Group Audit: FELDA and its subsidiaries

1.0 Executive summary

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2.0 Parties involved and audit engagement

Mainly the parties that involved in this case can be divided into two different parties which
are parent company (FELDA) and subsidiaries company (FIC Global Ltd and FIC London
Hotel Pvt. Ltd). Both company been audited by different firms. For example, FELDA been
audited by Jabatan Audit Negara whereas subsidiaries companies been audited by private audit
firm. FELDA or Federal Land Development Authority was established on July 1, 1956 under
the Land Development Ordinance of 1956 for the development of land and relocation with the
objective of poverty eradication through the cultivation of oil palm and rubber. Later,
government has entrusted FELDA to stand with their own financial and become a statutory
body that can generate their own income to support various development through a variety of
business (felda.net, ND). Besides, FELDA also has launched several numbers of private
corporate entities such as FELDA Capital cooperative, FELDA Global Ventures and FELDA
Investment Corporation primarily to ensure complete value chain of its core activities.
Therefore, FIC Global Ltd and FIC London Hotel Pvt. Ltd are the subsidiaries companies for
the FELDA.

Audit engagement that will involved for this case purposely regard to group audit.
Group audit can be defined as the audit of a group financial report. In a group situation, the
parent entity will have to prepare its own audited financial statements together with audited
group financial statements incorporating the result s of all subsidiary entities (opentuition.com,
ND). There are two different terms that need to be understand in group auditor which are group
and component. Group refers to all the components whose financial information is included in
the group financial statements whereas component refers to an entity or business activity that
is required to be included in the group financial statements (bakertilly.com, ND). Therefore,
group audit can apply whether or not auditors are from different firms, different offices, or
different teams within the same firm, or even if it is the same team performing the audits of the
group and all components. This type of engagement will be governed under International
Standard on Auditing 600. There are several challenges associated with this type of
engagement. For example, group audit needs to use the work of another auditor and problem
such as different accounting policies will arise when a subsidiary is located overseas. Besides,
Jabatan Audit Negara as group auditor for this case needs to solely depend on work done by
the component auditors.

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3.0 What went wrong

` On 24 October 2017, one police report has been lodged by member of Malaysia
parliament YB Rafizi Ramli from opponent’s party. Report was regard to property investment
by Federal Land Development Authority (FELDA) subsidiary companies in United Kingdom.
In that report Rafizi Ramli claimed that one of the subsidiaries company that been listed in
annual report of FELDA did not exist. He makes a comparison between two different
information in annual report and found out that the information that been stated did not
consistent. For example, page 281 of annual report, note 39 (d) (viii) declared that a loan of
$17.5 million was taken and pledged to FELDA shareholding in the FIC London Hotel Pvt.
Ltd (FICLH) which is subsidiary company to FELDA, but in the same annual report, on page
293, note 44(a) that was listed all the subsidiary companies of FELDA without mention any
information regarding FIC London PVT. Ltd (FICLH). Inconsistent of information in annual
report of FELDA is not a fault of group auditor because the information that been consolidated
is purely derived from audit report by component auditor. Therefore, the problem will arise
when there is not enough audit procedure carried out by the group auditor and solely
depend to component auditor.

Besides, YB Rafizi Ramli also found out that two subsidiaries companies of FELDA
which are FIC Global Ltd and FIC London Hotel Pvt. Ltd were registered in British Virgin
Island (BVI). There is issue because in annual report of FELDA stated that the companies been
registered in United Kingdom. According to nerine.com (nd) stated that the advantages of
companies that been registered in British Virgin Island are no requirement for the auditing of
financial accounts and information regarding directors and officers, shareholders, any due
diligence documentation on the directors, shareholders and beneficial owners, minutes of
meetings and resolutions and financial record will be kept private and will not be disclosed
under general course of events. Therefore, component auditor will have a problem in order
to express opinion regarding the financial report of the company that been registered in
British Virgin Island because cannot access the important information of company. On
the other hands, Chairman of FIC said that “we established FIC London Hotel Pte Limited and
registered the company in British Virgin Islands for the purpose of investment and this is the
norm in the foreign investment structure of the UK, to maximise on the tax benefits”.

