CASE 1 DELIMA ENTERPRISE SDN BHD

Mustapa Kamal Mohd Razali Aini Aman Azbir Abu bakar Yasmiza Long

It was July, 2006 when Encik Zayed engaged the external Auditor Aziz & Co (Chartered Accountant) introduced by his friend to perform the statutory audit for the period of 2003 to 2006. That was the first audit experience for Encik Zayed and Puan Hashimah and it was a difficult learning experience. The Auditors expressed their intention to qualify the Financial Statements due to several unresolved issues. However, Encik Zayed and Puan Hashimah tried to negotiate with the Auditor to not qualify the Financial Statements, failing which Encik Zayed planned to terminate the auditors appointment and appoint a new friendly party auditor. Encik Zayed and Puan Hashimah were not familiar with Accounting Standards and the provisions of the Companies Act 1965, including their roles and duties as Company Directors. The company had maintained a very lean organisation and had employed their owned family members as its employees and some did not have the necessary job experiences. Time was the essence and the Audited Financial Statements had to be issued to the bank at least by September, 2006, as Encik Zayed had applied for banking facilities to implement several contracts the company had managed to secure. Encik Zayed had assigned the tasks to Cik Amy, the Finance Executive who was newly appointed by the company to analyse and provide the Auditors with the necessary clarifications and documentations.

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Company Background

Delima Enterprise was founded in 1981 by Encik Zayed. It had conducted trading and supplying related products including manpower supplies to the oil and gas industries. Subsequently in 2004, due to encouraging business growth the enterprise was incorporated as Delima Enterprise Sdn Bhd. The two principal shareholders and controlling directors were Encik Zayed and Puan Hashimah (husband and wife). The company activities had expanded into provision of engineering services as part of their business diversification and expansion plans. The company corporate mission was to become a leading service contractor and provide quality products and excellent services. Since 2006, the company had been awarded with several engineering projects and its cumulative revenue for 2004 and 2005 were nearly RM1.0 million and RM1.7 million respectively. Appendix A to D presents Delima Enterprise Sdn Bhd Unaudited Financial Statements as at 31 May 2004 to 31 May 2005.

The company had maintained a very lean organisation (refer to Appendix E) with basic functional positions, with Encik Zayed as the Managing Director and his wife Puan Hashimah as the Chief Operating Officer. The other personnel were Puan Balqis, the Operations Manager and Encik Salam, the Administration and Human Resource Manager. Both Puan Balqis and Encik Salam were family members of the Directors. Encik Zayed and Puan Hashimah were self made business owners with only secondary school background and likewise, Puan Balqis and Encik Salam. In May 2006, the company had employed Cik Amy, a young Accounting graduate as Finance Executive responsible for maintenance of the accounting and financial matters, including the preparation of accounts. Prior to Cik Amys appointment, Puan Hashimah was responsible for all finance related matters. Cik Amy graduated from a local university since April 2006 and had no working experiences.

In May 2006, the company had secured a contract worth RM750,000 to be implemented over a duration of six months. Due to shortage of funds, the company had submitted applications to Malayan Banking Berhad and CIMB Bank Berhad for banking facilities totaling RM1 million. The banks required the companys past two years Audited Financial Statements and this was when Encik Zayed realised that the company had not performed the statutory audit. A friend had introduced to Encik Zayed an audit firm and shortly after, Aziz & Co (Chartered Accountant) was engaged to perform the audit. The audit was targeted to be completed at the earliest possible to meet the banks requirement.

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Accounting Systems, Information and Records

All accounting records were maintained using the standard financial software MYOB. The programme was not integrated [the data was not processed and generated automatically between several modules namely Procurement, HR, Accounts Payables (AP), Accounts Receivables (AR) and Cash Book (CB)]. At every end of accounting period, information summary generated by all purchases, accounts receivables and payroll transactions were updated and entered into the general ledger (GL) system.

The Sales invoices were manually produced when orders were received and the job was completed, while the manual sales invoices were not pre-numbered. One copy of the sales invoices was attached to the delivery order for the customer and the other copy was used to update the sales records.

