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Flat Cargo Berhad (FCB) is an air cargo company that was listed in Bursa Malaysia since 15
September 2001 and it was one of the largest airfreight companies in Malaysia. However, in
this case, the auditor from Kencana & Associates which is Mr. Chuah Mun Soong has
discovered several suspicious and questionable results which is indirectly lead to a delay in
finalizing the auditors report. Hence, the main problem faced by Mr. Chuah is he was
believed there might be a high possibility that FCB is involving in fraud. So, the problem in
FCB should be identified and the solution also should be implemented. This can give
immediate effect in order to avoid devastating FCB reputation as well as allowing FCB
remained as the nations leading air cargo carrier. The problem that rose in the case is about
the accounting fraud, weak in the corporate governance and incompetence of auditors. The
accounting fraud was being spotted based on the fraudulent of company transactions. For the
weak corporate governance, Board of Director FCB does not have a balance of executive
directors and non-executive directors as mentioned in MCCG.
For the recommended plan of action, we have suggested that FCB need to strengthen
their internal controls. They need to strengthen their internal control by establishing
segregation of duties policies. This is important to avoid fraud from occur. Other than that,
FCB need to strengthen their internal audit committee. This is because they are the one of the
components of internal control. The internal audit committee is the one that can help the
company to give a fair view on the figure in financial statement.
2) Termination of Lim
In the case of SAP for ATLAM, Lim was having conflict on opinion with Zulkifli when
discussing the matter of SAP system in ATLAM. Lim was disagreed to implement the SAP
system in ATLAM because he know there is extreme factors will faced such as low of fund,
lack of expertise, and short of facilities. He relies on his experience in ATLAM then suggests
that need to use ACCPAC system rather than SAP system.
These contribute to the conflict when Zulkifli was very unsatisfied with Lims behaviour and
intended to kick him out of the project team. Kamal advise him that the critical ideas of Lim
is good for organization since he was very experienced in such related industry. He, advised
Zulkifli to reconsider on the termination of Lim.
This resistance to change issue refers to developing a new accounting system with the
PETRA group-wide SAP system. Zulkifli as Finance Manger concern that whether ATLAMs
employee would be ready to embrace the new system. We found that there are several reasons
the ATLAM is resistance to change at that time. Most reasons are their lack of information
about SAP system and also lack of knowledge about this system. This is, creating the
misunderstanding between Lim and Zulkifli. Lim understanding is SAP system is only
suitable for manufacturing industry and this system was costly compared to ACCPAC.
In other hands, ATLAM is resistance to change because they are facing the lack of resource to
implement SAP system which are need a lots of funds, equipments, spaces, and intelligence
resources. The project team members were complaint they are not enough Personal
Computers in the departments to make this practical to them. Then they do not even have the
space available to house the system, some of the employee in ATLAM have never used a
Personal Computer before and lack of the knowledge about information technology.
Furthermore, employees are also fear of loss power when change the system in ATLAM
operation. For information, ATLAM is a PETRA subsidiary and has to link its system to
PETRAs to match with their group reporting structure. Due to this reason, ATLAMs
employees are fear of loss of the power to control the system operating and their old job also
will be separately divided to each others. They are worried that may change their role and
responsibilities.
The second cause is the chairman had failed to play his role in assessing the
effectiveness of board especially the audit committees. Since the board of the company is not
effectiveness, it also had led to some other problem such as problem in practicing MCCG in
their company. The composition of the board of director was in not adherence to the MCCG.
It had breach the MCCG by having non-independence director more than independence
director and by having an executive director as audit committee. Ali Bin Ahmad is not able to
be part of Audit Committee because he is non-independence executive directors. In MCCG
stated that all the members in Audit Committee should be non-executive director.
The last cause of the problem is about the external auditors which lack professional
scepticism and convinced that reputable company will less likely to commit fraudulent.
