CONTENTS

INTRODUCTION 2

1.0 CONTENT : SOLUTION Question 1 3 - 5 Question 2 5 - 6 Question 3 (a&b) 7 - 10 Question 4 11-14

2.0 CONCLUSION 15

3.0 REFERENCES 16

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1.0 INTRODUCTION

The DELIMA case study is about a comoany named Delima Entreprise which was

established in 1981. The company was initiated by a couple of husband and wife which

are Encik Zayed and Puan Hashimah. They are the principal shareholders and the

controlling directors of Delima Entreprise. The nature of the company is conducted

trading and supplying related products including man power supplies to the oil and gas

industries. After several years of commencement, the company had diverged to Delima

Entreprise Sdn Bhd and the company activities had expanded into provision of

engineering services. Their mission is to be the leader in the service contractor and

provide quality products and tremendous services.

In 2006, Encik Zayed engaged the external Auditor which is Auditor Aziz & Co

(Chartered Accountant). It was the first experience for Encik Zayed and Puan Hashimah

as their Financial Statements due to several unresolved issues where they had noted

several fraud and misstatements. They also found some of the inappropriate procedure be

used by the company in generating their business. Their Finance Executive which is a

fresh graduate, Cik Amy had also made some analysis regarding the company’s accounts.

Cik Amy was very concerned with the situation and gave her best to facilitate in doing

the audit completion. She has given a thought that the company need to be improved

accordingly to achieve the company’s mission.

Therefore, in developing and handling Delima Entreprise Sdn Bhd there were several

questions were asked. It will be discussed in the content.

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2.0 CONTENT : SOLUTION OF CASE STUDY (DELIMA SDN BHD)

1. From legal perspective, where there any abuses of power by the management

and breach of fiduciary on the part of the directors?

Yes, there is abuses of power by the management and breach of fiduciary duty of

director. Fiduciary is someone who is in control of property I which others have an

interest, or is give powers which is exercised on behalf of those who are in a position

of dependence. According to section 132(1) of the Companies Act 1965 stated that

the directors must at all time act honestly in the exercise and discharge of the duties

of their office. According to section 132(2) of the Companies Act 1965 stated that

fiduciary duties regarding the use of confidential information. As a fiduciary, a

director’s duties are to act honestly and in a good faith, duty of care, duty of care,

obedience and loyalty, avoid conflict of interest, and duty to exercise their powers for

their proper purpose.

The first type of fiduciary duties is to act honestly and in a good faith. Director

must at all times to act honestly in exercise their duties. They must not take advantage

to the others and must act in a good faith. In this case study, the director Encik Zayed

can be considering breach his fiduciary duties because he tries to negotiate with the

auditors to qualify the Financial Statement and if the auditors refuse to do so, he will

terminate the auditor’s appointment and appoint the “new friendly party” auditor.

From this situation, we can see that Encik Zayed try to not act honestly and good faith

because he tried to get the funds from Malaysian Banking Berhad and CIMB Bank

Berhad.

Second type of fiduciary duties is duty of care, obedience and loyalty. Duty of

care is defined as a director must discharge his duties with that degree of diligence,

care, and skill that typically prudent person would exercise under similar

circumstances in a like position. Duty of obedience requires a director to act in

accordance to business organizational goals and mission and prohibit directors to act

outside the scope of business organizational power. Duty of loyalty is where a

director must act in a good faith, be faithful to the organization and pursue the

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organization best interest. The director must put organizational above their interest

and the interest might be in term of financial or personnel interest. In this case study,

the directors have breach their fiduciary duties as they failed to discharge their duties

with that degree of diligence, care and skill. Encik Zayed and Puan Hashimah were

not familiar with the accounting standard and provision of the Companies Act 1965

including their roles and duties as company directors. Furthermore, both of the

directors have secondary school background. These show that the directors failed to

act their duty with less degree of skill in accounting field. This will cause omission of

assets purchased records and cash and bank balance reconciliation. There was a

situation where the directors beach their duties of loyalty because there is personnel

vehicle expenses totaling RM50150 were charge to the company instead of the

director.

