INTRODUCTION Delima Enterprise was established in 1981 by Encik Zayed. The directors of the company are Encik Zayed himself and Puan Hashimah, Encik Zayeds wife. Delima Enterprise Sdn Bhd was a company that conducted trading and supplying related products including manpower supplies to the oil and gas industries. In 2004, the company has incorporated as Delima Enterprise Sdn Bhd. The mission of the company is to become a leading service contractor and provide good products and excellent services. Unfortunately, there are several practices applied in the company was unethical and causes many issues within the company. In 2006, the company got a contract worth RM 750,000. However, due to shortage of funds, the company tried to apply for a loan from Malayan Banking Berhad and CIMB Bank Berhad, where Encik Zayed realised that the company had not performed the statutory audit for the last two year. On July 2006, Encik Zayed engaged the external Auditor Aziz & Co to perform the statutory audit.
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PROBLEM ISSUES AND SOLUTIONS The timesheet is manually prepared by the employees. Paper timesheets system is easily lead to error because it could be difficult to distinguish time data from employees that hand write their time. This causes error in transcribing the data. This also translates into employees not being paid correctly and corrections needing to be done after that. Thus, lead to frustration on both the employee and payroll admin. Another issue with manual timesheets is the ability for employees to cheat their work hour. This happens far more often than is caught. The reason is simple. There is no verification. They can simply write any kind of work they have done when in reality they are not. The company should implement the access control system to obtain an accurate time of in and out of the employees. The term "access control system" refers to an electronic card access control system. Access control systems are most commonly used to control entry into exterior doors of buildings. Access control systems may also be used to control access into certain areas located within the interior of buildings. The purpose of an access control system is to provide quick, convenient access to those persons who are authorized, while at the same time, restricting access to unauthorized people. Another computerized system that the company can utilize is Superior TimeCost (SPC). Superior TimeCost is a software where employer can monitor the job done by each employees efficiently, manage time and expenses toward employees and manage unlimited clients and users. By utilizing this software, the employees impossibly able to waste their work hour on unnecessary things like gossiping, messaging and hang out in other employees tables. As Cik Amy is a freshly graduated from university, she is still in the stage of learning. She also has no working experience that can enable her to do her work effectively. The issue here is that Cik Amy is lack of training in her work area. In the absence of training, employees become unsure of whats expected of them and may end up doing their work tasks inefficiently. Misunderstandings may occur because employees are not clear about the requirements. With confusion comes frustration, as employees become increasingly uncertain about their role in the company. Untrained employees cannot produce high-quality performance. They also lack adequate knowledge and skills to provide satisfactory customer service. This combination results in 3
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dissatisfied customers. The company will experience declining revenue if dissatisfied customers choose competitors who can provide quality products and appropriate service. Encik Zayed must send Cik Amy for training to improve her knowledge and skills like attending conferences, seminars, workshops and courses. External training can bring fresh ideas and energy into the learning process. Mixing with employees from other businesses can be an opportunity to discover how other businesses operate. A good trainer should challenge the way your staff think and operate. Training comes in a wide range of forms such as lectures and conferences where is typically lots of information delivered to a large audience, with great networking possibilities, seminars and workshops which is giving people information and letting them practise problem solving. Next is mentoring. Mentoring usually involves the informal transmission of knowledge with some face-to-face meetings supported by email and telephone communication. A mentor is someone they trust and can consult for business advice and guidance to assist their employee. Encik Zayed can hire a consultant company to provide advices on accounting work that follow the accounting standard. Next issue is, the company not segregates the duties equally among the employees according to their job specification. For example, the Cik Amy has to perform overall work in the finance division. They should assign a specific task that she should do in the division. This is to avoid fraud in performing her duties. It also is to avoid overload of work bear by Cik Amy. The suitable solution for this situation is, Encik Zayed should segregate the duties among the employees. This is to ensure work perform by his employees are done effective and efficiently. Next issue is vision and mission of the company. Delima Enterprise Sdn. Bhd. has only short term goal that is not clear. Moreover, the vision and mission of the company are also not clear. Unclear vision and mission will result the company unable to achieve its goal and the company might not be able to survive in the long run. So, Delima Enterprise Sdn. Bhd. must set a clear vision and mission. It is to make every people that are takes part in the company easy to understand the company objective in short term and long term. Its also must be inform to the employees so they will know the company goal and will together strive to achieve it. Next issue is regarding the lack of control in corporate governance. The issue was involving the relationship with the internal environment. First, Cik Amy, a fresh graduate was not given proper training by the company as the company not willing to invest on it. Its very 4
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important for company to conduct training as it is essential to the achievements of a business. Moreover, its also make employee to be more loyal to company as the company put the best effort to shape the employee and lastly it can improve the growth and performance of the company. For example, Cik Amy was given task to handle over all financial matters of the company as she only graduate from university and not have any working experience.
