Delima Report

INTRODUCTION

Delima Enterprise Sdn. Bhd., formed in 1981 is a family owned business business in which Encik Zayed and his wife, Puan Hashimah are the two principal shareholders and controlling directors of the company. The company engaged in trading and supplying related products including manpower supplies to the oil and gas industries. The company had expanded and diversify into provision of engineering services. The company did not have an audited financial statement until July July 2006 when the company had secured a contract worth RM750,000 and due to shortage of fund, they intend to apply for banking facilities with Cimb Bank Berhad and Malayan Banking Berhad and the banks requires the company to prepare an audited financial statement for the last two years. The company did not provide or prepare financial statements previously. During the audit process, the company is facing problem to not qualify the financial statement since there were several problems and issues arise during the audit of the company in which the external auditor, Aziz & Co (Chartered Accountant) intend to qualify the financial statement of the company. Encik Zayed and Puan Hashimah Hashimah tried to negotiate with the auditor to not qualify the financial statement, failing which Encik Zayed planned to terminate the auditor’s appointment and appoint a new” friendly party” auditor.

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FINDINGS

Were there any abuses of power by management and breach of fiduciary on the part of the directors?

Yes there were abuses of power by management and breach of fiduciary on the part of the directors. In the case study, abuses of power can be clearly seen in the situation where family members of Encik Zayed and Puan Hashimah,the directors were simply employed as employees although some did not have the necessary job experiences. Secondly, personal vehicle expenses of Encik Zayed and Puan Hashimah totaling RM50,150 were charged to the company is an obvious proof that they were abusing abusing their power as directors.

Next, there was also breach of fiduciary duties by Encik Zayed. There is an intention to commit fraud in which he does not act honestly on behalf of the company. He did not not act in the best interest of the company. For example, he Intend to commit fraud by trying to negotiate with the auditor to not qualify the Financial Statements failing which Encik Zayed planned to terminate the auditor’s appointment and appoint a new ‘’friendly party’’  auditor.

Who should be held responsible and accountable?



The Directors



All management level

In the context o f 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. By referring to the sections of the Act below, Encik Zayed and Puan Hashimah, the directors of Delima Enterprise should :



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 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.

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•

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. Section 167(1A) requires accounting entries and other records to be properly documented within sixty days of the completion of the transaction.

•

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 financial year.

•

Section 169(15) on the director’s statement requires directors to state that the profit and loss

account and the balance sheet (including consolidated accounts, where applicable) give a true and fair view of the results and state of affairs of the company and that the accounts of the company are in accordance with applicable approved accounting standards. A director or where the director is not primarily responsible for the financial management of the company, the person responsible is required by •

Section 169(16) to state his opinion in the statutory declaration on the correctness or otherwise of the balance sheet and the t he profit and loss account (including the consolidated accounts, where applicable).

Could the Audit be completed soon without any qualification?

Yes, the audit can be completed soon provided that the audit report is classified as qualified opinion report as there are several unresolved issues. If the rest of the financial statements are audited and the auditor thinks that they confirm with Generally Accepted Accounting Principles (GAAP), then he may come to an opinion that the financial statements are fairly presented, with the exception of the issues which could not be audited.

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ISSUES, PROBLEMS ARISING AND RECOMMENDATION.

1.Statutory Audit The company did not perform the Statutory Audit.

In accordance with Company Act 1965, statutory audit is only legal to Public Listed Company. It is not compulsory for Private Company to perform Statutory Audit. However, Private Companies may need to do so when applying for loans and etc from F inancial Institutions. As in the case study, D elima Enterprise Sdn. Bhd. is planning to apply loans from Malayan Banking Berhad and CIMB Bank Berhad. Therefore, the company needs to perform statutory audit.

Statutory compliances and responsibility of directors of Private Limited Company as required in Companies Act 1965 in auditing process :-

The directors did not carry out their duties and responsibilities as the director of the company as required in the Act in preparation of auditing process. In the case study, Encik Zayed and Puan Hashimah did not perform their proper duty as directors of Delima Enterprise Sdn. Bhd. as there are many mismanagement and unresolved issues everywhere such as poor management in terms of administration, improper use of accounting system, unavailability of receivables note, no proper documentation presented and so on.