Third type of fiduciary duty is to avoid conflict of interest. this can be defined

that they must not allow a situation to develop their duties to the person whose

benefit they act and their personnel interest are or may be conflict. It is to prevent

directors from making profit from their office. In this case, Puan Hashimah is a

director and at the same time she also responsible for all finance related matter before

Cik Amy is appoint as Finance Executive. This will lead to conflict of interest where

Pn Hashimah might use the company money for their personals expenses where in

this case there is personnel vehicle expenses totaling RM50150 were charge to the

company instead of the director. Thus the director have breach their fiduciary duties.

Lastly, is the duty to exercise their powers for their proper purpose. The

director must not engage into the improper act or purpose that will guide them to

breach their fiduciary duties. In this case, the auditors express their intention to

qualify the Financial Statement of Delima Enterprise Sdn. Bhd. Due to unresolved

issues regarding financials of the company. However, Encik Zayed and Puan

Hashimah tried to negotiate with the auditor not to qualify the Financial. If the auditor

refuses to do so, Encik Zayed planned to terminate the auditor’s appointment and

appoints a “new friendly party”. This shows that Encik Zayed has misuse his power

for improper purpose to get the funds from bank. He wants to show to the bank that

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their company Financial Statement was “clean” from any problems. Thus, Encik

Zayed has breach his fiduciary duty as a director.

2. Who should be held responsible and accountable?

i. Director

There are two directors in Delima Enterprise which are Encik Zayed and

Puan Hashimah. As the key personnel of the company, they must plan

how to solve the issue regarding the outstanding matter issued by the

Auditors. When refer to this case, the company had maintained a very lean

organization and had employed their own family members as employees

and some did not have the necessary job experience. In order to improve

internal control system, one of the way is they must focus on their

employees by commit and invest on necessary training to their employees

to produce better outcome. Moreover, as this company had maintained a

very lean organization, Encik Zayed must hire more experience and

knowledgeable employees to segregate the duties. Encik Zayed and Puan

Hashimah must prepare some comprehensive business plan. Thus, it will

require the two of them to reconstruct their organization business plan

such as prepare standard of operating procedure (SOP) to increase the

effectiveness and efficiency in the operating system.

ii. Account Department

The problem arise when Puan Hashimah who are the director of the

company are also the accountant for account department. She will be

responsible and accounted for as she is the first person that had handled

the account department from the beginning. Here, it can be seen clearly

that they must hire skill employees to fulfill the responsibility as

accountant. Once Puan Hashimah has been appointed as director of the

company, she cannot be assigned as accountant or CEO of the company.

There are many problems regarding accounting department which are

Puan Hashimah do not perform her duties properly that result the losses of

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several pages of the account receivable listing. Puan Hashimah should

make proper filing documentation based on book keeping process in order

for easy reference in the future. Besides that, Puan Hashimah should pre-

number the transaction as in this case, sales’ invoice and purchase orders

(PO) were manually recorded without pre-numbered.

iii. Company Secretary

Company secretaries are responsible for ensuring that a company complies

with standard financial and legal practice and maintains standards of

corporate governance. They must have a thorough understanding of the

laws that affect their areas of work. They act as a point of communication

between the board of directors and company shareholders, reporting in a

timely and accurate manner on company procedures and practices. In

small businesses such as Delima Enterprise, other duties commonly

undertaken by company secretaries may include entering into contractual

agreements with suppliers and customers and managing office space and

property and dealing with personnel administration.

iv. Human Resource and Administration Manager

As in this case, Encik Salam is the Human Resource and Administration

Manager. He is responsible regarding the employee’s issues and

administration department. Other than that, he must prepare the budget to

provide training and seminar for staff. Besides that, he had to re-organize

chart by assign more staffs with qualification and experience.

v. Operation Manager

Puan Balqis as the operation manager is responsible to implement standard

of operating procedure in order to increase the effectiveness and

consistency while performing task. So, the employees can work more

efficiently because they can refer to standard of operating (SOP) to

perform their duties without wasting their time.

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3. a) Could the audit be completed soon without qualification?

