Question 1

SECTION B: ADVISORY REPORT

Company Background:
AquaPure Utilities is a recently privatized regional water and sewage company. Following privatization, the company took on massive debt to pay special dividends to its new private equity owners.

Current Situation:
AquaPure is currently facing a severe crisis. The CEO, who acts as both Chairman and Chief Executive, dominates board meetings and recently fired the Finance Director for raising concerns about cash flow. The company’s infrastructure is aging rapidly, leading to a 30% increase in water pipe leaks over the last two years. Furthermore, AquaPure has been fined heavily by the environmental regulator for discharging untreated sewage into local rivers during heavy rainfall.

Financials are deteriorating rapidly. The company is dangerously close to breaching its debt covenants, and the newly appointed Finance Director has warned that the company may not have enough cash to cover the next interest payment.

The Board of Directors is terrified of imminent corporate failure and has asked for an independent assessment.

Requirements:
Write an advisory report to the Board of Directors of AquaPure Utilities which:

(a) Applies the Argenti (A-Score) model to evaluate the qualitative indicators of corporate failure currently present at AquaPure. (15 marks)

(b) Recommends three non-financial performance indicators (NFPIs) that AquaPure must urgently adopt to monitor and improve its operational and environmental performance, justifying your choices. (10 marks)

Accepted Answer

Step 1: For part (a), structure your answer using the three stages of the Argenti model: Defects, Mistakes, and Symptoms. Map the specific facts from the scenario (e.g., CEO/Chairman duality, high debt, environmental fines) into these three categories. Step 2: Conclude on the likelihood of failure based on the Argenti analysis. Step 3: For part (b), identify the core operational issues (leaks, sewage, underinvestment). Step 4: Formulate three specific, measurable non-financial metrics to track these issues, and provide a clear justification for why each metric will help management regain control.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Students often confuse the Argenti model with the Altman Z-score and attempt to calculate financial ratios. Another mistake is providing generic NFPIs like 'customer satisfaction' instead of specific operational metrics like 'leakage rates' or 'discharge incidents' tailored to a water utility.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA APM — Advanced Performance Management Practice Exam 1

More questions from this exam