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    SADE 1013INTRODUCTION TO ENTREPRENEURSHIP

    INDIVIDUAL ASSIGNMENT

    RINGKASAN JURNAL SYARIAH :PRINSIP-PRINSIP KUALITI KE ARAH

    MELAHIRKAN USAHAWAN MUSLIM YANG

    BERJAYA

    PREPARED BY:NUR ALIA ATIQAH BINTI MOHD YASIN (214516)

    LECTURER:

    ARMANURAH BINTI MOHAMAD

    GROUP D

    DATE SUBMIT: 9 OCTOBER 2014

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    TABLE OF CONTENTS

    1.0EXECUTIVE SUMMARY ..................................................................................... 1

    2.0STATEMENT OF THE PROBLEM ....................................................................... 3

    3.0CAUSES OF THE PROBLEM ............................................................................... 5

    4.0DECISION CRITERIA AND ALTERNATIVE SOLUTIONS .............................. 6

    5.0RECOMMENDED SOLUTION, IMPLEMENTATION AND JUSTIFICATION

    ...................................................................................................................................... 10

    5.1RECOMMENDED SOLUTION ....................................................................... 10

    5.2IMPLEMENTATION ........................................................................................ 11

    5.3JUSTIFICATION .............................................................................................. 12

    6.0BIBLIOGRAPHY .................................................................................................. 14

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    1.0 EXECUTIVE SUMMARY

    Flat Cargo Berhad (FCB) was established in 1997 as the mean of providing air

    freight services to the Intra-Asia air market. FCBs services were not only limited to

    air freight and aircraft ground handling but also included aircraft charter and leasing.

    FCB was chaired by Dato Ibrahim Samad, a former Director General for the Ministry

    of Transportation and former President of Malaysian Chamber of Commerce. He was

    the companys Independent Non-Executive Director (INED).

    The top management team consisted of Mr Lim Loon Sim as the Chief

    Executive Officer, Mr Ali Bin Ahmad as the Executive Director and Mr Kim Boon

    Chok as the Chief Financial Officer. Mr Ali Bin Ahmad also held the position of

    FCBs Audit Committee Chairman besides being a member of Employees Share

    Option Scheme Committee.

    In terms of financial growth, FCB showed a tremendous increase from year

    2001 to 2005. It attained 1 times of increase in revenue amounting RM 550 million

    in 2005 compared to 2004 and was projected to increase further by 54% to RM 809

    million in the following year. The increase in share price per unit was also significant

    from RM 1.89 in 2001 to RM 10.60 in 2005. The amount of dividend paid for four

    consecutive years were at a steady rate of 3% per annum.

    However, we can see from the financial statements that FCB had low debt

    coverage ability and high gearing ratio over the years. One way to identify this

    situation is by performing debt ratio computation.

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    Here, we found that the debt ratio for year 2004 and 2005 were 0.3 and 0.54

    respectively. The number increased by 44% in 2005 compared to its previous year.

    This indicated that FCB depended highly on debts to run operations and would

    probably have difficulties in paying back the debts as half of its assets were used to

    cover its debts over the years.

    There are many puzzling issues that could occur in the process of auditing a

    listed company. These issues could be created either intentionally or the other way

    around. Therefore, an objective analysis is needed to clear the puzzles especially if the

    auditors wish to curb fraud cases among their clients.

    In the case of Flat Cargo Berhad (FCB), the auditor has found some

    inconsistencies in the accounts of FCB. Thus, a case study is conducted to bring the

    hidden mystery to the light as possible. Based on the study, a report was written to

    summarize the situation. The aspects that were given highlights in the report included

    the issues contributing to those inconsistencies and the possible reasons that have led

    to this situation.

    Based on the identified problematic issues, several possible solutions have

    been suggested to overcome the said problems. Finally, an objective conclusion is

    made to make a stand about the given case study. This is important as it could

    facilitate the auditor to make an appropriate decision for the said case.

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    aircrafts by offsetting the debtors accounts and also a non-functional rundown

    aircraft worth RM231 million in a hangar.

    Flat Cargo Berhad also had violate the corporate governance Malaysian

    Code. They had incompliance with the Malaysia Code of corporate governance

    regarding to company audit committee member. Mr Ali bin Ahmad who is non-

    independent executive director, which according to Malaysian code of corporate

    governance all audit committee member must be non-executive director.

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    3.0 CAUSES OF THE PROBLEM

    The first main causes was because of pressure ( Financial Aspect) : analyst

    expectation on increasing the revenue and steady payment of dividend despite of

    decreasing profit margin bussiness in higly competitive market. Increasing in oil

    proce that significantly affect FCB to smooth its earning using any means even

    though illegal.

    Next, Opportunity ( Weak internal control ) : If FCB have good corporate

    governance, it may lead to difficult in perform misconduct ad high risk detection

    hence a strong internal control. In FCB, they had a weak of corporate governance as

    the their audit committee member is a non-independent executive director which

    violate the Malaysian code of corporate governance. It had affected independent of

    audit committee perform to oversee internal control. FCB boards, independent and

    non-independent is not balance as specified by code, thus the objective to maintain

    independence might have not achieved.