Yes, the audit can be completed soon without any qualification but the director must give

full cooperation and work together with the auditor. The director must give true

information and objectively answer all questions to help audit process runs smoothly in a

short time period. They also must ensure all the documents, information, evidence and

complete details of all transaction occurred in the company are provided including the

complete set of accounts. The reconstruction and reconciliation of accounts that have

been wrongly recorded must be done. The director cannot fully rely on the auditor to do it

because it will expand the time needed to complete the audit process. In this case, Puan

Hashimah must assist and help Cik Amy by giving her ideas in dealing with the

unresolved matter regarding the financials matter such as reconcile all the insignificant

matter in accounting record and reconstruct the cash and bank balances. Besides that,

they also need to identify any human error, error in recording and any missing

information in the company transaction. Cik Amy as a new Finance Executive cannot be

fully responsible to do all the reconciliation and reconstruction of account because she is

a fresh graduate with no working experience and still new in accounting field. The

directors need to understand that the audit report can be classified as qualified due to

several unresolved matters and if they do not follow accounting standard, it will leads to

qualified accounting report.

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b) From the financial perspective, discuss and recommend objectively the most

appropriate solution for Delima Enterprise Sdn. Bhd. (DESB) financial

management and operations.

Financial Problem Recommended Solution

Personal expenses were charged to the

company accounts.

The vehicle expenses are considered as

personal expenses and must be recorded under

director accounts not company expenses.

Several withdrawals were made from

the company without proper

documentation. Timesheet were

recorded manually and payments of

salaries are made in weekly basis.

Proper documentation and authorized person

are needed for all the withdrawals incurred in

the company. The person authorize to approve

and sign the cheque must be different people

from the person who in charge with the

preparation of the payment of cheque. The

finance executive need to sign the payment and

follow by the director as a last person to sign

and approve the cheque. The implementations

of punch card system or biometric system are

more effective to trace the actual arrival and

leave time of the workers. For payments of

salaries, the company can use payroll system

and paid on monthly basis as it is more

efficient and easy to record.

No reconciliation of account was

performed.

The Delima Enterprise Sdn. Bhd. should

reconcile all their accounts. Reconciliation or

write off the amount overstated in Cash Books

in the Profit and Loss should be performed to

ensure all missing figure and errors will be

recognized immediately.

No individual project budget, business They must construct the individual project

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plan and analysis were prepared. budget for each new project to avoid the over

outflow of capital. Besides that, business plan

and analysis to manage their business are

needed.

No EPF contribution for contract

workers were deducted and remitted to

EPF.

The company’s Finance Department should

deduct the EPF and make sure the deductions

are following the guidance as stated in

statutory requirements.

Operations Problems Recommended Solutions

Unfamiliar with the provision of

Companies Act 1965 and accounting

standard.

Encik Zayed and Puan Hashimah need to

attend short courses of training for the directors

which provided by Register of Companies to

improve credibility in managing the company

as they are not familiar with the provision of

Companies Act 1965 and accounting standard.

Termination of Auditor. The director should not terminate the auditor

appointment. They should negotiate with the

auditor first and give full commitment to help

the auditor. If the directors really want to

change the auditor, they should wait until the

next Annual General meeting.

No segregation of duties. In this case, Puan Hashimah as a director and

the only one person who responsible for all

matters regarding the operation and financial of

the company. It may lead to the conflict of

interest. In order to avoid this, they should

appoint new staff to prepare the entire task

such as appointing CIk Amy as a Finance

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Executive and Puan Hashimah will act as

Executive Director, which will attend the

meetings and receive information about the

progression of company from the staff.

No training provided for all staff. The company should provide training, seminar

or courses for directors, managers and all staff

for a few hours once in a week can help to

improve the skills and make them work

efficiently.

Records are not organized and filed

accordingly.

All records must be well-organized, filed

accordingly and being review by authorized

person to ensure it is correct and no error or

missing information.

No Standard Operating Procedure

(SOP).

It is important to prepare and implement the

SOP as a guideline. It will help the staff and

workers to understand and follow the

procedure easily.

