Flat Cargo Berhad (FCB) is an air freight services and ground handling company. Its company’s operations cover Asian Pacific region including China, Japan, Thailand, Singapore and many more. Their main customers are United Parcel Services (UPS), City Link and Nationwide Express. The main shareholder for FCB is Bangor Sdn Bhd which is part of Miri Group represented by 26.5% of the company interest. Kencana & Associates is the auditor company that audit FCB’s account. The leader of the auditors is Mr Chuah Mun Soong. The auditing team found some irregularities in accounting record of FCB. There are two parties which Mr Chuah has to report, they are his superior, Mr Keong Chee Wah and FCB Audit Committee. However, Mr Chuah concerns that FCB might have a fraud due to the past experience such as Media Com and Blue Vital.
2.0 The Root Cause of the Problems
As per our discussion about this case study, we managed to find out several root cause of the problems.
2.1 Rising of Oil Price
The first root cause is the rising in oil price in the year 2005. In the year 2005, there was an international crisis occurred with the exceptional increase in oil prices. The hike started in mid-2004 at US$40 per barrel but eventually, the increase continued to stages of US$50, US$60, US$65, US$70 and US$80 per barrel. The price hike in fuel surcharges drastically affected the freight 1
forwarding industry significantly because of its reliance on fuel for operations. This rising give huge impact on operation cost of FCB in 2005 which the highest within 2001 to 2005.
2.2 Ineffectiveness of the Management Team
The second root cause is the ineffectiveness of the management team. FCB unable to collect payments from the debtors because they fail to update their debtors’ data. Believing that, some of the debtors had changed their mailing address. Besides that, there was a large sum of sales transactions were found with no supporting documents although most of these transactions only involved small clients. Furthermore, FCB has incorrectly recorded a loan from Hong Kong into the debtors’ account. This incident is evidence that the company is lack of competent account manager. It also contributes to the weak internal control system in FCB.
2.3 Conflict of Interest
The third root cause is the conflict of interest. In this case, Ali Bin Ahmad is the founder of FCB. He holds the position as a Non-Independent Executive Director but at the same time he acts as a Member in the Audit Committee. According to Malaysian Code on Corporate Governance (known as “Code”), the key amendments to the Code are aimed at strengthening the Board of Directors and Audit Committee, and ensuring that they are to discharge their roles and responsibilities effectively. Even though the Code has clearly defined, but he still breaks the regulation.
There are several problems identified by Kencana & Associates when the auditor examines financial report of FCB.
3.1 Accounting Equation is not Balanced
The first problem that we have discovered is the Accounting Equation is not balanced. The percentage of increase of profits was plummeting for the 4 consequence years. In year 2002, the percentage of increase of profit was 44.82%, follow by year 2003, 25.18%; year 2004, 26.14% and finally in the year 2005, the percentage increase for profit is 19.96%. On the other hand, the percentage of increase in the non-current assets indicated a very encouraging performance. From year 2002 to 2005 are 30.46%, 5.16%, 25.71%, and 156.48%. From here, we can see that the percentage increase for profit is decreasing, but the percentage increase for non-current assets is increasing. This does not make any sense, if a company’s profit is decreasing, we are expecting to get a decreasing in the company assets but non-current assets for FCB had a great increment. Especially year 2005, the percentage of increase in non-current assets leap to 156.48%....
References: http://accounting-simplified.com/management/relevant-costing/. Accessed on
January 27, 2015.
http://www.acfe.com/fraud-triangle.aspx. Accessed on January 30 , 2015.
Atlantic Cape Community College. (2008, April 22). Description: Recording
Bad Debt Expense
htm. Accessed on January 27, 2015.
Bursa Malaysia Securities Berhad. (2015, January 27). Main Market Listing
Requirement Chapter 15 :Corporate Governance
pdf. Accessed on January 30, 2015.
January 27, 2015.
Rezaee, Z. (2009). Corporate Governance and Ethics . United States : Joh
Wiley & Sons Inc.
Securities Commision Malaysia. (2012, March). Malaysian Code on
Corporate Governance 2012.
Please join StudyMode to read the full document