Second, personal expenses cannot be charged as company expenses. Here directors make personal expenses under the companys money and this done without proper documentation. Should directors at least prepare documents for anything they used for their personal so that later they can pay back to the company. As per case study, withdrawals from the company totaling RM12,500 found without proper documentation. Besides, personal vehicle expenses by En. Zayed and Puan Hashimah amount to RM50,150 was charged to the company. Other than that, the company did not provide EPF contribution for their workers. It is must for company to provide such fund as it stated in employment act 1991. Here under the section mention that all employers and employees are required to contribute to the fund at the 11% and 12% respectively of the employees monthly wages.
Next issue is about fiduciary duties of directors. Firstly, duty to act bona fide in the best interests of the company. This is the basic duty that directors must hold. It mean a director at all times ensure that his actions are always in line with well-being of the company. This lay on section 132(1) of Companies Act 1965. Here as we can see that the directors no act in the best interest of the company and not maintain separate legal entity principle. For example, the relationship between En.Zayed and Puan Hashimah can be identify unsecured to the company as they are husband and wife, thus there is no practice of independent view in make decisions for the whole management. Second, duty to disclose all material matters. This duty can avoid potential conflict of interest. This duty to disclose stipulate under Section 131 of Companies Act 1965. In this case, the directors no disclose all information to the management thus at the end it turn to be conflict within the department. For example, there are several withdrawals from the company amounting to RM12,500 were made by directors without any further disclose to the company. Third, duty to avoid conflict of interest. Duty of avoid conflict of interest can described as one profits by ones position as a directors at the companys expenses. For instance, in Delima case, the use of accounting software for the company is not intregated thus, some data may not access or seen by other department and as a result this can arise to conflict as some employees may took advantage.
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Next issue is there is no standard operating procedure in the company. For example, there is no authorization needed for an important transaction and a withdrawal of money also is done without proper documentation. This problem will cause unexpected thing will happen such as fraud and theft. This will result Delima Enterprise Sdn. Bhd. will suffer loses. The solution is the company should implement the standard operating procedures as a guideline for the employees in the company to follow. This can increase the effectiveness and efficiency of the company operation since the employees task is performed was based on stated procedures. Next issue is creditworthiness of the Delima Enterprise Sdn. Bhd. The company should take into consideration the five key element of borrower should have in order to obtain credit. Firstly is Character. Delima Enterprise Sdn. Bhd. should have integrity in term of presenting of financial statements. Secondly is Capacity. This means the company must be able to pay its obligation in the future. Thirdly is Capital. Capital is related to net worth which means value of the company. Fourthly is Collateral. The company must have enough assets to secure the debts. Finally is Condition. The condition of the company and economy should be stable in order to obtain credit. When the auditor tried to perform the audit process for the companies, they are facing several difficulties to complete the audit session. This is due to the incomplete records and documentations of the transactions incurred within the company. There are several assets bought by the company were not recorded. This can lead to bad occurrences such as overpayment to the trade creditors. Delima Enterprise Sdn Bhd must record every purchased asset, by both manually and computerised. For example, acquisitions transaction file is a computer-generated file that includes all acquisition transactions processed by the accounting system for a period such as weekly, monthly or yearly. The file also contains all information for each transaction such as vendor name, date, amount, account classification and description. Failure to record the acquisition of assets received directly affects the balance in account payable and may result in an overstatement of net income and owners equity. As we know, the relationship between assets, liabilities and shareholders equity in the balance sheet is where the total of all assets always equals the sum of the liabilities and shareholders equity sections. At general level, whenever there is a recordable transaction, the choices for recording it all involve keeping the accounting equation in balance. The organization structure of Delima Enterprise Sdn Bhd was maintained in a lean behaviour. The company only comprises with a basic functional positions where both directors Encik Zayed and Puan Hashimah were also acts as chief executive officer and 6
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chief operating officer. Where else the company only has other several employees including Encik Salam as human resources & administration manager, Puan Balqis as operations manager, Cik Amy as a finance executive, a clerical assistant, a project supervisor and a project team. It was not a problem if the company maintained its lean organization. However, each of the workers must understand their job scope. So, they can clarified their job function clearly. In practises, before the company appointed Cik Amy as a new finance executive, Puan Hashimah, who was the chief operating officer, was responsible for all finance matters eventough she did not have any academic qualification or experience in the finance field. Next issue in Delima Enterprise Sdn. Bhd. is accounting system is not integrated. That mean, the account between divisions in the company was not link to each others. For example, the account of account payable division and human resource division are not linked. An accounting system that is not integrated will result to misstatement of account and take a longer time in order to prepare the financial statement. Delima Enterprise Sdn. Bhd. needs to update the overall account by combining all the division account into general ledger system at the end of the accounting period. The solutions for this issue, Delima Enterprise Sdn Bhd need to purchase new accounting software that already integrated or buy a server to integrated current accounting software. By doing this, misstatement in preparing the financial statement can be reduced. Furthermore, time in preparing the financial statement also can be reduced. Next issue is there is a problem in human resource division in Delima Enterprise Sdn. Bhd. such as they pay wages weekly and has no any employee benefits. Other than that, Delima Enterprise Sdn. Bhd. also hired unqualified and inexperience staff. This will result the task that perform by the employees are not effective and efficient. Moreover, Delima Enterprise Sdn. Bhd. has insufficient number of employees to coup current business operation. The solution is the company should pay wages monthly together with employees benefits such as EPF and SOCSO. This is to save more time and the process of paying those salaries to be more efficient. The company also must hired staffs that have qualification and related experience that meet the job specification. The company also can provide training to staff in order to improve their knowledge and skill.
