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Flat Cargo Berhad:

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by

Mei Chien Yap

on 7 October 2014

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Transcript of Flat Cargo Berhad:

Statement of the Problem
Decision Criteria & Alternative Solution
Causes of the Problem
Headline 2
Headline 3
Headline 4
Issue 1: Accounting Fraud
$1.25
BKAF 3063 Integrated Case Study
Vol XCIII, No. 311
Executive Summary
Headline 1
Recommended Solution, Implementation & Justification
Headline 5
This case attempts to bring out the whole accounting fraud issue at Flat Cargo Berhad (FCB) from an auditor’s perspective.
It creates an atmosphere of suspense and tension by portraying the dilemma of an auditor when he found out that there may be a fraud in FCB, his client, during a routine financial audit.
In fact, this company engaged in shady business practices and relied on manipulation of accounting numbers to inflate the revenue figure in order to paint a prosperous picture of financial conditions. The auditor was only able to reveal the dark secrets after years.
This case provides a penetrating view of the accounting fraud at FCB and other related issues that aggravated the whole chaos.
Flat Cargo Berhad:
An Auditor's Conundrum

Prepared by:

Tan Lih Chen 213655
Yap Mei Chien 213665
Tan Yong Zuan 213867
Muhammad Fadhil Bin Ismail 214100
The main issues can be found from the case of Flat Cargo Berhad (FCB) are as follows:-

1. Accounting Fraud
2. Problematic audit committee
3. Incompetence of auditors
Issue 2: Problematic Audit Committee
Issue 3: Incompetence of Auditors
Opportunity
Pressure
Rationalization
To sustain as industry leader in Malaysia air cargo carrier and maintain reputation of FCB under the international crisis of increase in oil prices.

Weak internal control, under poor structured Audit committee which affected independence.




Justifying to achieve earning expectation and maintain as reputable company

Ahmad Bin Ali
Non-Independent Executive Director
# Lack of professional scepticism and convinced that reputable company will less likely to commit fraudulent act.

Internal + External Auditors
# Suspicious audit objective and process that unable to unveil revenue inflated since 2004.

# Negligence and should be liable on the material misstatement that was not discovered.

Issue 1: Accounting Fraud
Objective : To prevent fraud
Alternative 1:

To create a culture of honesty, openness and assistance

Alternative 2:
Eliminate opportunities for fraud to occur
Alternative 3:
To conduct proactive fraud auditing
Issue 2 : Problematic Audit Committee
Alternative 1:
To restructure the audit committee
Alternative 2:
To regularly assess the effectiveness and contributions of the audit committee

Alternative 3:
Audit committee prepares systematic documentation and report progress regularly to the board

Issue 3: Incompetence of Auditors
Objective: To move toward effective auditing

Alternative 1:
To conduct annual assessment and periodic comprehensive review on external auditor

Alternative 2:
To strengthen internal audit

Objective: To build and maintain an effective audit committee

Recommended Solution:
Creation of a culture of honesty and high ethics
Alternative Solution:
Eliminating opportunities for fraud to occur
Recommended Solution:
Restructure Audit Committee
Alternative Solution:
Regularly assess the effectiveness and contribution of the audit committee
Recommended Solution:
Conduct annual assessment and periodic comprehensive review to ensure the effectiveness of external auditor
Alternative Solution:
Full collaboration between the internal and external auditors
Issue 1:
Accounting Fraud
1. Top management models appropriate behavior - Tone at the top
*
Executive leaders play an important role in communicating ethical standards - use rewards and punishments to reinforce appropriate conduct
*
Transformational leadership
James MacGregor Burns:
'' Transformational leaders encourage followers to embrace moral values and to act in the interest of the collective rather than self-interest ''
Bass’ Transformational Leadership Theory:
One of the four components of transformational leadership-
idealized influence
, which states that the transformational leader serve as a role model for follower
2. Hire the right kind of employees
*
KPMG research among the American working population:
21% witnessed a colleague overclaiming expenses ; 18% saw a co-worker stealing property belonging to the organization ; 15% aware of unauthorized business gifts being accepted within the organization
*
Proactive hiring procedures - background check on prospective employees, a thorough check of candidates’ references, online test for candidates’ level of honesty and training new employees about FCB’s code of conduct
*
Hire Industrial and Organizational psychologist - participate in parts of the hiring process to help review candidates and identify potential issues that may not be obvious on the surface.
1. Implement whistle-blowing channel
Most fraud is discovered by tip or by accident
Should assure confidentiality and ensure no retribution towards the whistle-blower
Sarbanes-Oxley Act of 2002 not only mandate publicly traded corporations establish procedures for employees to file internal whistleblower complaints, it also protects any retaliation against whistle-blower
2. Establish proactive fraud measures
Segregation of duties
Eg, The person who requisitions the purchase of goods or services should not be the person who approves the purchase
Physical safeguards
Eg, Locked storerooms and password protected accounting records
Independent checks
Eg , job rotation and mandatory vacations
Issue 2: Problematic Audit Committee
Audit committee should consist of only non-executive directors
Consider enlarging its audit committee to more than three members - 5 wholly owned subsidiaries
FCB should aim to achieve a mix of expertise and qualifications relevant to the nature of the entity, its size and the Audit Committee’s responsibilities
At least one member of the Audit Committee must be a member of the Malaysian Institute of Accountants (MIA), or if he is not a member of the MIA, must have at least three (3) years working experience and either have passed the examinations specified in Part I of the First Schedule of the Accountants Act, 1967, or a member of one of the associations of accountants specified in Part II of the First Schedule of the Accountants Act, 1967 or fulfils such other requirements as prescribed or approved by Bursa Malaysia Securities Berhad.
Assess the competency and performance of the Audit Committee against the expectations of the different stakeholders and the company’s position, financially and otherwise.
Can be done in whichever manner the audit committee members are comfortable be
Feedback should be provided and corrective actions such as developmental suggestions and peer remediation should be taken if necessary
Issue 3: Incompetence of Auditors
Audit committee should assess external auditors continuously and be prepared to evaluate and oversee both the external audit plan and the external auditor
Audit approach taken by the external auditor should be modified year by year as appropriate.
Several questions that should be considered when assessing the external auditor’s plan
Recognize the barriers that might lead to a miscommunication as this will have a direct impact on the success of the audit
Distortion or omission of information
Wrongful perception of external auditors towards the internal auditors
It is worth pointing out that we cannot put all blame on the auditor for not detecting the fraud earlier as the corruption of FCB was a result of the collapse of internal control, corporate governance and individual responsibility altogether.
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