Collections from the customers were received via cheques and cash and not all payments from customers were received in full. Monthly Statement of Accounts was not sent to customers on a monthly basis. Instead, it was done as and when the payment had been long outstanding.

Likewise the purchase orders (PO) were also manually prepared and not pre-numbered. The original PO was issued to the suppliers or services providers and a copy was retained for record and GL system update.

The employees prepared their timesheets when they arrived at work and recorded the time they leave the office, manually. At the end of every week, the employee timesheets were sent to Puan Hashimah for approval and payment of salaries. The company also paid their general workers in cash on a weekly basis and it was therefore, not unusual to withdraw large sums of cash from the local banks when needed.

Audit findings and recommendations

The Auditor had difficulties to complete the audit of the accounts due to incomplete information and records and in addition, a standard operating procedure was not in place. The records were not organised and filed accordingly for easy reference. Several assets purchased by the company were not recorded and there were several over payments made to Trade Creditors. They also found out that several collections from Trade Debtors were long outstanding and several personal withdrawals and

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expenses were charged to the company. On top of that, several unrecorded cash withdrawals and Cash and Bank balances were not reconciled.

The Auditor had noted the following findings: 1. That there was no Standard Operating Procedure (SOP) in place and all decisions were made and authorised by either Encik Zayed or Puan Hashimah. The Auditors recommended that a SOP be prepared and implemented. 2. That no reconciliation was performed for Accounts Payables, Accounts Receivables, Cash Book and Bank balances. Non-reconciled payments and collections noted for the period under review totalled RM150,000 and RM250,000 respectively. The Auditor recommended that the amount be provided in the Profit & Loss Accounts. 3. That several over payments were made to the Trade Creditors totaling RM50,000. The Auditor recommended that the Company advise the respective Trade Creditors and request for Credit Notes. 4. That the Cash and Bank balances in Cash Book were overstated by RM70,000 compared to Bank Statements. The Auditor recommended that the amount be reconciled or written-off to Profit & Loss Accounts. 5. That the balances of the detail Accounts Receivables were understated by RM40,000 compared to the Accounts Receivables General Ledger in total. 6. That no individual project budget and analysis were prepared. 7. That personal vehicle expenses for Encik Zayed and Puan Hashimah totaling RM50,150 were charged to the company. 8. That several withdrawals from the company totaling RM12,500 were made from the company without proper documentation.

Based on the analysis performed by Cik Amy, the following was noted: 1. That the RM150,000 recorded as Accounts Payables was actually Cash Advances made by Encik Zayed to the companies. 2. That the sum RM250,000 from the Accounts Receivables Summary Report was wrongly entered into the General Ledger and no one had reviewed the record. Several pages of the Accounts Receivables listing went missing and thus, the listing of the individual accounts receivable balances was not a continuous list, distorted at several points and the individual Account Receivables balances did not add up to the total of the report. 3. That the overpayment of Trade Creditors totaling RM50,000 was due to human error as a result of lack of control.

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4. That the receipts of RM70,000, which was recorded twice in the General Ledger and RM40,000, were related to Trade Receivables Accounts and the RM30,000 was related to Cash Advanced from Encik Zayed. 5. That EPF contribution for contract workers were not deducted and remitted to EPF. 6. That there were no comprehensive business plan and budget prepared. 7. That Encik Zayed was not willing to commit and invest on necessary training to enhance the knowledge of the employees so that could be more effective and efficient in performing their job.

Cik Amy was very concerned with the situation and had tried her best to facilitate the audit completion. She admired the leadership and the struggle demonstrated by Encik Zayed and Puan Hashimah, but she thought that was not enough. Were there any abuses of power by the management and breach of fiduciary on the part of the directors? Who should be held responsible and accountable? Could the Audit be completed soon without any qualification? What should be done to improve the leadership and management of Delima Enterprise Sdn Bhd?

