MAF680

INTERGRATED CASE STUDY

CASE: CHICKEN RUN

NAME

: MUHAMAD AMIRUL FIRDAUS

NO.MATRIX :2013581981
CLASS

:AC2208B

REVIEW BY : PROF MADYA DR. MAHERAN ZAKARIA

ACKNOWLEGEMENT

First of all, Alhamdulillah thanks to God because given me and my friends to complete
this task just in time. Even I faced with a lot of difficulties along to complete this task, my group
still manages to complete it. Then thanks to my lecture maf, Prof Madya Dr. Maheran Zakaria for
being such good guider for us whiles us doing this assignment. She had given us appropriate
example and knowledge in order to make us understand more about this task. She spends her
time to makes sure we understand everything she told and explanation before we begin to work
on these assignment. We also want to thank other members which willing to share their
information about this assignment. They give me a lot of new ideas about the task and I us all
their information to complete this assignment. Also a great thanks to my family and friend who
tried their best to give their support for me either by giving me a lot of encouragement for keep
up with this task or by supporting the financial for use to pay all the cost required to complete
this task.
Thank you.

Chicken Run
Introduction
Encik Selamat, a Certified Public Accountant (CPA), had been the General Manager of Excel
Poultry & Meat Sdn Bhd (EPM) since 2005. EPM was established in 1998 to carry on chicken
farming and supplying of whole chicken to various outlets in Malaysia. Now, EPM had more
than 200 employees within the organization and started positioning itself amongst the top 5
chicken suppliers, in the mid-tier producers in country. The company was able to maintain its
operations and started to make profits in the poultry and meat industry since the demand for
chicken buoyant. However, the company had facing problem in 2008. The issues arose includes
the management of trade receivables, in dealing with superiors, subordinates and customers as
well as in handling credit control. The case became worse with a situation faced by general
manager of the company who took opportunities and capitalized on his past connections while
assuming office. The issues also highlighted the leadership style, lack of adequate internal
control system on sales and collection processes, flaws in internal reporting channel as well as
issues on professional ethics and conduct of an accountant. Besides, it was also related to
situation when accountants would be required to act when information might not readily be
available.

1. What were the problems/issues facing the company?

Since 2008, the company has been facing the problem of increased chicken feed cost which has
risen to RM88 from RM54.50 (an increase in almost 61.5%). The increase in feeding cost has
ultimately increased the companys production cost to about 56.5%. The increase of feeding cost
has affected the whole industry. Thus, FLFAM has called for higher chicken prices in order to
protect producers earnings in the face of feed cost hike. However, members of the FLFAM had
seen a drop in demand of the chicken.
Since the event of the feed cost hike, the company discovered that they have systematically low
operating cash. In that event, the company resorted to borrowing short-term loans from the bank

in order to meet operating obligations. This in turn increased its financial obligations in terms of
interest payments.
The aging analysis of the customers of the company had turned out that one of the major
customers Cold Gold Sdn. Bhd. has gone over the companys credit limit, yet marketing
department continued to supply products to the company.
Another problem faced by the company is that the companys General Manager, Encik Selamat
has close relationship with one of the executive directors of Cold Gold Sdn. Bhd., Encik Azman.
This relationship has enabled Cold Gold to extend its credit limit with authorisation from Encik
Selamat and not the Credit Controller (Ms. Choy).
Encik Selamat also has personal interest in the deal with Cold Gold Sdn. Bhd. The deal was if
Encik Selamat extended the credit limit of Cold Gold Sdn. Bhd., he will personally benefit from
the deal. Encik Selamat did not disclose this matter to the Board.
The company also faced a decrease in net profit within 3 years of its operation in year 2006
2008. The decrease of net profit is mainly because of the feeding cost hike and also undiscovered
irregularities in the accounts.
The figures in the balance of the accounts of the company do not tie up to the confirmations
given to their debtors and creditors. This proves that the companys accounts are not in proper
order and there is possibility of misstatements in their accounts.
Another problem discovered during the aging analysis is that in EPMs books, a retailer, Mr.
Sivas account had outstanding balance. This was in contrast with the books of Mr. Siva, where
he claimed to have paid all outstanding balance and the cash payments had been made to Encik
Munir (one of the former personnel in finance department).

