Delima Enterprise was set up by Encik Zayed in 1981. It engaged in trading and supplying related products including manpower supplies to the oil and gas industries. In 2004, the enterprise was incorporated as Delima Enterprise Sdn. Bhd. Both Encik Zayed and Puan Hashimah (husband and wife) were the two principal shareholders and controlling directors of the company.
The company expanded its activities into provision of engineering services while its corporate mission was to become a leading service contractor who provide quality products and excellent services. The company had been awarded with several engineering projects since 2006. Delima Enterprise Sdn. Bhd. (DESB) had maintained a very lean organization with basic functional positions. En Zayed and his wife Pn Hashimah were the Managing Director and Chief Operating Officer respectively.
He and his wife only had secondary school background. They employed their own family members to work in DESB with minimal education background and no job experience. Puan Balqis, the Operation Manager and En Salam, the Human Resource and Administrative Manager were their relatives who only had secondary school background as well. Cik Amy, a young Accounting graduate was employed as Finance Executive responsible for maintenance of the accounting and financial matters of the company although she did not have working experience.
Case SummaryDESB had applied for banking facilities to implement the contract it had secured. The banks required the company’s Audited Financial Statements for the last two years. It was then when En Zayed realized that the company had not performed statutory audit and was introduced to Aziz & Co (Chartered Accountant) as their external auditor to perform the audit from the period of 2003 to 2006.
The auditor wanted to qualify the Financial Statements due to several unresolved issues. Encik Zayed and his wife attempted to convince the auditors to not qualify the Financial Statements but failed. Encik Zayed wished to terminate the auditor’s appointment and appoint a new “friendly party” auditor to do the audit. IDENTIFIED ISSUES IN DESB
There were several issues that can be identified within DESB. It is important to identify these issues which require solutions and improvements in order for the company to meet the statutory audit requirements. The issues can be divided into several categories which are legislation, corporate governance, internal control, human resource, ethical, accounting information system (AIS) and management issues. Legislation Issues
One of the legislation issues was breach of director’s fiduciary duty in DESB. The controlling directors, En Zayed and Pn Hashimah tried to negotiate with the Auditor to not qualify the Financial Statement. They planned to terminate the auditor’s appointment and appoint a new “friendly party’’ auditor who can cooperate with them. The directors showed the intention to commit fraud and they definitely did not act in the best interest of the company.
According to Section 132(1) of Companies Act 1965, a director of a company shall at all time exercise his power for a proper purpose and in good faith in the best interest of the company. The directors had gone against the provision in the Companies Act 1965. Besides that the directors had also charged their personal vehicle expenses on the company.
There were also withdrawals of company’s money without proper documentation. Section 132(2)(a) of CA 1965 stated that the director cannot simply use the company’s property or asset. The directors’ action had breached their fiduciary duties stated in the CA 1965. They were also not familiar with Accounting Standards and the provision of the Companies Act 1965, including their roles and duties as Company Directors. Section 132(1A) of CA 1965 stated that the director are expected to have knowledge, skill and experience.
In addition to that, En Zayed and Pn Hashimah also wished to remove the present auditor, Aziz & Co before the expiration of their term from the office without a proper procedure. Section 172 of CA 1965 stated that only the shareholders can remove the auditor before the expiration of his terms with the required passing of ordinary resolution at general meeting with special notice of 28 days given to the auditor. IDENTIFIED ISSUES IN DESB
Corporate Governance IssuesOne of the corporate governance issues in DESB was the roles and responsibilities of the managers were not clearly stated. The organizational chart in DESB was very lean and the personnel did not know their roles and responsibility well. The management was not properly controlled. The organizational chart should be properly drawn with distinct functional department. En Zayed and Pn Hashimah had also appointed their own relatives into the company without taking into consideration of the basic educational requirements for the positions they offered.
They were also not familiar with Accounting Standards and the provision of the Companies Act 1965, including their roles and duties as Company Directors. As stated in Section 132(1A) of CA 1965, directors are expected to have knowledge, skill and experience. They need to be updated on the law, regulations and accounting standard failing which had caused poor corporate governance in DESB.
