INTRODUCTION

Delima Enterprise Sdn. Bhd., formed in 1981 is a family owned 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 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 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

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 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 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. 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 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 Financial Institutions. As in the case study, Delima 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 :

Ensuring all relevant documents made available

Schedule of every balance sheet items

Details for items in income statement

Maintenance of proper accounting records

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

Payment vouchers are pre-numerically numbered, properly checked & authorised by respective

personnel in-charge and attached together with supporting documents

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

month

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

basis

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Proper books such as sales, purchases, debtors, creditors, journal and bank book should be

maintained and updated promptly.

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

financial position of the company.

Generally, all transactions should 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 ;

Sec 174(2), auditor is required to:

- Express opinion in 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 ;

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

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

Not prepare monthly reconciliation

Use company’s money for personal use

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

Unqualified staff (lack of knowledge and experience)

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.

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 when decisions in the company were 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 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 performing 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.

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 mappings for these accounts. Normally

these changes should be made by IT personnel after approval.

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 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 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 distinct departments to show the

organisation by departmental functions. The unclear 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 Enterprise Sdn. Bhd.:

The Proposed Organisation Chart

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Encik Zayed & Puan HashimahExecutive Director

Chief Operating Officer (New position)

Finance Manager (New position)

Puan BalqisOperation manager

Encik SalamHR & Admin manager

Project supervisor(New position)

Clerical Assistant(New position)

Clerical Assistant(New position)

Cik AmyFinance Executive

Clerical Assistant

12.Unaware of director’s duties

Encik Zayed and Puan Hashimah, which are both the directors of Delima Enterprise Sdn. Bhd 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 training by the company’s top management to further enhanced her

understanding in relation to her job description and competency to perform 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 actual 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

• Direct materials

• Direct labour

• Direct wages &

salaries

Actual Cost Budgeted Cost

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

As a solution, the company should spend more on training to equip employee with proper knowledge

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Apart from that, they should hire qualified staffs that have experience.

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 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) were not appointed through a proper 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 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.

Bhd. , the bank should assess Delima Enterprise Sdn. Bhd. based on these 5 criterias :

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 to appoint a friendlier party 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. The Directors and all the managements should be held responsible. Every

individual should play their role in keeping the well being of 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.

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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-borrower-creditworthiness/

#.UkwYkYZTrkA. [Last Accessed 2 October 2013].

• Joseph Benoit (2009). How to create a simple budget. [ONLINE] Available at:

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

• Fishers Hypnosis (2012). Standard Operating Procedure. [ONLINE] Available at:

http://www.fishershypnosis.com/free-standard-operating-procedure-template.html. [Last

Accessed 3 October 2013].

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