CONTENTS

INTRODUCTION 1.0 CONTENT : SOLUTION Question 1 Question 2 Question 3 (a&b) Question 4 CONCLUSION 2 3-5 5-6 7 - 10 11-14 15 16

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3.0 REFERENCES

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INTRODUCTION

The DELIMA case study is about a comoany named Delima Entreprise which was established in 1981. The company was initiated by a couple of husband and wife which are Encik Zayed and Puan Hashimah. They are the principal shareholders and the controlling directors of Delima Entreprise. The nature of the company is conducted trading and supplying related products including man power supplies to the oil and gas industries. After several years of commencement, the company had diverged to Delima Entreprise Sdn Bhd and the company activities had expanded into provision of engineering services. Their mission is to be the leader in the service contractor and provide quality products and tremendous services. In 2006, Encik Zayed engaged the external Auditor which is Auditor Aziz & Co (Chartered Accountant). It was the first experience for Encik Zayed and Puan Hashimah as their Financial Statements due to several unresolved issues where they had noted several fraud and misstatements. They also found some of the inappropriate procedure be used by the company in generating their business. Their Finance Executive which is a fresh graduate, Cik Amy had also made some analysis regarding the companys accounts. Cik Amy was very concerned with the situation and gave her best to facilitate in doing the audit completion. She has given a thought that the company need to be improved accordingly to achieve the companys mission. Therefore, in developing and handling Delima Entreprise Sdn Bhd there were several questions were asked. It will be discussed in the content.

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CONTENT : SOLUTION OF CASE STUDY (DELIMA SDN BHD) and breach of fiduciary on the part of the directors? Yes, there is abuses of power by the management and breach of fiduciary duty of director. Fiduciary is someone who is in control of property I which others have an interest, or is give powers which is exercised on behalf of those who are in a position of dependence. According to section 132(1) of the Companies Act 1965 stated that the directors must at all time act honestly in the exercise and discharge of the duties of their office. According to section 132(2) of the Companies Act 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, duty of care, obedience and loyalty, avoid conflict of interest, and duty to exercise their powers for their proper purpose. The first type of fiduciary duties is to act honestly and in a good faith . Director must at all times to act honestly in exercise their duties. They must not take advantage to the others and must act in a good faith. In this case study, the director Encik Zayed can be considering breach his fiduciary duties because he tries to negotiate with the auditors to qualify the Financial Statement and if the auditors refuse to do so, he will terminate the auditors appointment and appoint the new friendly party auditor. From this situation, we can see that Encik Zayed try to not act honestly and good faith because he tried to get the funds from Malaysian Banking Berhad and CIMB Bank Berhad. Second type of fiduciary duties is duty of care, obedience and loyalty. Duty of care is defined as a director must discharge his duties with that degree of diligence, care, and skill that typically prudent person would exercise under similar circumstances in a like position. Duty of obedience requires a director to act in accordance to business organizational goals and mission and prohibit directors to act outside the scope of business organizational power. Duty of loyalty is where a director must act in a good faith, be faithful to the organization and pursue the organization best interest. The director must put organizational above their interest 3