The appointment of auditor was also made without any proper procedure. It is stated in the Act that the appointment of auditor should be made at each annual general meeting. The directors’ intention to remove the present auditor, Aziz & Co before the expiration of their term from the office without a proper procedure showed the directors were not familiar with corporate governance. Section 172 of CA 1965 stated that only the shareholders can remove the auditor before the expiration of his terms with the required passing of ordinary resolution at general meeting with special notice of 28 days given to the auditor. Internal Control Issue
One example of internal control issues in DESB was the lack of authorization of business transactions. All decisions were made & authorised by either En Zayed or Pn Hashimah. Personal vehicle expenses were charged to the company and several withdrawals of company’s money were made without proper documentation. IDENTIFIED ISSUES IN DESB
Internal Control Issue (Cont’d)Another example of internal control issues in DESB was no Standard Operating Procedure (SOP) in place and all decisions were made and authorized by either En Zayed or Pn Hashimah. Some wwithdrawals of company’s money were made without proper documentation. The recruitment of new employees was also made without proper procedures. There was no segregation of duties in DESB.
En. Zayed does not segregate management duties equally among the employees. For instance, there was no segregation of duties between the person who approved payments of employees’ salary and the one who actually paid the money to the employees because everything was all done by Pn Hashimah alone. This issue may cause task redundancy, fraud, negligence, power abuse, inefficiency and work delay to occur within the company. There was also no Audit Committee set up in the company. DESB should establish an Audit Committee for a better internal control. DESB was also lack of control and supervision.
The employees prepared their timesheets by their own without any manager authorization. Puan Hasimah approved and made payment of the salaries. Supervision should be done in regular basis. The management too should review the adequacy of internal control and assign supervisors to manage the timesheets for the employees’ time in and time out. They may as well use a punch card system. Finally, DESB also had no budget planning. The budgets can be used to compare the budgeted costs and actual costs to see any variance. This can help managers to make efficient decision making. IDENTIFIED ISSUES IN DESB
Ethical IssueThe ethical issue that can be identified in DESB is the abuse of power by the directors. The family members of the directors were employed as employees although some did not have the necessary job experiences needed for their positions. Puan Balqis and Encik Salam who only had secondary school background were appointed to be the Operations Manager and Human Resource and Administrative Manager respectively. Besides that, abuse of power by the directors can also be seen when the directors’ personal vehicle expenses were charged to the company. It is not ethical for the directors to take advantage of their power in the company. Accounting System Issue
DESB had used ‘MYOB’ Accounting Software that was not integrated. This caused the data not to be processed and generated automatically between certain modules. DESB should purchase new software that can simplify the recording of business transactions such as the USB Accounting Software. Accounting system issue can also be seen when the customers’ monthly statement of accounts were not sent to the customer on monthly basis. Documents were not pre-numbered and missing which made it hard to reconcile customer’s account balances. Management Issues
Other issue related to DESB was inadequate job training for the employees. Most of the employees have no necessary job experience before joining the company. The management should employ candidates with suitable qualification and working experience. DESB should also invest on necessary training to enhance knowledge of the employees. For instance, DESB must provide training to Cik Amy who is a fresh graduate without working experience. Besides that there was no proper recording of assets. Several assets purchased by the company were not recorded properly. IDENTIFIED ISSUES IN DESB
Management Issues (Cont’d)DESB paid its employees’ wages weekly without employee benefit and EPF contribution. EPF contribution for contract workers were not deducted and remitted to EPF. The EPF should be contributed to the employees as stated in the Employment Act. One of the management issues was that the company maintained a lean organization It apply a simple structure of organization. Position and function were not clarified clearly.
QUESTIONS & ANSWERS
1. Were there any abuses of power by the management and breach of fiduciary on the part of the directors? Yes. Based on Company Act 1965, Directors are required to act bona fide for the benefit of the company as a whole. Fiduciary is a term used to cover situation where a person is expected to act for the interest of others not for their own self interest. Directors’ fiduciary obligations are to exercise their powers under the company’s constitutions for proper purpose, to avoid conflict of interest and not to profit from their position such as misuse of corporate fund, misuse of confidential information, honesty and diligence.
While power is defined as the ability to conferred on a person by law to determine and alter the rights, duties and other legal relations of him or others. Abuses of power by the management can be seen when the controlling directors, En Zayed and Pn Hashimah tried to negotiate with the Auditor to not qualify the Financial Statement. They planned to terminate the auditor’s appointment and appoint a new “friendly party’’ auditor who can cooperate with them.
The directors showed the intention to commit fraud and they definitely did not act in the best interest of the company. According to Section 132(1) of Companies Act 1965, a director of a company shall at all time exercise his power for a proper purpose and in good faith in the best interest of the company. The directors had gone against the provision in the Companies Act 1965. Besides that the directors had also charged their personal vehicle expenses on the company.