2. Who are the stakeholders and what their stakes are?

Customers are one of the important people that help a company grow. Without them, a company
cannot sustain its operations. That is the importance of customers to the company. In turn,
customers also have stakes in the company. Customers rely on the supply of products, in this
case, poultry supply for their daily sales and consumptions. They need reliable supply of poultry
in terms on quality, price and time of delivery of the poultry.
Government is also one of the stakeholders of the company. At this point of time, Malaysian
government is promoting the integrated chicken production in the East Coast Economic Region
(ECER). Therefore, the government relies on the poultry industry to succeed in this project. This
includes EPM as one of the top five chicken suppliers in Malaysia.
The major creditor in this case is the bank. The company has been facing low operating cash
which resulted in the company to resort in borrowing short-term loan from the bank. The stakes
of the bank in the company is to be assured that the company has consistent cash flow to pay for
their monthly commitment of bank loan instalment to the bank.
Another stakeholder of the company is the employees. As employees, they are concerned about
not losing their jobs (i.e. job security). They need to be assured that their time and energy spent
on the company are worth it. Therefore, they need to be assured that the company is doing well
so that they do not have to find another job that has higher job security.

3. How were the affairs of the company managed?

There are several affairs faced EPM. First, the company faced operational crises when the cost of
production rises in 2008 by about 56.6%. Fortunately, Federation of Livestock Farmers
Associations of Malaysia (FLFAM) increase the price of chicken to protect producers income.
However, demand for chicken decreased.
Then, EPM faced another problem relating to the development of the company in late 2008 as
the note of a report indicates that the operating cash was systematically running low. The

company managed to resort to significant increase in short-term borrowing in order to meet its
operating obligation.
The companys Credit Controller, Ms Choy has discovered from the aging analysis of customers
that the credit limit of its major customer, Cold Gold Sdn Bhd had reach its level but still the
marketing department continued to supply chicken to the company. She managed to inform the
matter to Encik Selamat and he went for a meeting with one of the executive directors of Cold
Gold Sdn Bhd to settle it. Puan Azura, the Accounts Executive and Ms Choy also send reminders
to all customers with outstanding balances in respect of their accounts.
However, a few weeks later, Mr Siva, one of the retail customers with a small account came by
the office to complain to Ms Choy about the incorrect figures on the statement of accounts sent
to him. She found out that Encik Munir, a former staff who received the cash payment from Mr
Siva, had not disclosed the receipt of payments from customers. Then she reported the matter to
one of EPM directors.

4. How would you describe the system that existed within the company?
In account receivable system of Excel Poultry &Meat Sdn Bhd, marketing department send a
copy of sales invoice of each sales transaction to the accounting department. The account
receivable division in the accounting department will set credit limit for every customer to make
sure there is cash inflow to the company. Then, accounting department will send timely
reminders to customers with outstanding balances in respect of their accounts. Then the
department will produce aging analysis of customers and the credit controller will report
customers who have reach their credit limit to Encik Selamat. Customers will then pay the
amount payable by them to the finance department. After that, finance department will send a
copy of the payment receipt to the accounting department to update the customers accounts.

5. How would you assess and rate the financial health of the company?

Generally, the financial health of Excel Poultry & Meat Sdn Bhd (EPM) is getting worse year by
year. It was getting worse because the net profit of EPM is decreasing since year 2006. Even the
company had growing in revenue in which cause by the demand in the poultry and meat industry,
the company still cannot gain higher operating profit. It was mainly pertaining to significant
increase in cost of sales. The company had to incurred higher feeding cost because the increasing
in purchase price of a bag of feed. The increasing affect on the companys cost of sales.
The financial position becomes worse as the company continued supply products to their
customers even though their customer credit limit had already exceeded. The customers had
difficulty in paying the debt which leads to long outstanding debts. Therefore, there are
increasing in trade receivables as well as trade creditors. The increasing in trade creditor caused
of low operating cash. So, the company had to resort to significant increase in the short-term
borrowings in order to meet its financial operating obligation.