    Rationalization which is the mind set of fraudster in justifying themselves

    was the last factor contributes to the problem happened in FCB. Individual that

    involve in cooking the book in FCB might had justified themselves, so as to maintain

    the company reputation and meeting the analyst as well as other st akeholders

    expectation. Concluded that, fraud triangle model might had been existed but not

    realized. Lead to late detection on the possibility of fraud conducted in FCB.

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    4.0 DECISION CRITERIA AND ALTERNATIVE SOLUTIONS

    For Flat Cargo Berhad (FCB):

    FCB should improve the its corporate governance :

    1. Audi t committee

    FCB should improve the effectiveness of audit committee. The company

    should have followed the Malaysian Code on Corporate Governance. Based on the

    case, the Code was revised in 2007. As revised, the Code requires that audit

    committee must comprise at least three members which a majority of whom are

    independent. Ali Bin Ahmad is not suitable taking the position in the audit committee

    since he is a Non-Independent Executive Director of the company.

    2. Board of D ir ectors

    FCB should restructure the board composition by increasing more independent

    directors. Based on the Code, in order to maintain independence, the board should

    include a balance of executive directors and non-executive directors including

    independent non-executive. Based on the Appendix D in the case, FCB consists of

    three executive directors and six non-executive directors which is unbalance. This will

    affect the directors independent.

    Deal with international crisis

    1. Cost efficiency

    FCB could try to reduce the supplier cost in order to manage the crisis.

    Besides, FCB could also reduce employee headcount through attrition.

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    For Kencana & Associates

    The objective for the decision criteria used is to find the alternative solution

    for both Flat Cargo Berhad and their external auditor which is Kencana & Associates.

    For Kencana & Associates we have used the Fraud Triangle Model as the decision

    criteria to find for an alternative solution. The fraud triangle, which has the three

    elements of pressure, opportunity and rationalization, analyze the situation in FCB.

    The first element in the Fraud Triangle Model is pressure where this element

    becomes the motivation for individuals and companies to commit fraud. The pressure

    that can be identified in FCBs situation is related to the financial aspect of the

    company. The analysts expectation on increment of revenue and the steady payment

    of dividend despite of the low profit margin business in highly competitive market

    and the increase in oil prices that significantly affect the business might had become

    FCBs motivation to smooth its earnings using any means even though it might be

    illegal.

    The second element in the model is opportunity which is commonly

    associated with weak internal control of a company. Internal control of a company is

    closely related to the companys corporate governance as good corporate governance

    may lead to the difficulty to perform any misconduct and high risk detection hence a

    strong internal control.

    The corporate governance in FCB that might be lacking was a member of

    FCBs Audit Committee, Ali Bin Ahmad is non-independent executive director which

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    violated the Code of Corporate Governance applied during that time where all the

    members supposedly consists only non-executive directors.

    This violation hence might be affecting the independence of the Audit

    Committee whose function is to oversee the internal control of the company. In

    addition, whilst there was a good composition between executive and non-executive

    directors in FCBs board, the composition between independent and non -independent

    directors seems to be not in balance as specified by the Code thus the objective to

    maintain independence might have not been achieved.

    The third element of the model is rationalization which can be defined

    as the mindset of fraudsters in justifying themselves. The individuals that involved in

    cooking the books in FCB might had justified themselves so as to maintain the

    companys reputation and meeting the analysts as well as other stakeholders

    expectation.

    In summary, the three elements of the Fraud Triangle Model might had

    been existed but not been realized thus led to the late detection on the possibility of

    fraud committed in FCB. From the criteria and issues arise, Kencana as the external

    auditors of Flat Cargo Berhad can be considered responsible for not detecting the

    misstatement only but not responsible for causing the fraud.

    The main reason for this justification is because during the audit process, the

    auditors have found some suspicious transactions related to sales where one of them is

    a large sum of sales transactions were found with no supporting documents.

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    So, this group of sales transactions can be the main contributor for inflating

    the FCBs annual earnings. Auditors should give a serious justification on any

    misstatement or suspicious activities.

    Besides that, this finding somehow can be a good evidence to show that

    misstatement has been detected then justify the possibility of fraud to be happened in

    FCB. So, auditors should report this misstatement in their auditors report after

    finishing their audit process. Action need to be taken as soon as possible. However,

    Kencana and Associates cannot be the one that solely blamed for this issue because

    the main parties responsible for leading the misstatements and fraud are the Board of

    Directors and Management of FCB who in the first place should ensure good internal

    control is implemented in the FCB which at least can reduce the risk of fraud.

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    5.0 RECOMMENDED SOLUTION, IMPLEMENTATION AND

    JUSTIFICATION

    5.1 RECOMMENDED SOLUTION

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    5.2 IMPLEMENTATION

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    5.3 JUSTIFICATION

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    BIBLIOGRAPHY

    1. Frecon, A. (1986). Practical Considerations in Drafting F.O.B. Terms in. Berkeley

    Journal of International Law.

    2. Hensley, S. (2008, March 24). The Wall Street Journal. Retrieved September 22,2014, from The Wall Street Journal:

    http://blogs.wsj.com/health/2008/03/24/truckload-of-sec-problems-for-biovail/

    3. L. Tuner, Jerry., J. Mock, Theodore., P. Srivastava, Rajendra, (2003).Analysis of

    Fraud Triangle.

    4. Michael Keenan, (2008), The auditors dilemma : to disclaim or not disclaim, The

    University of Auckland.