulled a brown manila folder from the top right-hand drawer of her desk and flipped it open.
“In round numbers the inventory adjustment was the sum of $49 million for England; $11 million for Rio; $20 million for Boston; and various smaller amounts from the remaining 16 plants, all totaling $95 million. Pounds of course are not proportional to dollar value because more expensive species such as shrimp, lobster, and crab are landed in some locations and not in others.”
“Understand.” St. James purposely threw a curveball. “I’m more interested in why trawler inventory was not counted in the first place.”
“What makes you think it wasn’t counted?” she asked with a surprised look.
“Size of the adjustment.”
Van Hoyt looked puzzled, and her tone became defensive. “The size of the adjustment doesn’t mean trawlers weren’t counted. It comes from all locations, including trawlers. Those tied at wharfs around the world were inventoried late. Sheets tallied, costed, added, checked, and re-checked at the plant level, then emailed to us a couple of days after year-end, after the plant managers approved the results. Only then did we know the final dollar amount.”
“Sorry, I didn’t mean to suggest anything negative. My question was ill-formed. May I have copies of the count sheets and calculations leading up to the adjustment?”
Van Hoyt returned to a less defensive demeanour and smiled. “Yes, of course.”
St. James’s forehead furrowed. “So, the greatest reason for the inventory adjustment was trawler inventory?”
“Mostly, yes.”
“Was trawler inventory counted late afternoon at every plant around the world?”
“Yes. Wherever there were trawlers, of course.”
“After plant counts were finished in every case?”
“Yes, I believe so.”
“Were the auditors present for all counts, start to finish?”
“Not sure they were present for trawlers in the late afternoon.”
St. James moved on.
“So, Portsmouth and Plymouth accounted for almost fifty-two per cent of the adjustment?”
“That’s correct.”
“I see.” St. James thought for a moment. “Cameron tells me the managers of those plants are brothers.”
Van Hoyt smiled.
“Bizarre isn’t it? Wonder what mathematicians would say about that probability.”
“Fairly remote, I suspect,” St. James conceded without expression.
“They help each other with advice and analysis, that sort of thing.”
“Which is the manager of which?”
“Basil Hughes manages Plymouth. William, Portsmouth.”
“I’ll try to keep them straight,” he said with a slight smi
le. “What do you know about their lifestyles?”
“Fairly modest I’d say. Been to both homes for dinner on more than one occasion. Comfortable, well-kept homes but not over the top for their income levels, if that’s what you’re getting at.”
St. James nodded. “It is. Automobiles?”
“If memory serves me right, they drive Volkswagen sedans. I am not a car person. But I can tell you they don’t have the most expensive vehicles.”
“Alcohol or drug addictions?”
Van Hoyt was instantly taken back by the question. “Oh my God! We’ve no indication or reason to suspect that.”
“Gambling?”
“Don’t believe so.”
“Tax or financial problems?”
“None I am aware of.”
St. James’s rapid-fire questioning was obviously increasing Karen’s anxiety.
“If I asked all the same questions about every plant manager would your answers be the same?”
“All except Lagos, Portugal. The manager there is José Miguel. I watch him closely. I believe he’s living beyond his means. He and his wife just built a new house and purchased a Mercedes-Benz, a small one, mind you, but nevertheless a Mercedes. He also likes his wines expensive.”
“What is he paid?” St. James asked, continuing to take notes.
“A base equivalent to $75,000 US, plus a bonus if the company surpasses $90 million profit and plant goals are met.”
“The bonus, I’m guessing from my discussion with Cameron, would be about $30,000. That right?”
Van Hoyt smiled. “Yes. You did your homework.”
“Maximum of $105,000 then,” he concluded. “Cost of living’s cheaper in Portugal for sure but he’d still have to count on his bonus every year for a mortgage and car loan. Does his wife work?”
“Yes. Bank teller.”
St. James stroked his chin. “Not much income there. I take it you haven’t been surprised by any improprieties?”
“None so far. But I view him as a risk.”
“Smart lady.”
Karen’s cheekbones rose higher when she smiled broadly. “Thanks.”
“What do you get from plant managers once counts are completed?”
“Excel spreadsheets listing species and pounds counted by trawler, cooler room and freezer number, and in-process on production lines at the time of the count. Cost per pound is assigned by local plant accountants and multiplied by pounds counted to arrive at inventory value by species. Inventory costs per species are totaled to arrive at total plant inventory. Then, the inventory’s approved or altered by the plant manager. Final count summaries are sent to the HQ accountant responsible for that particular plant. Common count policies and guidelines are given to all plants to ensure uniform procedures are carried out across the company.”
Double Shot of Scotch Page 17