6. What are the possible salvage plans?

One of the possible salvage plans for the company is managing cash flow system. The company
offers the customers to purchase their products by credit. Before approving the customers to
engage with the company, the company should screening the customer credit and relationship.
This is to avoid personal interest in the companys management team. The company should
prepare a contract that includes the credit term period (e.g. 90 days, 120 days or 180 days) in
collecting the debt. The customer will not have long outstanding which could affect on the
company cash flow. The company can send reminders to customers with outstanding balances in
respect of their accounts. So, the customers can avoid paying higher debts and pay at specific
time.
In order for the company avoid in having risk of customers purchase with credits, the company
probably can look for potential customers that purchase their products by cash. The customers
can be small-medium sized company or small groceries stores. The income of the company can
be increased and higher operating cash flow.

The company can apply for banking facilities in order to meet their financial obligations. The
money they received can be used for improving the cash flow of the company. The company can
purchase additional raw materials in order to supply their products to their customers. Besides,
they can use the money for encouraging their customers in paying the debt. For example, provide
reminders and improve the company debt collection.

7. What would you suggest as appropriate course of actions?

There are several problems faced by EPM. The first problem of EPM is which indicated that the
operating cash of the company was systematically running low. The problem emerged during the
financial year 2008 the economic turmoil. As a result of recession, with high inflation in the
market, the price of a bag of feed increase, hence the increase of cost of production. At the end of
the day, EPM without hesitation, have to increase the price of chicken to maintain their
sustainability. The consumer accepts such increase negatively, the demand of whole chicken
drop. The situation described was the initial part of the problem which later on gets much worst.
With the drop of demand of the chicken, EPM indicated that the operating cash was
systematically running low. EPM later, planning to increase the short-term borrowing in order to
meet its operating obligation. Having to service the high interest rate currently in the market
makes absolutely a bad idea, however they was left with no choice. Everyday the business of
EPM went from bad to worst. The management team tried everything to bring the business on
track. In the process, they discovered that, well from the aging analysis of customers that the
credit limit of Cold Gold Sdn Bhd, one of their major customers had gone into its level and yet
the marketing department continue to supply products to the company. This exacerbated the
existing operating loss faced by the company. I am here suggesting that the appropriate course of
action is to have a proper guideline in selecting customer. The guideline need to clearly reveal
the requirement needed in accepting customers, the financial stability of the customer so to
speak. A good screening of customer such as credit check will definitely benefit the company in
the long run; upon each credit terms of each of the client come due.
As the problem of EPM being analysed deeper, we discover that there is conflict of interest
involved. Encik Selamat was curiously caught single-handedly by EPMs Credit Controller, Ms

Choy. Encik Selamat said to have a deal between him and one of the director in Cold Gold Sdn
Bhd (highly likely to be En Azman). If this was the case, looking at the bigger picture, this
conflict of interest somehow can be one of the factor of the financial fiasco faced by EPM. In
handling this proble, again, EPM need to have a proper guideline or policies and procedures so to
speak in handling conflict of interest. Implementing a policy to ensure the members of EPM to
disclose any conflict of interest in any of their client is to be made compulsory. This is a good
first step in moving EPM in a better direction, a company which does not tolerate with any such
behaviour. My next suggestion in handling this problem in much quicker and more serious, is to
have interference of Board of directors seem appropriate before the situation gets much worst. At
least to have En Selamat being transferred to other subsidiary. The successor however need to be
an experienced person in

poultry industry to turn EPM around. In a bigger picture, the

subordinates of En Selamat will view of the action(transferring En Selamat to other subsidiary)

to be a serious measure shown by the Board of Directors to not tolerate with greediness and
putting self interest beyond the interest of the company.

