Marriott Case - Reporting, Development and Financing Risks

Reporting, Development and Financing Risks    

To ensure the financial reports are complete, accurate, transparent and in line with regulations. Marriott puts controls to mitigate the risks of reporting errors and frauds. These controls include strong internal control at transaction level to make sure transactions are not appropriately authorized:

Like: Authorizations/Approvals control: The person initiating a transaction should not be the person who approves the transaction.

Segregation of duties: A common segregation is in the cash accounts. The same employee is not allowed to sign checks, post them in the accounting system and reconcile the bank statement. This type of segregation can be spread throughout the accounting department.

Meanwhile, Marriott reinforces audit and management oversight to prevent improper financial recording and violation of GAAP and laws.

External & Internal Audit: Test their financial information for accuracy by having an audit of their financial statements. This helps management understand where weaknesses are in their accounting department and allows them to take corrective measures quickly.

Management Review: Publicly held companies are required by the Sarbanes-Oxley Act (SOX) to provide a written statement by management validating the accuracy of financial statements.

Marriott believes that these controls reduce the risk of both erroneous and inappropriate actions.

Moreover, I’d love to address the risks related to development and financing. So far, Marriott’s become the largest lodging provider in the world after acquisition of Starwood. In general, the lodging business is a capital-intensive business and involves high fixed costs. A small change in revenue during the economic downturn will likely have a much larger impact on the company’s cash flow.

So to avoid those risks, over the past ten years, Marriott has been increasing its focus on capital-light segments like managed and franchised properties, by the end of 2015, 65% of their revenue generated from their management and franchise segments. This business structure transition raises some special risks to Marriott.

One is after their spinoff of their timeshare vacation ownership business in 2011, there are some unappealing financial ratios, like negative working capital and negative equity and low current ratio, Marriott are trying to expand their profitable business and doing their cost housecleaning to mitigate the solvency risk.

The other is the financing ability and credibility of the hotel owners on capital market. Once these third parties failed to get the mortgage loans or cannot repay or refinance mortgage loans secured by their properties, revenues and profits could decrease and business could be harmed. Marriott actually could either provide loans or issue guarantees to facilitate the development, on the other hand, they are controlling and monitoring the risks by assessing the credit quality upon entering into the loan agreement and on an ongoing basis, asking for collateral and establishing the reserve.