Kencana & Associates served as Flat Cargo Berhads auditor in current year and few years
ago. The fraud is not starting with occur on the year 2006. It had already occur in few years
ago but undetectable. The fraud that undetectable by the external auditor had given the
opportunities to the fraudsters to continue exploits the companys resources. The auditors are
negligent in doing audit process and fail in detect material misstatement. So, the auditor can
be sued for negligence if they breach a duty of care towards a third party who consequently
suffers some form of loss (Finley, 2015). It showed that the auditors are not competent in
their work or they want to maintain their audit firms reputation by issuing unqualified report.
the process of addressing any fraud within the company. However, open-door policy also has
disadvantages such as can disrupt and delay the work flow system and supervisors also
cannot practice their problem solving skills. This method is not costly but it will give bad
implication to the efficiency of work flow in future.
Secondly, FCB can strengthen their internal control. One of the things that can be
made by FCB to strengthen their internal control is by establishing segregation of duty
policies. Segregation of duties has two purposes. Firstly, it ensures that there is oversight and
review to catch errors and secondly, it helps to prevent fraud or theft because it requires two
people to make a fraud or to hide a transaction. In segregation of duties policies, there are 3
duties that have to be separated or have to be conduct by different employee which is duty of
having custody of assets, duty of being able to authorize the use of assets and duty of
recordkeeping of assets. This method is costly because company has to hire more workers but
it will give good implication in the long term.
MCCG also requires at least 3 members of audit committee, a majority of whom are
independent and all members of the committee should be non-executive director. Based on
the case, one of the members audit committee is non-independent executive director which is
Ali bin Ahmad, so FCB have to replace him with another independent non-executive director
from qualified individuals that can give full commitment to the committee.
In MCCG 2012, the board need to comprise a majority of independent directors so
that the board member can enhance their independency. To fulfil the MCCG 2012, the board
of directors will need to resign some of the non-independence director and appointing some
new independence director.
Secondly, the board need to regularly access the effectiveness and contributions of
audit committee. The audit committee should maintain the communication with the
companys chief financial officer (CFO) and external auditors. They have the authority to
investigate any suspicious accounting practices or transaction. Board need to ensure that audit
committees carry out their work properly as if they playing their role such as oversight of
financial reporting and monitoring the accounting policies, the possibility of fraud risk can be
mitigate.
3. Problem of incompetence of auditors
To solve the problem of incompetence of auditors, Audit Committees have to conduct
annual assessment and periodic comprehensive review on external auditor. This can enhance
the quality of audit works because auditor will be more proactive in doing their job if they
know that the company is evaluating their performance. By doing this annual assessment,
audit committee can identify potential areas where the external audit firm can improve,
identify potential areas where your audit committee can improve oversight and reach a final
conclusion on whether the auditor should be reappointed or the audit should be put out for
tender.
Besides, FCB also have to strengthen their internal audit because external auditors are
relied on internal audit works. So to get a better quality of audit work, internal auditors and
external auditors have to give full cooperation to each other to produce competence auditors.
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References
Albrecht W. S., Albrecht C. O., Albrecht C. C., and Zimbelman M. F. (2014) Fraud
Examination. United states of America
Cendrowski, H., & Martin, J. (2015). The Fraud Triangle. Harry/Handbook The Handbook of
Fraud Deterrence, 41-46. doi:10.1002/9781119202165.ch5
Chartered Institute of Internal Auditors 2015. Retrieved October 6, 2016, from What is
internal audit?: https://www.iia.org.uk/about-us/what-is-internal-audit/
Corporate Governance | Securities Commission Malaysia. Retrieved October 5, 2016, from
https://www.sc.com.my/general-section/corporate-governance/
Finley, S. (2015, August 18). ACCA. Retrieved October 2016, 6, from Auditor liability: fair
and
reasonable
punishment?:
http://www.accaglobal.com/za/en/student/exam-
support-resources/professional-exams-study-resources/p7/technical-articles/auditorliability.html
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