4. What should be done to improve the leadership and management?

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NEW ORGANISATION STRUCTURE

For this new organization structure, the Executive Directors should be Encik Zayed and

Puan Hashimah instead of Chief Executive Officer and Chief Operating Officer

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respectively. If both of directors hold such position it will cause conflict of interest in

handling the operation of the company. They just monitor the operation of the company

to be more effective and efficient to achieve their mission. Next, there must be at least

one company secretary in the company to carrying out the functions of the Chief

Administrative Officer of the company, supervising the preparations of tax return, being

conversant with meeting procedure, ensuring that the company’s book of accounts are

kept in accordance with the act and that annual accounts and reports are prepared in the

form at the time required by the act. Thus, there must be a new recruitment of the

company secretary in the organization.

The position of Chief Executive Officer will recruit a new person to monitor the manager

either they do their work or not. Moreover, this is to avoid the conflict of interest because

the administrative and operations manager are relatives to Encik Zayed and Puan

Hashimah. Next, the administrative and human resources manager will still be Encik

Salam as he has an experience in this field but there is a new recruitment for clerk under

him because he or she will help him in during clerical jobs. For finance manager there

will be a new recruitment because Cik Amy who is the Finance Executive has no

experience in accounting field in addition she is a fresh graduate. Thus, the percentage for

her to make mistake is higher and this will affect the company financial position.

Lastly, for operations manager will be the same person which is Puan Balqis. She will be

the leader for the new project supervisor, in the operations of the company. This new

project supervisor is the new recruitment and their scope is to supervise the project team

to accomplish a project in a certain time of period. This team is on contract basis based

on the project requirement. This team was very important because the company has

expanded their company into provision of engineering services.

Thus, this new organizational structure is much more flexible rather than the old because

the company will have the segregation duties among each department.

Standard of Operating Procedure (SOP)

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Standard of Operating Procedure is the manual lists that list all the tasks that are essential

for the business success, how to do these tasks, and who is responsible for the tasks.

Problem Solution

Authorization & approval Limitation

Authorization was by manager and

approval by BOD

Limit the amounts that may be

authorized

Should be done by different person

Cheque

All incoming cheque should be

recorded in a logbook (cheque pre-

list) and be recorded by

receptioneries.

The cheque pre-list should be

compared with the bank deposit

slips to ensure all cheque receive

were deposited into the bank.

Payment Voucher

It should be authorized by the

payment authorized signatory.

This can ensure that there will be no

misuse of cheque for personal

advantages.

Accounting records Sales invoice and purchase order

should be pre-numbered for easy

reference in the future.

Prepare account payable, account

receivable, cash and bank

reconciliation.

Used the latest software to record

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the data such as USB for easily

update the system.

Segregation of duties Hire internal auditor to maintain

adequacy of financial reporting.

Time sheet and salary should be

done by Human Resource manager.

The record keeping function should

be carefully divided. For example,

the person who in charge in the

record should not be the same

person to record the payments.

The person who has access to cash

should not handle accounting

records.

Inventory access The company should verify the

quantity and qualify of inventory

orders received immediately upon

delivery. The access to inventory

should be limit and control to

safeguard the inventory on hand.

To ensure the inventory is sufficient,

the company needs to perform a

physical inventory count on a

predetermined frequency and submit

it the treasurer.

For the unsold inventory, the person

returning the inventory should

control personnel where they should

count, document, and sign for the

items returned.

3.0 CONCLUSION

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From the audit findings by the auditor, they have detected several misconducted,

misstatements and unrecorded transactions in the Financial Statement and in the

operations of the company. Delima Entreprise Sdn Bhd needs to be improved a lot in

running the company and in achieving their mission.

The Director of the company should take some training in developing their knowledge

and skills regarding their duties. They also need to learn more about the Accounting

Standards and the provision of Companies Act 1965. Moreover, they need to have regular

supervision and review on the activities and transactions happened in their company.

Furthermore, the company need to construct a new organization structure for their

company as they are some responsibilities that been done by the same person. They need

to have the segregation of duties for the directors and employees of the company. They

also need to implement the Standard Operating Procedure (SOP) for the guidelines for

the employees in the company in doing their work.

4.0 REFERENCES

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Books

a) Companies Act, 1965

b) Rachagan S., Pascoe J., Joshi A., Concise Principles of Company Law in

Malaysia, LexisNexis Malaysia Sdn Bhd

Websites

a) www.freedictionary.com

b) www.sop-stand-operating-procedure.com

c) http://www.asu.edu

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