1. From legal perspective, where there any abuses of power by the management

and the interest might be in term of financial or personnel interest. In this case study, the directors have breach their fiduciary duties as they failed to discharge their duties with that degree of diligence, care and skill. Encik Zayed and Puan Hashimah were not familiar with the accounting standard and provision of the Companies Act 1965 including their roles and duties as company directors. Furthermore, both of the directors have secondary school background. These show that the directors failed to act their duty with less degree of skill in accounting field. This will cause omission of assets purchased records and cash and bank balance reconciliation. There was a situation where the directors beach their duties of loyalty because there is personnel vehicle expenses totaling RM50150 were charge to the company instead of the director. Third type of fiduciary duty is to avoid conflict of interest. this can be defined that they must not allow a situation to develop their duties to the person whose benefit they act and their personnel interest are or may be conflict. It is to prevent directors from making profit from their office. In this case, Puan Hashimah is a director and at the same time she also responsible for all finance related matter before Cik Amy is appoint as Finance Executive. This will lead to conflict of interest where Pn Hashimah might use the company money for their personals expenses where in this case there is personnel vehicle expenses totaling RM50150 were charge to the company instead of the director. Thus the director have breach their fiduciary duties. Lastly, is the duty to exercise their powers for their proper purpose . The director must not engage into the improper act or purpose that will guide them to breach their fiduciary duties. In this case, the auditors express their intention to qualify the Financial Statement of Delima Enterprise Sdn. Bhd. Due to unresolved issues regarding financials of the company. However, Encik Zayed and Puan Hashimah tried to negotiate with the auditor not to qualify the Financial. If the auditor refuses to do so, Encik Zayed planned to terminate the auditors appointment and appoints a new friendly party. This shows that Encik Zayed has misuse his power for improper purpose to get the funds from bank. He wants to show to the bank that

their company Financial Statement was clean from any problems. Thus, Encik Zayed has breach his fiduciary duty as a director. 2. Who should be held responsible and accountable?

i.

Director There are two directors in Delima Enterprise which are Encik Zayed and Puan Hashimah. As the key personnel of the company, they must plan how to solve the issue regarding the outstanding matter issued by the Auditors. When refer to this case, the company had maintained a very lean organization and had employed their own family members as employees and some did not have the necessary job experience. In order to improve internal control system, one of the way is they must focus on their employees by commit and invest on necessary training to their employees to produce better outcome. Moreover, as this company had maintained a very lean organization, Encik Zayed must hire more experience and knowledgeable employees to segregate the duties. Encik Zayed and Puan Hashimah must prepare some comprehensive business plan. Thus, it will require the two of them to reconstruct their organization business plan such as prepare standard of operating procedure (SOP) to increase the effectiveness and efficiency in the operating system.

ii.

Account Department The problem arise when Puan Hashimah who are the director of the company are also the accountant for account department. She will be responsible and accounted for as she is the first person that had handled the account department from the beginning. Here, it can be seen clearly that they must hire skill employees to fulfill the responsibility as accountant. Once Puan Hashimah has been appointed as director of the 5

company, she cannot be assigned as accountant or CEO of the company. There are many problems regarding accounting department which are Puan Hashimah do not perform her duties properly that result the losses of several pages of the account receivable listing. Puan Hashimah should make proper filing documentation based on book keeping process in order for easy reference in the future. Besides that, Puan Hashimah should prenumber the transaction as in this case, sales invoice and purchase orders (PO) were manually recorded without pre-numbered.

iii.

Company Secretary Company secretaries are responsible for ensuring that a company complies with standard financial and legal practice and maintains standards of corporate governance. They must have a thorough understanding of the laws that affect their areas of work. They act as a point of communication between the board of directors and company shareholders, reporting in a timely and accurate manner on company procedures and practices. In small businesses such as Delima Enterprise, other duties commonly undertaken by company secretaries may include entering into contractual agreements with suppliers and customers and managing office space and property and dealing with personnel administration.

iv.

Human Resource and Administration Manager As in this case, Encik Salam is the Human Resource and Administration Manager. He is responsible regarding the employees issues and administration department. Other than that, he must prepare the budget to provide training and seminar for staff. Besides that, he had to re-organize chart by assign more staffs with qualification and experience.

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Operation Manager Puan Balqis as the operation manager is responsible to implement standard of operating procedure in order to increase the effectiveness and consistency while performing task. So, the employees can work more efficiently because they can refer to standard of operating (SOP) to perform their duties without wasting their time.

