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In 1981, Delima Enterprise was founded by Encik Zayed in conducted trading and supplying related product including manpower supplies to oil and gas industries. In 2004, Delima Enterprise incorporated as Delima Enterprise Sdn Bhd. It has two principal shareholders and controlling director who is Encik Zayed and Puan Hashimah. Both of them are husband and wife. In 2006, the company submitted application to get a loan since the company gets several contract. The director of Delima Enterprise Sdn Bhd tries to get a loan from MAYBANK and CIMB BANK. However, both bank required company’s Audited Financial Statements for the last two years.
This case is about an enterprise founded by family members and later was incorporated as Sdn Bhd. The shareholders are mainly the directors of husband and wife who involved in the management of the company. It was July, 2006 when Encik Zayed engaged the external auditor Aziz & Co(Chartered Accountant) introduced by his friend to perform the statutory audit for the period of 2003 to 2006. That was the first audit experience for Encik Zayed and Puan Hashimah and it was a difficult learning experience. The Auditors expressed their intention to qualify the Financial Statements due to several unresolved issues. However, Encik Zayed and Puan Hashimah tried 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.
Encik Zayed and Puan Hashimah were not familiar with Accounting Standards and the provisions of the Companies Act 1965, including their roles and duties as Company Directors. The company had maintained a very lean organization and had employed their owned family members as its employees and some did not have the necessary job experiences. Time was the essence and the Audited Financial Statements had to be issued to the bank at least by September, 2006, as Encik Zayed had applied for banking facilities to implement several contracts the company had managed to secure. Encik Zayed had assigned the tasks to Cik Amy, the Finance Executive who was newly appointed by the company to analyze and provide the Auditors with the necessary clarifications and documentations.
QUESTION AND ANSWER
Were there any abuses of power by the management and breach of fiduciary on the part of the directors? Yes, there is abused of power and breach of fiduciary duty. 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.
In this case, 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.
Who should be held responsible and accountable? Person who needs to be responsible and accountable includes the directors, top management and employees of Delima Enterprise Sdn Bhd. 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) until 166A(5) 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. 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. Could the Audit be completed soon without any qualification? 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. 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.
What should be done to improve the leadership and management of Delima Enterprise Sdn Bhd? There is several issues arises in Delima Enterprise Sdn Bhd. Below is the issues arise and recommendation that could be implemented to solved this issue.
INTERNAL CONTROL ISSUES
There was no Standard Operating Procedure (SOP) in place and all decisions were made and authorized by either En Zayed or Pn Hashimah. Some withdrawals of company’s money were made without proper documentation. The recruitment of new employees was also made without proper procedures. Apart from that, 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. There was also no Audit Committee set up in the company.
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. Provide training
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. Cik Amy should be send for further training to enhanced her understanding in relation to her job description and competency to perform her job. For instance, Cik Amy also needs a few supervisors to supervise her work. Implement Standard Operating Procedure (SOP)
When implemented SOP, it can increase efficiency and consistency in performing task. Besides that, it can indicate the entity requirement and can be used to train others. In DESB, when SOP is used, the progress of the work can be done smoothly and the entire employee must follow all the regulations stated especially in performing task. The new recruited staff also must adhere with the entire standard to avoid any lacking of work.
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. 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.
Change to other accounting software
DESB can change to other software such as User Business System (UBS). UBS can maintain financial records with efficiency because it very easy to handle and understand. Furthermore, it is deemed essential for a person to know about accounts in general to keep account in DESB business. However, MYOB software is a little slow speed when you have a lot of data to enter.
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.
Corporate Governance Issues
One 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. 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.
All types of incorporated companies enhance corporate governance. The directors of DESB 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. Create new organizational chart
The company should create a new organizational chart according to function. All the positions and function should be clarified clearly. DESB need to authorize the job for every staff liked who are responsible to approving purchase requisitions or purchase orders, approving time sheets, approving charge orders. In future, DESB should emphasize on the authorization in any transaction. This will prevent misappropriation of cash or assets.
No budget planning
There is no individual project and analysis budget. Moreover, En.Zayed as director had applied for banking facilities to implement several contracts the company had managed to secure.
DESB management should prepare budget planning, plan on any cost that is likely to be incurred. This enables 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.
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. The first one is character which refers to the borrower’s integrity and willingness to repay the financial obligation. Next, 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. Besides that, collateral refers to any property owned by the borrower that can be pledged for security. Conditions refer to the event that may occur during the period of the loan that could have the impact such as the interest rate.
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.
Finance manager should prepare worksheet to verify the performance of finance department staff independently. Supervisor must be hired to evaluate the time in and time out. They must not prepare their own timesheet anymore. Apart from that, DESB also can install the thumb-print machine since this machine is automatically record the attendance of employee. Every month, the supervisor must print the attendance record to be given to Puan Hashimah as a salary reference.
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. Apart from that, the recruitment of new staff must be done in effective way like an interview. It very important since it will affect the company performance in the future. If the employee shows good reputation and performance, Delima Enterprise Sdn Bhd will be the best accounting firm as well. The current accounting standard and regulation must be followed well by the management of Delima Enterprise Sdn Bhd in order to avoid any confusion in any matter arise later.