There were also withdrawals of company’s money without proper documentation. Section 132(2)(a) of CA 1965 stated that the director cannot simply use the company’s property or asset. The directors’ action had breached their fiduciary duties stated in the CA 1965. They were also not familiar with Accounting Standards and the provision of the Companies Act 1965, including their roles and duties as Company Directors. Section 132(1A) of CA 1965 stated that the director are expected to have knowledge, skill and experience. QUESTIONS & ANSWERS
In addition to that, En Zayed and Pn Hashimah also wished to remove the present auditor, Aziz & Co before the expiration of their term from the office without a proper procedure. Section 172 of CA 1965 stated that only the shareholders can remove the auditor before the expiration of his terms with the required passing of ordinary resolution at general meeting with special notice of 28 days given to the auditor. One of the most distressing issues confronting board members is how to comply with their fiduciary duty to shareholders and unit owners. Although misconceptions abound as to the precise nature and scope of this obligation, a breach of the fiduciary duty could result in grave consequences for both offending board members and the community which he represents.
Perhaps the most widespread misconception is that fiduciary duty is related to degree of competence with which board members perform their management responsibilities. In fact, the fiduciary responsibility has nothing to do with board member’s skill. Basically, a breach of the fiduciary duty to shareholders and unit owner occurs whenever a board member’s abuse of such power result in harm to one or more of his constituents. The placement of one’s trust, confidence and responsibility in another person is the hallmark of a fiduciary relationship.
The investiture of such trust, confidence and responsibility in the fiduciary bestows upon him, a position of influence and superiority over the person with whose he deals. As such, he is charged with an extraordinary degree of moral accountability to those people. Clearly, trust and confidence has been reposed on one side and there is a resulting superiority and influence on the other side. Thus, board members are fiduciaries to shareholders and unit owners who have elected them to their position of power. QUESTIONS & ANSWERS
2. Who should be held responsible and accountable?The directors, top management and employees of Delima Enterprise S/B should be held responsible and accountable. This is because the directors should be more familiar with their roles and duties as company directors. They should have possessed enough skill and expertise to develop a good strategy and structure in the company. In the context of the Malaysian corporate law framework, the duties and responsibilities of the company directors in Malaysia are clearly stated in the Malaysian Companies Act 1965 (Act).
Under the Act, company directors are responsible for the management of their companies and have a fiduciary duty to act in the best interest of their companies. Sections 166A(3), 166A(4), 166A(5), 167(1), 167(1A), 169(1), 169(3), 169(5),169(15), 169(16) of the Companies Act are some of the key references that state that company directors are responsible for the maintenance of accounting and other records, as well as the tabling of the audited financial statements at a general meeting of members of a company.
While Sections 166A(3), 166A(4), 166A(5) state clearly that the directors of a company shall ensure that the accounts of the company (including consolidated accounts, where applicable) laid before the annual general meeting are in accordance with the applicable approved accounting standards. Section 167(1) requires the company directors and managers to ensure proper maintenance of accounting and other records to enable them to be conveniently and properly audited and Section 167(1A) requires accounting entries and other records to be properly documented within sixty days of the completion of the transaction.
Besides that Section 169(1) and 169(3) require directors of a company to table at the annual general meeting a profit and loss statement for the period and a balance sheet to which the profit and loss account relates. Section 169(5) requires directors of each company to prepare a resolution signed by no fewer than two of the directors attesting to the profit or loss of the company for the financial year and the state of affairs of the company’s affairs as at the end of the financialyear. QUESTIONS & ANSWERS
The top management on the other hand should have involved in giving opinions on decision making. They are the ones who discuss with the directors on any matters that are important for the future of the company. They should also carry out their own responsibilities and duties in the company. The finance executive, Cik Amy for instance should suggest the directors to have proper documentation for any information and data that is related to the accounting transaction in DESB as well as to maintain proper recording of the Company’s assets and integrated accounting system to be used in the Company.
3. Could the Audit be completed soon without any qualification? An auditor’s report is considered an essential tool when reporting financial information to users, particularly in business. It is mandatory for all companies under the Companies Act 1965 to perform the statutory audit. In this case, DESB was required to comply with the Companies Act 1965 to prepare the Audited Financial Statements and in addition to meet the banker’s request to process the facilities application. Yes, the audit can be completed soon without any qualification if En Zayed and Pn Hashimah could attend to the outstanding matters objectively.
They should discussed objectively with the auditors and be guided by the auditors for the appropriate solutions. It was noted from the audit findings that several transactions with significant amount were wrongly recorded and due reconciliation was necessary to identify and make appropriate adjustments to the accounts. 4. What should be done to improve the leadership and management of Delima Enterprise Sdn Bhd? The leadership of DESB can be improved by stating a clear job description of each position in the company to prevent redundancy and breach of fiduciary responsibilities. DESB must also have sufficient control mechanism in both the management and operation level.