As a director, they should involve in maintenance of good practice for auditing process such as by :

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Ensuring all relevant documents made available

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Schedule of every balance sheet items

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Details for items in income statement

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Maintenance of proper accounting records

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Invoices are pre-numerically referenced & the copies are filed accordingly in invoice file

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Payment vouchers are pre-numerically numbered, properly checked & authorised by respective personnel in-charge and attached together with supporting documents

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Bank balance should be checked & reconciled with the bank statements at the end of every month

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Receipts & payments should be updated promptly to monitor company’s cash flow on daily

basis 4

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Proper books such as sales, purchases, debtors, creditors, journal and bank book should be maintained and updated promptly.

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Management account (ie. BS & IS) be drawn up at the end of every month to monitor the financial position of the company.

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Generally, all transactions should be be recorded in the books within sixty (60)days as specified in Section 167(1A) of the CA 1965

2. Auditor’s duties and responsibilities

In the case study, Encik Zayed tried to negotiate the auditor, Aziz & Co. (Chartered Accountant) to make unqualified report even though there are many unresolved issues. The auditor should not agreed as it is against the statutory duty and responsibility of auditor since it is considered as attempting to commit fraud. Aziz & Co.

In accordance to the relevant sections in Company Act 1965 below, auditor should comply and is to carry out duties and responsibilities as follow ;

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Sec 174(2), auditor is required to: -

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Express opinion in report report (duty to report defects, irregularities in account).

Sec 174(3) -

Report particulars of deficiency, failure and shortcoming.

3. Accounting system

In the situation given in the case study,MYOB Software used in Delima Enterprise Sdn. Bhd. is not integrated. It can disrupt or complicate the operation and management of Delima Enterprise Sdn. Bhd. To solve this matter, Delima Enterprise Sdn. Bhd. should ;

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Purchase and used new accounting softwares -

For example, UBS accounting software, Autocount and etc.

4. Problems in Finance Division

The followings are issues and problems identified in finance division; 

Invoice not pre-numbered 5

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Company did not send Statement of Account(SOA) to client

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Not prepare monthly reconciliation

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Use company’s money for personal use

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No segregation of duties

Recommended solutions for these problems are Delima Enterprise Sdn. Bhd. needs to appoint new finance manager to authorize and to supervise finance department. Duties of staff needs to be separated according to work position to enable a fluid information flow and a more organized management operation.

5. Problems in Human Resource Division.

The followings are issues and problems identified in finance division; 

Pay wages weekly without employees benefit

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Unqualified staff (lack of knowledge and experience)

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Lack of employees and unbalance staff allocation

Recommended solutions for these problems are Delima Enterprise Sdn. Bhd. should implement or change their payroll system whereby they needs to Pay wages in monthly basis including EPF and Socso. As for unqualified staff and lack of employees and unbalance staff allocation, the company should provide training and seminar for staff. They also assign more staffs with proper and necessary qualifications.

6. Timesheet are manually prepared by the employees.

The problem is the employees record their in and out time from the company themselves. This provides a greater opportunity to commit fraud in the company among the employees. They can manipulate the timesheet for their own benefit and interest.

As solution for this problem, the company should , the company should exercise the use of punch card or thumbprint to ensure the a proper and valid confirmation of employees attendance. Apart from that, the company should hire another employee as in supervisor to monitor the attendance of the staff.

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7.Documents (sales and purchase invoice) are not properly numbered, recorded and documented.

The identified problem is the monthly statement account are only being prepared and send to customer when the payment had been long outstanding. This will lead to increase in the amount of bad debts and unrecorded amount of receivables.

The solutions are: 

All the documents as in sales invoice should be pre-numbered accordingly.

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The statement of account should always be updated and periodically prepare to avoid any error or fraud to occur.

8.Lack of authorization in their business transactions.

Lack of authorization in business transaction happens happens when decisions in the company were made made and authorized by either Encik Zayed or Puan Hashimah only. There was no standard operating procedure involved. This can lead to manipulation and abuses of power by the directors. This also may lead to a poor decision making which will affect the company as a whole. Apart from that, lack of authorization in their business transaction can be seen through personal vehicle expenses of the director is charged to the company.

To solve this problems, personal expenses should not be charged in the company’s expense. The director must comply with the regulation by not including their expenses in the company’s account. To

improve authorization in the business transactions, all the decisions being made should be in compliance with the standard operating procedure (SOP).