3. a) Could the audit be completed soon without qualification? Yes, the audit can be completed soon without any qualification but the director must give full cooperation and work together with the auditor. The director must give true information and objectively answer all questions to help audit process runs smoothly in a short time period. They also must ensure all the documents, information, evidence and complete details of all transaction occurred in the company are provided including the complete set of accounts. The reconstruction and reconciliation of accounts that have been wrongly recorded must be done. The director cannot fully rely on the auditor to do it because it will expand the time needed to complete the audit process. In this case, Puan Hashimah must assist and help Cik Amy by giving her ideas in dealing with the unresolved matter regarding the financials matter such as reconcile all the insignificant matter in accounting record and reconstruct the cash and bank balances. Besides that, they also need to identify any human error, error in recording and any missing information in the company transaction. Cik Amy as a new Finance Executive cannot be fully responsible to do all the reconciliation and reconstruction of account because she is a fresh graduate with no working experience and still new in accounting field. The directors need to understand that the audit report can be classified as qualified due to several unresolved matters and if they do not follow accounting standard, it will leads to qualified accounting report.

b) From the financial perspective, discuss and recommend objectively the most appropriate solution for Delima Enterprise Sdn. Bhd. (DESB) financial management and operations. Financial Problem Personal expenses were charged to the company accounts. Several withdrawals were made from the company without proper documentation. Timesheet were recorded manually and payments of salaries are made in weekly basis. Recommended Solution The vehicle expenses are considered as personal expenses and must be recorded under director accounts not company expenses. Proper documentation and authorized person are needed for all the withdrawals incurred in the company. The person authorize to approve and sign the cheque must be different people from the person who in charge with the preparation of the payment of cheque. The finance executive need to sign the payment and follow by the director as a last person to sign and approve the cheque. The implementations of punch card system or biometric system are more effective to trace the actual arrival and leave time of the workers. For payments of salaries, the company can use payroll system and paid on monthly basis as it is more No reconciliation of account was performed. efficient and easy to record. The Delima Enterprise Sdn. Bhd. should reconcile all their accounts. Reconciliation or write off the amount overstated in Cash Books 8

in the Profit and Loss should be performed to ensure all missing figure and errors will be recognized immediately. No individual project budget, business plan and analysis were prepared. They must construct the individual project budget for each new project to avoid the over outflow of capital. Besides that, business plan and analysis to manage their business are No EPF contribution for contract workers were deducted and remitted to EPF. needed. The companys Finance Department should deduct the EPF and make sure the deductions are following the guidance as stated in statutory requirements.

Operations Problems Unfamiliar with the provision of Companies Act 1965 and accounting standard.

Recommended Solutions Encik Zayed and Puan Hashimah need to attend short courses of training for the directors which provided by Register of Companies to improve credibility in managing the company as they are not familiar with the provision of Companies Act 1965 and accounting standard. The director should not terminate the auditor appointment. They should negotiate with the auditor first and give full commitment to help the auditor. If the directors really want to change the auditor, they should wait until the next Annual General meeting. In this case, Puan Hashimah as a director and the only one person who responsible for all matters regarding the operation and financial of the company. It may lead to the conflict of interest. In order to avoid this, they should 9

Termination of Auditor.

No segregation of duties.

appoint new staff to prepare the entire task such as appointing CIk Amy as a Finance Executive and Puan Hashimah will act as Executive Director, which will attend the meetings and receive information about the No training provided for all staff. progression of company from the staff. The company should provide training, seminar or courses for directors, managers and all staff for a few hours once in a week can help to improve the skills and make them work Records are not organized and filed accordingly. efficiently. All records must be well-organized, filed accordingly and being review by authorized person to ensure it is correct and no error or No Standard Operating Procedure (SOP). missing information. It is important to prepare and implement the SOP as a guideline. It will help the staff and workers to understand and follow the procedure easily.

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4.