Question 1 Were there any abuses of power by the management and breach of fiduciary on the part of the directors? Fiduciary duty is someone who has a duty to act in the best interest of another party. He has the power to control of property, which is owned by another party. Section 132(1) of the CA 1965 Stated that the directors must at all time act honestly in the exercise and discharge of the duties of their office. Company Act 1965 Section 132(2) of the CA 1965 Stated that fiduciary duties regarding the use of confidential information. As a fiduciary, a directors duties are to act honestly and in a good faith, duty of care, obedience and loyalty, avoid conflict of interest, and duty to exercise their powers for their proper purpose. Yes, there is abuses of power by the management and breach of fiduciary duty of director. Encik Zayed and Puan Hashimah only have secondary school background and were not familiar with the accounting standard and provision of the Companies Act 1965. This cause no standard operating procedure was not in place, several assets purchased were not recorded and there is no cash and bank balance reconciliation. Abuse power by using companys fund for personal expenses. The directors personal vehicle expenses were charge to the company. Thus the director have breach their fiduciary duties. Encik Zayed and Puan Hashimah tried to negotiate with the auditor not to qualify the financial statements. If the auditors refuse to do so, he will terminate the auditor and appoint a new friendly party auditor. This shows that Encik Zayed has misuse his power for improper purpose to get the funds from bank. Therefore, Encik Zayed has breach his fiduciary duties.
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Question 2 Who should be held responsible for effective leadership & management? Sarbanes Oxley 2002 Top management is responsible to prepare to the financial statements according to the accounting standards (applicable to all companies no matter public listed or private limited companies) 1. Two Controlling Director Encik Zayed &Puan Hashimah They should be held responsible and accountable for the issue regarding the outstanding matter issued by the auditors, such as lack of internal control, no budget prepared, no standard operating procedure. Encik Zayed and Puan Hashimah must prepare standard of operating procedure (SOP), improve internal control system and invest on necessary training to their employees to increase the effectiveness and efficiency in the operating system.
2. Accounting personnel Puan Hashimah and Cik Amy Puan Hashimah should be accountable of her actions, which include the missing of several pages of the account receivable listing, documents are not pre-numbered and classification of cash advance transaction into account payables account. They must hire experienced employees to fulfil the responsibility as accountant and to give training to Cik Amy.
3. Human Resource and Administration Manager Encik Salam Encik Salam should be held responsible for allowing employees to prepare their own timesheet manually, no EPF contribution made by the company and no training provided to the employees. He must prepare punch card or employee ID cards so that they cannot manipulate the time record. Provide training and seminar for staff and he should hire more staffs with necessary qualification and experience.
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4. Operations Manager Puan Balqis She should be held responsible as there is no standard operating procedure for operations in the company. She should implement standard of operating procedure in order to increase the effectiveness and consistency of the companys operation.
Question 3 Could the Audit be completed soon without any qualification? The audit cannot be completed without any qualification before September because the company has serious issues regarding accounting record. There are many corrections that have to be made before a proper audit can be done. Besides, the accountant that should help the auditor does not competence in her work as an Executive Finance. Moreover, there is a dispute between the Encik Zayed and the audit team about the qualification of Financial Statement. The decision by Encik Zayed to change the auditor services to a new friendly party shows that he is not familiar with legal regulation. This issue cannot be resolve in short period of time.
Question 4 What should be done to improve the leadership and management of Delima Enterprise Sdn Bhd? First is regarding the authorization issue, for instance there is no authorization in the process of purchasing goods. Supposedly the company should check the inventory before make an order and the purchase order must be approved by top management as well as supplier. Besides that the issue of segregation of duties was also arise. Encik Zayed did not segregate the duties well among the employees. For example, Cik Amy has to perform overall work in finance division. Encik Zayed should segregate the duties of its employees. He should be more specific in Cik Amys task such if she was has control over account payables, other staff should control over account receivables. 11
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The account record also does not have proper and incomplete documentation. The document are not properly pre-numbered, recorded and documented. As we can see the Delima Enterprise Sdn. Bhd. manually produce its sales invoice and were not pre-numbered. This case was similar with purchase order. The company should prepare the invoice and purchase order in computerize system, so that they can easily trace the required transaction. Regarding the issue of access control, the company should limit employees to access the companys assets and document. For example, specific employees should be assigned to access inventories while others cant. This will prevent from manipulation of companys assets and to avoid theft. Lastly, in order for DESB to operate effectively, the company should have independent verification. For example, the company should have specific person to authorized transaction. For certain documentation, there should be second person to verify the transaction.
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SUMMARY Both directors, Encik Zayed and Puan Hashimah should have a better understanding about their roles and duties as the company auditor. It was not wrong if the company want to maintain a lean organization but as long as every basic position holds by the qualified employee. From a audit perspective, Encik Zayed and Puan Hashimah should have known that it is compulsory for every registered company to perform a statutory audit every year.