9.No Standard Operating Procedure (SOP)

In the situation given, there is no standard operating operating procedure provided in the company. For example, the decision in company were being made without proper documentation. The Auditor is having a difficult time to monitor the transactions and asset movement since there is no proper documentation, procedure and records due to absence of SOP. The company’s money withdrawal is also done without proper documentation and records.

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As a solution for these problems, Delima Enterprise Sdn. Bhd. should implement and exercise the standard operating procedure as it is a necessity. Every organization requires standard operating procedure to ensure an organize operation and proper control in the operation and management. It will also helps in being more efficient in per forming task.

This is our suggestion of Standard Operating Procedure in Delima Enterprise Sdn. Bhd.

SUGGESTION OF OUR STANDARD OPERATING PROCEDURE

1. Purpose To ensure that the processing of financial documents is consistent and to describe the procedure of processing of financial documents.

2. Scope This SOP applies to the whole department processes.

3. Responsibilities It 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.

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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.

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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.

Accounting records 

The Chief Financial Officer, Controller and accounting department personnel should not have access to modify general ledger accounts or change change mappings for these these accounts. Normally these changes should be made by IT personnel after approval.

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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.

10.Segregation 10.Segregation of duties.

Encik Zayed does not perform his duties in segregating management equally in accordance to their skills and experience. For example, Cik Amy has been assigned to numerous workloads and some of the tasks are not under her skills and description. Furthermore, Cik Amy is a fresh graduates and she does not have necessary experiences to carry out her works.

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As solutions, Encik Zayed should segregate all the duties equally among his employees of the company. Cik Amy workloads should be equally segregate to other personnel according to the relevant job description. For example, Account payables can be performed by other different personnel.

11. Improper Organisational Organisational Chart

The organisational chart was improperly arranged and too few positions (with unclear job scope) had been added to the chart. For example,the chart does not include include distinct departments to show the organisation by departmental functions. The unclear positions positions will lead to unclear job scope and functions.

As solutions, 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. This is our recommendation of organisation chart for Delima Delima Enterprise Sdn. Bhd.:

The Proposed Organisation Chart

Encik Zayed & Puan Hashimah Executive Director

Chief Operating Officer (New position)

Finance Manager (New position)

Puan Balqis Operation manager

Encik Salam HR & Admin manager

Cik Amy Finance Executive

Project supervisor (New position)

Clerical Assistant (New position)

Clerical Assistant

Clerical Assistant (New position)

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12.Unaware of director’s duties

Encik Zayed and Puan Hashimah, Hashimah, which are both the directors of Delima Delima Enterprise Sdn. Bhd do do not aware and do not understand about their duties as directors in accordance with Company Act 1965.

Both of them should acknowledge their duties as directors in compliance with Company Act 1965 and this will help to enhance corporate governance. They must know the matters regarding powers of the registrar of the company, management and administration of the company,officers of the company and accounting and auditing of the company (Company Act 1965)

13. Inadequate job training

Cik Amy is seen as having ‘trouble’ to handle her job as a Finance Executive effectively. Amy is a young, fresh graduate from a local university with no relevant working experience and was unable to solve even a simple accounting treatment.

Cik Amy should be send for further tra ining by the company’s top management to further enhanced her understanding in relation to her job description and competency to perform her her job. For example, the management should enrol her to a short course designated to improve work efficiency and effectiveness in any local institutions.

14. No budget planning was prepared

Budgeting is important in the planning stage of operation of a business, (Benoit 2009). Delima Enterprise Sdn. Bhd. does not have budget planning prepared.

Delima Enterprise Sdn. Bhd. should : -

Prepare budget planning, plan on any cost that is likely to be incurred.

-

To compare the budget cost and ac tual cost to see any variance – performance evaluation

-

This will help manager to make efficient decision making

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This is the example of a simple format of budget planning :

Direct Costs •

Actual Cost

Budgeted Cost

Direct materials

•

Direct labour

•

Direct

wages

&

salaries

Indirect Costs •

Indirect materials

•

Indirect labour

•

Indirect

wages

&

salaries

Manufacturing Overheads •

Maintenance cost

•

Rental

•

Electricity

•

(Operation Costs)

(Benoit, 2009)

15. Lack of competency Head of department is leaded by unqualified staff. For example, Encik Zayed appointed Puan Balqis as operation manager and Encik Salam as Human Resource and Administration manager which are their relatives. This may lead to mismanagement and improper administration and thus poor decision making in the company

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As a solution, the company should spend more on t raining to equip employee with proper knowledge Apart from that, they should hire qualified staffs that have e xperience.