8. How would an external auditor perform his work in this company?

As an external auditor of this company, they have to fulfil all the duties and rights of an auditor
which are laid down under Section 174 of Companies Act 1965. The normal audit works have to
be performed for the normal financial statements with no issues arise. For example, under
Section 174(2), the auditor shall consider all accounting records are properly kept. However,
there were issues arose in the financial statements of the Excel Poultry & Meat Sdn Bhd. The
auditor must react from these issues that had been arisen. The main issue faced by the company
is regarding its trade receivables. It has been supported by general manager who took
opportunities and capitalized on his past connections while assuming office. Hence, the main
focus here pertaining to the reaction of the auditor reflected by the issues in the financial
statements. As the auditor had discovered this kind of irregularities, he has to report to the board
of directors. But, Encik Selamat who is the general manager of the company and also the key
person involved in this main irregularity has strong connections with board members at the
parent company. Hence, there is a possibility that the board may not adequately deal with the
problem after having brought to their attention. As a result under Section 174(8) which stated

that require auditor to report the matter in writing to the CCM. Thus, this reaction has to be done
by the auditor in performing audit works in this company.

9. If you are appointed as the auditor to handle the audit work of this company, describe an
appropriate audit programme on the Trade Receivables of the company?
In designing the tests of details of balances in trade receivables of the company, the auditor must
satisfy eight accounts receivable balance-related audit objectives which are as follows:
1. Accounts receivable in the aged trial balance agree with related master file amounts, and
2.
3.
4.
5.
6.
7.
8.

the total is correctly added and agrees with the general ledger. (Detail tie-in)
Recorded accounts receivable exist. (Existence)
Existing accounts receivable are included (Completeness)
Accounts receivable are accurate. (Accuracy)
Accounts receivable are properly classified (Classification)
Cutoff for accounts receivable is correct (Cutoff)
Accounts receivable is stated at realisable value. (Realisable value)
The client has rights to accounts receivable (Rights)

After all of these eight objectives have been achieved, external confirmation are given to the
accounts receivable. The primary purpose of accounts receivable confirmation is to satisfy the
existence, accuracy and cutoff objectives.
When sending in confirmations, there are basically two types of confirmations: positive and
negative. Positive confirmation is a confirmation requesting the debtor to confirm directly the
amount stated in the confirmation is correct or incorrect. Negative confirmation is a confirmation
addressed to the debtor but requests only to responds if debtor disagrees with the stated amount.
When there are non-responses in the first confirmation sent, second and third requests of
confirmation are sent. Even with these confirmations, debtors still does not respond to the
confirmation, subsequent test are necessary. For example, subsequent cash receipts, duplicate
sales invoices, and shipping documents.

10. How should a professional member conduct himself/herself in commerce and industry?

A professional member in commerce and industry should always comply with the Companies
Act 1965, Accountants Act 1867, and other regulatory bodies constituting its responsibilities.
MIA By-Law has distinguished the responsibilities between professional member in the public
practice and professional members in business. However, both parts require a professional
member to always act with integrity, objectivity or the good reputation of the profession and as a
result would be incompatible with the fundamental principles.
A professional accountant shall comply with the five main fundamental principles. The first
fundamental principle is integrity. A professional accountant should be straightforward and
honest in all professional and business relationships. A professional accountant should also be
objectivity. He is not allowed to be bias, have conflict of interest or undue influence of others to
override professional or business judgments. A professional accountant must be competence and
due care to maintain professional knowledge and skill at the level required to ensure that a client
or employer receives competent professional services based on current developments in practice,
legislation and techniques and act diligently and in accordance with applicable technical and
professional standards. A professional accountant is also required to act with confidentiality. He
must respect the confidentiality of the information acquired as a result of professional and
business relationships and, therefore, not discloses any such information to third parties without
proper and specific authority, unless there is legal or professional right or duty to disclose, nor
use the information for the personal advantage of the professional accountant or third parties. A
professional accountant must act with professional behaviour that complies with relevant laws
and regulation and should avoid any action that discredits the profession.
As a professional member of public practice and commerce, one should always avoid threats to
the compliance of the fundamental principles. The first threat is self-interest threat. This threat is
the threat that a financial or other interest will inappropriately influence the professional
accountant judgment or behaviour. The second threat is self-review threat. This is the threat that
a professional accountant will not appropriately evaluate the result of a previous judgment made
or service performed by the professional accountant, or by another individual within the
professional accountants firm or employing organization, on which the accountant will rely
when forming a judgment as part of providing a current service. The third threat is advocacy

threat. This threat is the threat that a professional accountant will promote a clients or
employers position to the point that the professional accountants objectivity is compromised.
The fourth threat is familiarity. This is the threat that due to a long or close relationship with a
client or employer, a professional accountant will be too sympathetic to their interests or too
accepting of their work. The final threat is intimidation threat the threat that a professional
accountant will be deterred from acting objectively because of actual or perceived.

