SADE 1013

INTRODUCTION 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
1.0 EXECUTIVE SUMMARY ..................................................................................... 1
2.0 STATEMENT OF THE PROBLEM ....................................................................... 3
3.0 CAUSES OF THE PROBLEM ............................................................................... 5
4.0 DECISION CRITERIA AND ALTERNATIVE SOLUTIONS .............................. 6
5.0 RECOMMENDED SOLUTION, IMPLEMENTATION AND JUSTIFICATION
...................................................................................................................................... 10
5.1 RECOMMENDED SOLUTION ....................................................................... 10
5.2 IMPLEMENTATION ........................................................................................ 11
5.3 JUSTIFICATION .............................................................................................. 12
6.0 BIBLIOGRAPHY .................................................................................................. 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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2.0 STATEMENT OF THE PROBLEM

This case is about the dilemma of an auditor, Mr. Chuah Mun Soong who
found suspicious issues that lead to fraud upon auditing Flat Cargo Berhad (FCB). He
was supposed to report to the audit committee of FCB regarding the audit outcomes.
Mr. Chuah needed to inform to Mr Keong Chee Wah, managing partner of Kencana
& Associate regards to the findings on the inconsistencies of accounts in FCB.
FCB was a listed company that operated primarily as an air cargo carrier. It
has several wholly-owned subsidiaries that provide air freight services and aircraft
group handling services. FCBs major shareholder was Bangor Berhad, owned by
Miri Group. Between 2001 and 2004, the extensive growth in e-business activities has
increased the demand for express transportation services.
In 2005, the share price of FCB has increase to RM10.60 per share, very high
as compared to RM1.89 in 2001. Besides that, its turnover was RM550 million which
is more than 1.5 times than 2004s turnover. Regarding to the rising fuel prices,
FCBs turnover was expected to increase by the next year. However, its high gearing
has caused Rating Agency Malaysia (RAM) to downgrade the companys long term
rating from stable to negative. Besides, FCB also has weak debt servicing ability that
shows weak ability to generate sufficient cash flow in future to pay back the interest
plus principal of the debts.
During the audit process, Mr. Chuah has found several issues with regards to
the inconsistencies of accounts. There was a large sum of transactions occurred with
no supporting documents and improper records of transactions where a loan received
from a Hong Kong based company was incorrectly recorded in the debtors account.
Furthermore, he discovered several abnormal transactions involving the purchase of
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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 stakeholders
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. Audit 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 Directors
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.