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4.0 Recommendation
4.1 Group auditor

As been mentioned in the prior topic, Jabatan Audit Negara (JAN) is the group
auditor for FELDA which is a government organization that is established under Land
Development Act. 1956. JAN mission is to conduct professional audits in accordance
with international auditing standard to produce quality audit reports to meet customer
requirements. The question is, is the quality of audit report produce by JAN is
accordance with international auditing standard or merely follow what the customer
(which is FELDA) wants?

Here are the problems that occurred by JAN in the FELDA issues: -

I. Inconsistence of information in annual report

II. Not enough audit procedure carried out by the group auditor
III. Two subsidiaries of Felda registered in BVI

Inconsistence of information in annual report

FIC London Hotel is not listed in the list of subsidiaries companies of FELDA.
Although, FELDA stated in the same annual report that it is backing up a loan of 17.5
million pound incurred by FIC London Hotel (FICLH) with their owned shares in
FICLH and its asset (Grand Plaza Kensington Hotel). This confused the stakeholders
of FELDA and the true owners of FELDA which are the settlers regarding whether
FELDA has owned the Grand Plaza Kensington Hotel or not.

The recommendation to this problem that need to be done by JAN is frequent

discussion among group engagement team members (JAN) and component auditors
(London based auditors) regarding the risks of material misstatement of the group
financial statements, including risks of fraud. As FICLH is based on London which is
outside the boundaries of JAN, the risk of fraud or other material misstatement to
happen is really high. In response to this, JAN should consider knowing external and
internal factors affecting the group that may create an incentive or pressure for group
management, component management, or others to commit fraud, provide the
opportunity for fraud to be perpetrated, or indicate a culture or environment that enables
group management, component management, or others to rationalize committing fraud.

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Not enough audit procedure carried out by group auditor
As FICLH and FIC Global Ltd are based on oversea, JAN seems to depend
heavily on the component auditors to provide information in consolidated financial
statement. FICLH and FIC Global Ltd show financial significant to the group. As a
result, JAN needs to perform an audit to both FICLH and FIC Global Ltd until sufficient
appropriate audit evidence on which to base the group audit opinion can be obtained.
Then the communication with component auditors can be established on a timely basis.
This communication shall set out the work to be performed, the use to be made of that
work, and the form and content of the component auditor’s communication with the
group engagement team.

Two subsidiaries of FELDA registered in BVI

Companies that been registered in British Virgin Island (BVI) will be kept
private and will not be disclosed under general course of events. Both FICLH and FIC
Global Ltd are being setup in BVI. Hence, it increases the difficulty of JAN to perform
audit for FELDA

Component auditors may be required by statute, regulation or for another

reason in this case the JAN , to express an audit opinion on the financial statements of
components which are FICLH and FIC Global Ltd. JAN shall need to request FELDA
management to inform its two subsidiaries (FICLH and FIC Global Ltd) managements
of any matter of which JAN becomes aware that may be significant to the financial
statements of FICLH and FIC Global Ltd especially regarding their ownership status
that their managements may be unaware. If FELDA management refuses to
communicate the matter to its two subsidiaries, JAN shall need to discuss the matter
with those charged with governance of the FELDA. If the matter remains unresolved,
JAN, subject to legal and professional confidentiality considerations, shall consider
whether to advise the component auditors not to issue the auditor’s report on the
financial statements of the components until the matter is resolved

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5.0 Lesson learnt

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6.0 References

http://www.felda.net.my/index.php/en/felda/mengenai-felda

https://opentuition.com/acca/p7/chapter-9-group-audits/

http://www.nerine.com/media/1172/bvi-companies-feb-2011.pdf

http://rafiziramli.com/category/felda/