The company can also introduce an internal audit department. Besides that, extensive sets of Standard Operating procedure (SOP) must be introduced in all aspects of the management and operational level with the objective to achieve goal, prevent deviation, provide details and information for controls. This question will be further answered in the next part under “Recommendations” for Delima Enterprise Sdn Bhd. Improvements.
RECOMMENDATIONSAfter identifying all the issues related to Delima Enterprise Sdn Bhd, now we can recommend on what should be done to improve the current management and leadership of the company. DESB must practice and implement some recommendations that will enable the company to enhance its performance and settle the unresolved issues. Segregation of duties
Firstly, the company must implement segregation of duties. Encik Zayed should assign different employees to different position so that each task would be carried out by different individuals. In custody of assets the employees responsible for purchases or disposals of fixed assets should not have an access to record transactions in the fixed asset ledger.
The useful life of the fixed asset (i.e. the life over which asset is depreciated) should be determined based on generally accepted accounting principles and entered in the system by a finance employee responsible for maintaining the fixed asset ledger. Fixed asset disposals should be made after review and authorization from a supervisory-level employee. Periodical physical counts of assets should be conducted by employees without record-keeping or authorization responsibilities, such as a finance department or an outside inventory service.
Adjustment to the fixed asset system should be reviewed and approved by a supervisory-level employee who is not involved in the physical count of the fixed and maintenance of fixed asset system. The reconciliation of the general ledger fixed asset balance to the fixed asset system should be completed by someone who does not maintain the fixed asset system. Account reconciliations should be reviewed and approved by someone other than the preparer of the reconciliation.
While for record keeping, the employee who is responsible for the receipt of cash should not have access to record or authorize transactions in the accounts receivable ledger and customer accounts. In addition, the person receiving the cash or preparing the deposit should not be responsible for recording cash transactions or preparing the preparing the bank reconciliation. The employee preparing should not be responsible for cash transactions in the account receivable ledger and customer accounts. In addition, the bank reconciliation should be prepared by an employee who is not involved in cash receipt or cash disbursement activities.
The Adjustments and write-offs to customer accounts should be reviewed and approved by an employee who does not have responsibility for recording these transactions. In addition, this employee should not be responsible for preparing the reconciliation of the accounts receivable subsidiary ledger to the general ledger accounts receivable subsidiary ledger to the general ledger account balance. The preparer of bank reconciliations should not have the responsibility for recording cash receipt or disbursement transactions. In addition, bank reconciliations should be reviewed and approved by an employee other than preparer. As a best practice, the reviewer should be in a supervisory-level position.
As for automation or computerised system, there should be segregation between systems development and operations, operations and data control, and data base administration and system development. The employee responsible for designing and implementing information system cannot be the same person as the person responsible for testing the system, conducting system audits, or monitoring and reporting on systems. Secondly, the management should provide necessary training to all the employees so that they could be more efficient in performing their jobs.
The directors too must equip themselves with all the necessary knowledge and skills to lead the company. En Zayed should spend more on training to equip the employees with proper knowledge. The management too must hire people that have good academic qualifications & relevant experiences. The qualifications of the candidates must be emphasized so that they can carry out their tasks well. Cik Amy should be send for further training to enhanced her understanding in relation to her job description and competency to perform her job.
The management should enrol her to a short course designated to improve work efficiency and effectiveness in any local institutions. Besides that, the company should create and implement Standard Operating Procedure (SOP) for all transactions related to each department in the company. (Refer Appendix 1) All types of incorporated companies enhance corporate governance. The directors must be updated with matters regarding powers of the registrar of the company, management and administration of the company, officers of the company, accounting and auditing of the company. Authorization
Authorization is the process of reviewing and approving transactions or operations. Some examples are verifying cash collections and daily balancing reports; approving purchase requisitions or purchase orders; approving time sheets, payroll certifications, leave request and cumulative leave records; and approving charge orders, computer system design or programming changes. In future, DESB should emphasize on the authorisation in any transaction.
This will prevent misappropriation of cash or assets. DESB management should prepare budget planning, plan on any cost that is likely to be incurred. This enable them to compare the budget cost and actual cost to see any variance on the performance evaluation. This will help managers to make efficient decision making.