16. Recording

Based on audit findings , several assets purchased by the company were not recorded. Every asset purchased must be recorded manually & computerized . The company should assign person(s) to be responsible responsible for the company assets. They should propose to implement Asset Tagging and management system software.

17. Appointment of Auditor

The auditor, Aziz & Co (Chartered Accountant) Accountant) were not appointed through a proper procedure procedure of appointment. They were simply introduced by Encik Zayed’s friends to audit on Delima Enterprise Sdn. Bhd.

The appointment of auditor should be made during the annual general meeting of the company. The auditor is to hold in the office until the conclusion of the next annual general meeting (Section 172 of Company Act 1965).

18. 5 C’s of Creditworthiness Creditworthiness of Borrower 5 C’s of creditworthiness of borrower is five criterias that most lenders use to assess a borrower’s

creditworthiness,   (Spencer, 2008). In the case study, before approving loan to Delima Enterprise Sdn. creditworthiness, Bhd. , the bank should assess Delima Enterprise Sdn. Bhd. based on t hese 5 criterias :

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Character.

This refers to the borrower's integrity and willingness to repay the financial

obligation. 

Capacity . This refers to borrower's cash flow and ability to repay the debt from ongoing business

operations. 

Capital . This 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 . This refers to any property owned by the borrower that can be pledged for security.

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Conditions . These 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.

(Spencer, 2013)

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EXECUTIVE SUMMARY As a conclusion, there are many issues and problems that need to be addressed in Delima Enterprise Sdn. Bhd.

First of all, there were abuses of power by Encik Zayed and Puan Hashimah, the directors in the company. They simply appoint staff in the company based on family members relationship without considering the qualification and experience needed to carry out the duties. They were also charging their personal expenses to the company is a proof of power abuse in the company. They should use and execute their authority wisely as a director to ensure the well being of the Delima Enterprise Sdn. Bhd. Encik Zayed breach his fiduciary duty by attempting to commit fraud in which he tried to negotiate with the present auditor to not qualified their financial statement even though there are many issues and problems, failing which he planned planned to appoint a friendlier party auditor. auditor. This is a breach of law by referring to relevant sections in Company Act 1965. Encik Zayed should not act in this way as it will compromised the law and as well as credibility of the company. The act is not in the best interest of the company as a whole. whole.

The Directors and all the managements should be held responsible. Every

individual should play play their role in keeping the well being of the the company, good management and free abuse of power of administration. In 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.

Overall, what they can do to improve the leadership and management of is through the directors themselves and the management. They need to overhaul and reorganized the management and administration of the company. Encik Zayed and Puan Hashimah should play role by acknowledging themselves with the duty as a director. They should hire people with good experience and qualification to do the work in the company. Other options are to send them for seminars and trainings to improve their competency and skills to carry out their duty. As for accounting system in the company, they should implement a new software which is more reliable and integrated such as UBS Accounting system. The most important thing that they must implement in reorganizing and restructuring their company is to establish a Standard Operating Procedure (SOP) in their company. Every organization needs SOP. The existence of SOP will ensure a good administration and management, internal control and the operation of the company as a whole. 15

REFERENCES

•

YYadvisors (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, from http://www.ssm.com.my/en/ls/application/auditor/how

•

Tom Spencer (2008). Five C analysis of borrower creditworthiness. [ONLINE] Available at: http://www.tomspencer.com.au/2008/12/28/five-c-analysis-of-borrowercreditworthiness/#.UkwYkYZTrkA. [Last Accessed 2 October 2013].

•

Joseph

Benoit

(2009). How

to

create

a

simple

budget .

[ONLINE]

Available

at:

Available

at:

http://www.entrepreneur.com/article/201670. [Last Accessed 3 October 2013]. •

Fishers

Hypnosis

(2012). Standard

Operating

Procedure.

[ONLINE]

http://www.fishershypnosis.com/free-standard-operating-procedure-template.html. Accessed 3 October 2013].

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