11. What are the roles of professional accountants in relation to their compliance to the By-Laws
of the Malaysian Institute of Accountants as in this case?
In this case, all the accountants of EPM are considered professional members in business.
Professional members in business and public practice both must comply with the fundamental
principles in Section 100 in the MIA By-Law. It also stated that all professional members of the
public and business must eliminate or reduce threats to an acceptable level. Encik Selamat is a
Chartered Professional Accountant. According to section 100.8 of the MIA By-Law, he is facing
the self-interest threat because he is accepting personal benefits when he extended the credit of
Cold Gold Sdn. Bhd. Self-interest threat is a threat that a financial or other interest will
inappropriately influence the professional accountant judgment or behaviour. Encik Selamat is
supposedly to safeguard which is to eliminate or reduce this threat.
According to Section 320 of MIA By-Law which regards to the preparation and reporting of
information, a professional accountants shall take reasonable steps to maintain information for
the professional accountant in business is responsible in a manner that firstly describe clearly the
true nature of business transactions, assets or liabilities. Secondly, classifies and records
information in a timely and proper manner. And thirdly, represents the facts accurately and
completely in all material respects. It also stated that threats to compliance with the fundamental
principles, for example in this case intimidation threats to objectivity or professional competence
and due care. Ms Choy is pressured to decide whether or not to raise the case of personal interest
of the Encik Selamat, the General Manager of EPM. The significance of the threats will depend
on factors such as the source of the pressure and the degree which the information is, or may be
misleading. It is the duty of Ms Choy and Pn Azura to reduce the significant threats to an
acceptable level. If still Ms Choy and the other professional accountants cannot eliminate the

threat of intimidation to the GM, they should disassociate themselves from the information that
creates threat. The first way is that they should obtain legal information to report the actions of
En. Selamat for his personal interest with Cold Gold Sdn. Bhd. Another way is to consider
resigning.

12.

List six critical success factors for small & medium size enterprise.
1. People - The right people needed to be employed by the company to ensure the
growth of a company.
2. Price The right price of the product and services is crucial in attracting customers.
The profit margin need not be too high and too low.
3. Place The place the business took place is very important as to make easy for the
customer to come and do business. A place which too remote from the target
customers or too near to other competitors will not be advisable.
4. Product A company must always bear in mind to not sacrifice the quality of their
product in achieving high profit solely. A company which is able to have loyal
customer always a winner.
5. Prize A company may be successful in a short term but to maintain in a long run, to
always reward the employees who worked hard day in day out will always enhance
their working productivity which at the end of the day benefits the company entirely.
6. Marketing A company need to have the right type of marketing (based on their
respective industry) to ensure them to reach their target market and make known of
their quality product and services at large. Failing to do that, a company may find
them a hard way to expand or grow their business further.

CONCLUSION
In conclusion it is recommended for Ms Choy to choose Option 3 which is to disclose the matter
internally to the board of directors. Suggested steps to follow are:

1. Bring the matter with sufficient evidences and justifications together with possible solution to
board of directors
2. Check whether EPM has a written guideline relating to these issues and take proper actions
against these issues (e.g. salary cut, not giving bonus etc.)
3. If no written guideline is established, in case to avoid similar situation in the future, Ms. Choy
should suggest for EPM to;
a. Set up and appoint an independent committees of directors to monitor the performance and
compensation of staffs
b. Establish policies for clear ethical conducts, job scopes and management of EPM especially to
solve ethical and agency problems
c. Establish a whistle-blowing policies to encourage staffs to report any irregularities
d. Communicate and implement guidelines and policies across levels of management, and absorb
them as the EPMs corporate culture to be shared within the organization.