Every asset purchased must be recorded manually & computerized, Assign person(s) to be responsible for the company assets, Propose the Asset Tagging System The company should create a new organisational chart according to function. All the positions and function should be clarified clearly. (Refer Appendix B) Accounting records
The accounting records must be kept in a safe place and documented based on its categories according to date. All the vouchers must be pre-numbered and statement of accounts must be sent to customers every month. Access controls
Access control to the company’s record must be restricted to authorised personnel only. For example, the employee responsible of accounting information records should have medium of control such as password to secure the information. Only authorize employee can access to the information. Independent verification
Finance manager should prepare worksheet to verify the performance of finance department staff independently. While supervisor must be hired to evaluate the time in and time out or the performance of DESB employees. They must not prepare their own timesheet anymore. 5 C’s of Creditworthiness of Borrower
In order to be eligible to apply for the bank loan facilities, the company management must ensure they comply with all the 5 C’s of creditworthiness of borrower. Character refers to the borrower’s integrity and willingness to repay the financial obligation. Capacity refers to borrower’s cash flow and ability to repay the debt from ongoing business operations. Capital is the borrower’s financial net worth.
A significantly positive net worth has the potential to offset insufficient cash flows, because financiers perceive the borrower still has more than adequate means to repay the loan. Collateral refers to any property owned by the borrower that can be pledged for security. Conditions refer to economic, industrial and company-specific prospects and events that may occur during the period of the loan that could have a significant effect on your company. For example material prices, an employee strike, increasing interest rates, etc.
As a conclusion, I have learnt how to relate the theories into practices in a real life situation from the issues encountered by Delima Enterprise Sdn Bhd. The directors surely need to equip themselves with necessary skills and knowledge before they incorporate the company into a private limited company in term of management and leadership. REFERENCE
•http://www.icoph.org/downloads/ICO-CEO-Job-Description-20-September-2011.pdf •http://www.akcelerant.com/Job%20Descriptions/Chief%20Operating%20Officer.pdf •http://www.docstoc.com/docs/4625243/general-manager-job-description
•http://www.fishershypnosis.com/free-standard-operating-procedure-template.html •Yycadvisors (2012). Appointment of auditor in Malaysia. Retrieved September 25, 2012, from http://www.yycadvisors.com/appointment-of-auditor-in-malaysia.html
•Malaysia, S. S. (2012, January). Removal of Auditor. Retrieved September 25, 2013, fromhttp://www.ssm.com.my/en/ls/application/auditor/how •Wikianswer (2013). 5C’s of creditworthiness of borrowers?. Retrieved September 25, 2013, from http://wiki.answers.com/Q/5_C’s_of_creditworthiness_of_borrower- •http://malaysiabizadvisory.com/auditor-role-in-sdn-bhd-company/ •Companies Act 1965
Suggested Standard Operating Procedure (SOP) (Appendix A) 1. Purpose
To ensure that the processing of financial documents is consistent and to describe the procedure of processing of financial documents. 2. ScopeThis SOP applies to the whole department processes.3. ResponsibilitiesIt is the responsibilities of the manager of each department to ensure that the procedure is being applied to his/her own department. 5. Procedures Authorization Contact. Each department should nominate at least two senior as their Authorized Contact Officials. Any important document requires verification from both authorization and both or one of them is not signed, it shall not be entertained. Segregation of duties.
Same job may require different people to complete the transactions and it also provides independent views on the work performed. Assets.
Custody of assets : Any storage of assets must be kept by the person chosen and frequently review the conditions of assets. Any obsolete assets must be analysed more whether to be disposed or upgrades. Recording of assets : The person who records and custody must be separated and he is to ensure that the records on amount, types of assets, value of the assets and anything regarding the assets must be properly kept and filed with proper coding. Suggested Standard Operating Procedure (SOP) (Appendix A) Accounting records
The Chief Financial Officer, Controller and accounting department personnel should not have access to modify general ledger accounts or change mappings for these accounts. Normally these changes should be made by IT personnel after approval. Financial statements should be approved by supervisory personnel at a higher authority level than person preparing the financial statements. Access controls.
The fingerprint verification machine can be used in accessing controls to important items. For example, the warehouse. Independent verification The fingerprint verification machine allows for multiple records to be crossed checked. There is no one allowed to make any changes to the first records and second records are used to verify the first records. This is to increase the level of security. Improper Organisational Chart
The organisational chart was improperly arranged and too few positions (with unclear job scope) had been added to the chart. The chart does not include distinct departments to show the organisation by departmental functions. It should be properly drawn with distinct functional departments to show distinct job description for each department and several important positions should be added to ensure effective and efficient control. Chief Executive Officer (CEO)/ Managing Director
Serves as the top executi