Note: This case presents the actual family-business dilemma and identities are changed to protect family privacy. The authors opinions do not necessarily reflect the views of the Malaysian Institute of Accountant and this case was written for academic purpose only and the author disclaim any legal responsibilities.

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Appendix A Delima Enterprise Sdn Bhd Unaudited Trial Balance as at 31 May 2004 to 31 May 2005 2005 RM DR Fixed Assets Trade receivables Other debtors, deposits & prepayments Cash & bank balances Auditors fee Secretarial fee Depreciation Directors emoluments Salaries Rental of office Office expenses Motor vehicle expenses Bank charges Trade payables Cost of Sales Sales Other payables, Accruals & provisions Provision for Depreciation (FA) Share capital Retained Profit/(Loss) Current year Profit/(Loss) Control Total 113,187 143,165 2,895,812 2,895,812 1,326,410 1,700,525 66,223 37,487 500,000 113,187 1,964,979 1,964,979 133,818 817,192 28,617 358,825 8,000 1,500 22,750 49,925 67,025 35,925 15,000 25,000 5,825 847,929 627,935 897,050 70,735 14,737 500,000 CR DR 98,244 520,632 181,906 267,147 1,500 14,737 42,188 45,000 21,833 10,000 15,000 5,670 482,457 2004 RM CR

DESCRIPTION

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Appendix B Delima Enterprise Sdn Bhd Unaudited Balance Sheets as at 31 May 2004 to 31 May 2005 ASSETS EMPLOYED FIXED ASSETS CURRENT ASSETS Trade receivables Other debtors, deposits and prepayments Cash and bank balances LESS: CURRENT LIABILITIES Trade payables Other payables, accruals & provisions NET CURRENT ASSETS/(NET CURRENT LIABILITIES) FINANCED BY SHARE CAPITAL ACCUMULATED PROFIT/(LOSS) CARRIED FORWARD 500,000 256,352 500,000 113,187 2005 RM 96,331 2004 RM 83,507

817,192 398,156 358,825 1,574,173 847,929 66,223 914,152 660,021 756,352

520,632 295,093 267,147 969,685 482,457 70,735 553,192 416,493 613,187

756,352

613,187

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Appendix C Delima Enterprise Sdn Bhd Unaudited Profit & Loss Statements for the period from 31 May 2004 to 31 May 2005 2005 RM 1,700,525 143,165 2004 RM 897,050 113,187

TURNOVER PROFIT/ (LOSS) FOR THE YEAR After charging/(crediting): Auditors fee Secretarial fee Depreciation Directors emoluments Salaries Office rental Office expenses Bank charges

8,000 1,500 22,750 46,925 67,025 35,925 15,000 5,825

1,500 14,737 42,188 45,000 21,833 10,000 5,670

ACCUMULATED PROFIT/(LOSSES)

256,352

113,187

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Appendix D Delima Enterprise Sdn Bhd Unaudited Cash Flow Statements for the period from 31 May 2004 to 31 May 2005 2005 RM SOURCE OF FUNDS Profit for the year Adjustment for items not involving the movement of funds: Depreciation OTHER SOURCE OF FUND Proceeds from disposal of fixed assets APPLICATION OF FUND Purchase of fixed assets Increase in paid-up capital 143,165 2004 RM 113,187

22,750

14,737

165,915 (35,574) 130,341

127,924 (98,244) 500,000 529,680

REPRESENTED BY: INCREASED/(DECREASED) IN WORKING CAPITAL Receivables Payables Movement in net liquid funds: Cash and bank balances

399,623 (360,960) 38,663 91,678 130,341

815,725 (553,192) 262,533 267,147 529,680

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Appendix E Delima Enterprise Sdn Bhd Organisational Chart as in 31 May 2005

Encik Zayed Chief Executive Officer

Puan Hashimah Chief Operating Officer

Encik Salam HR & Admin Manager

Puan Balqis Operations Manager

Cik Amy Finance Executive

Vacant Project Supervisor

Clerical Assistant

Project Team (On contract basis base on project requirements)

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