Corporate governance
Board of directors is responsible for ensuring among other things, that SSL maintains adequate policies that provide reliable financial information to the public. For this reason, the fact that the VPM and the VPO did not have the promotion approved by BOD, under appropriate discussion and analysis of cost-benefits and risks involves represents an important failure in corporate governance. Also, the fact that the BOD did not ask for any of this information and approved the Financial statements with no further analysis means they are probably bottom-line oriented, knowing that the company had been experiencing declining sales in the previous quarters. They do not seem to be long-term oriented which poses an important risk to the going concern of SSL.
The BOD lacked of duty of care when fulfilling its responsibility to oversee that the financial statements fairly represent SSL’s financial position.
Majority of directors should be independent from management in the BOD, as per CICA, and an audit committee composed of entirely independent members.
Promotion analysis – Accounting policies
By providing a promotion where retailers bear no risk at ordering higher quantities of products that can be returned with no fee even 6 months after, a very risky policy to the actual profitability of SSL is being created, and it should have been disclosed in the financial statements as well as revenue recognition was improper as 35% of sales through this promotion turned out to be returns. The extended credit from 30 to 60 days also created an easier way for retailers to boost purchases at a very comfortable and inexpensive credit. SSL should have, if the promotion and the credit terms were approved by BOD, disclosed this special promotion on the financial statements and record an accrual for potential returns so that they do not show overstated revenues and assets (accounts receivable). The allowance that was recorded did not take in consideration the fact that with the promotion there was a higher probability of returns taking place than last year.
The extended credit terms creates cash flow problems as the conversion period has been increased by 30 days, meaning sales actually collectible will not be received before 60 days after the sale. This could give room to working capital constrains and the need to look for short term financing in order to continue operations.
Revenue is recognized only if the benefit receivable can be estimated reliably and there’s significant probability of collection. As this is a first time of its kind promotion, it is difficult to estimate returns, and the rate for uncollectible estimates should not have been the same as prior years, due to the risk of return increased. Rate should have been higher, or the revenue recognition deferred until the return period expires.
Sales of Q4 are therefore overstated, and being 35% of returns, there’s a material overstatement.
The returns and decline in sales may indicate also the need to write down inventory as it should be stated at the lower of cost or net realizable value, so COGS may be actually higher than reported.

Ethics
2012 Financial statements contain material misstatements, and some relevant information was hidden from the public by not disclosing it. This could be seen as fraudulent behavior which could end up in criminal prosecution of the CEO and CFOs, from securities regulations, for filing false or misleading financial statements.
Sending false signs to the market, which resulted in a share price increase of 7%
The terms of the promotion should have been given to the audit committee and to the auditors.
Business performance
Cash flow problems are being generated, because of the decrease of sales and with the returns of 35% over promotional sales.
SSL has incurred in more production costs to have available inventory to sell, and will now incur in handling and freight costs due to the returns of sales. Also, a write-off