What should be done to improve the leadership and management? NEW ORGANISATION STRUCTURE

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For this new organization structure, the Executive Directors should be Encik Zayed and Puan Hashimah instead of Chief Executive Officer and Chief Operating Officer respectively. If both of directors hold such position it will cause conflict of interest in handling the operation of the company. They just monitor the operation of the company to be more effective and efficient to achieve their mission. Next, there must be at least one company secretary in the company to carrying out the functions of the Chief Administrative Officer of the company, supervising the preparations of tax return, being conversant with meeting procedure, ensuring that the companys book of accounts are kept in accordance with the act and that annual accounts and reports are prepared in the form at the time required by the act. Thus, there must be a new recruitment of the company secretary in the organization. The position of Chief Executive Officer will recruit a new person to monitor the manager either they do their work or not. Moreover, this is to avoid the conflict of interest because the administrative and operations manager are relatives to Encik Zayed and Puan Hashimah. Next, the administrative and human resources manager will still be Encik Salam as he has an experience in this field but there is a new recruitment for clerk under him because he or she will help him in during clerical jobs. For finance manager there will be a new recruitment because Cik Amy who is the Finance Executive has no experience in accounting field in addition she is a fresh graduate. Thus, the percentage for her to make mistake is higher and this will affect the company financial position. Lastly, for operations manager will be the same person which is Puan Balqis. She will be the leader for the new project supervisor, in the operations of the company. This new project supervisor is the new recruitment and their scope is to supervise the project team to accomplish a project in a certain time of period. This team is on contract basis based on the project requirement. This team was very important because the company has expanded their company into provision of engineering services. Thus, this new organizational structure is much more flexible rather than the old because the company will have the segregation duties among each department.

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Standard of Operating Procedure (SOP) Standard of Operating Procedure is the manual lists that list all the tasks that are essential for the business success, how to do these tasks, and who is responsible for the tasks. Problem Authorization & approval Solution Limitation Authorization was by manager and approval by BOD Limit the amounts that may be authorized Should be done by different person

Cheque All incoming cheque should be recorded in a logbook (cheque prelist) and be recorded by receptioneries. The cheque pre-list should be compared with the bank deposit slips to ensure all cheque receive were deposited into the bank. Payment Voucher It should be authorized by the payment authorized signatory. This can ensure that there will be no misuse of cheque for personal Accounting records advantages. Sales invoice and purchase order should be pre-numbered for easy reference in the future. Prepare account payable, account receivable, cash and bank reconciliation. 13

Used the latest software to record the data such as USB for easily update the system. Hire internal auditor to maintain adequacy of financial reporting.

Segregation of duties

Time sheet and salary should be done by Human Resource manager. The record keeping function should be carefully divided. For example, the person who in charge in the record should not be the same person to record the payments.

The person who has access to cash should not handle accounting records. The company should verify the quantity and qualify of inventory orders received immediately upon delivery. The access to inventory should be limit and control to safeguard the inventory on hand.

Inventory access

To ensure the inventory is sufficient, the company needs to perform a physical inventory count on a predetermined frequency and submit it the treasurer.

For the unsold inventory, the person returning the inventory should control personnel where they should count, document, and sign for the items returned.

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CONCLUSION 14

From the audit findings by the auditor, they have detected several misconducted, misstatements and unrecorded transactions in the Financial Statement and in the operations of the company. Delima Entreprise Sdn Bhd needs to be improved a lot in running the company and in achieving their mission. The Director of the company should take some training in developing their knowledge and skills regarding their duties. They also need to learn more about the Accounting Standards and the provision of Companies Act 1965. Moreover, they need to have regular supervision and review on the activities and transactions happened in their company. Furthermore, the company need to construct a new organization structure for their company as they are some responsibilities that been done by the same person. They need to have the segregation of duties for the directors and employees of the company. They also need to implement the Standard Operating Procedure (SOP) for the guidelines for the employees in the company in doing their work.

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REFERENCES 15

Books a) Companies Act, 1965 b) Rachagan S., Pascoe J., Joshi A., Concise Principles of Company Law in Malaysia, LexisNexis Malaysia Sdn Bhd Websites a) www.freedictionary.com b) www.sop-stand-operating-procedure.com c) http://www.asu.edu

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