379282855 311860818 ICS Transmile Group Berhad pdf PDF

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Transmile, Deloitte and Touche...

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EPPA4716 INTEGRATED CASE STUDY Semester 2 2015/2016

CASE STUDY: TRANSMILE GROUP BERHAD

PREPARED FOR: DATIN DR. ZAINI BINTI EMBONG

PREPARED BY: TAN BEE KUN

A140209

LAU KAR LING

A139789

WAH JUN YEW

A142341

NUR HALIZA AMIRAH BT HALEMI

A140099

NUR SHABIRAH BT SALIMAN

A136723

KOO YUH JYE

A139477

Content Description 1.0 Introduction 2.0 Board of Directors

Page 2 3-6

3.0 Audit Committee 3.1 Role of Audit Committee 3.2 Issue about the Integrity of Audit Committee 3.3 The issue of Effectiveness and Independence 3.4 Issue of Competency

7-10

4.0 Internal Auditor

11-12

5.0 External Auditor 5.1 Issue on Low Audit Fee 5.2 Issue the Long Term Relationship between Deloitte& Touch and Transmile Group 5.3 Issue of Deloitte Judgement towards Transmile Due to Their Long Relationship 5.4 Issue of late report fraud to BOD within 2 and half months 5.5 Audit Procedure and Practices

13-29

6.0 Research Analysts

30-32

7.0 Conclusion

33

1

1.0

Introduction The case study is about a company, Transmile Group Berhad who encounter

with accounting scandal where it causes the company to face suspension and delisting on Bursa Malaysia Securities Berhad. The overstated of revenue and profits had resulted in negative consequences to both the company and its shareholders due to the issue of corporate governance and business ethics. Transmile Group Berhad is an investment holding company who involved in the provision of air freight, aircraft engineering and maintenance services.The company was founded by Gan Boon Aun in November 1993 and was later listed on the Bursa Malaysia Securities Berhad on 27 June 1997. Operationally, Transmile had maintained regular flights between Peninsular Malaysia and East Malaysia as well as some major cities in the Asia Pacific. With a wide range network of operations, Transmile reported increasing revenues and profits since 1998 until 2006. The strong showing in revenue and profit were tracked by its share price which had risen substantially. However, in 2007, the external auditor of the company, Deloitte &Touche declined to approve the annual accounts for lacking of certain supporting documents. These has caused the company failed to adhere the deadline in submitting its audited annual accounts for the financial year ended 31 December 2006 to Bursa Malaysia for public release. Thus, the company faces suspension and de-listing. The culprits to the accounting scandal may include the audit committee, the board of director, the internal auditor, the external auditor and the research analysts. However, in our opinion, we strongly believe that the external auditor is the main culprits who cause the accounting scandal in the company due to few issues against the regulations and accounting standards caused by the external auditor during their audit works.

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2.0 The Board of Directors (BOD) The Board of Directors is a body of elected or appointed member by shareholder who will be responsible for monitoring the running company on behalf of the shareholder for the benefit of the shareholder. Based on the corporate governance principles, the responsibilities of the board of directors is monitoring managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demand on the corporation.

The Board of Directors must able to exercise objective and independent judgement to effectively complete their responsibilities. The board of directors also responsible to oversee the risk management system and systems designed to ensure that the corporation obeys applicable laws, including tax, competition, labour, environmental, equal opportunity, health and safety laws. The board is not only accountable to the company and its shareholders but also has a duty to act in their best interests.

As stated in the Corporate Governance Principles and also the Transmile Group Berhas’s annual report that the responsibilities of the BOD included overseeing and monitoring of the performance of management and the business of the Group, setting strategic and succession plan, developing and implementing shareholder communication policy, managing risks and putting in place adequate internal control and reporting procedures. The BOD are allowed to delegated some of the responsibilities to several agents but they still need to held fully responsible on the overall monitoring and overseeing the performance of the company.

However, in practice the board of directors of Transmile Group Berhad have left all their responsibilities to the agents where they believe that it would conduct the business with proper corporate governance and keep all directors informed. This was against the principles of the corporate governance and also the policy of the company that stated in the annual report.

It shows that the BOD never fulfill their responsibilities to the company and shareholders. As BOD of a listed company, the BOD have no obey to the Corporate

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Governance Principles where they need to held fully responsible on the overall monitoring and overseeing the performance of the company. The BOD had break the trust of the shareholders and the principles of the corporate governance. The BOD pass all the responsibilities to the agents and just with an assuming that the business with be conducted properly according to the corporate governance. BOD also against the principles of corporate governance where disclosure of information which is not true and fair. As stated in annual report BOD have the fully responsibilities in overseeing the company but in real the BOD did not practice it.

The corporate governance principles stated that, the board members should be able to commit themselves effectively to their responsibilities and the boards should regularly carry out evaluations to appraise their performance and assess whether they possess the right mix of background and competences. Training and evaluation are suggested to make sure for the competency of the boards. However, this two principle are also not being practicing by Transmile.

Refer to corporate governance, the boards should consider setting up specialized committee to support the full board in performing its functions, particularly in respect to audit and depending upon the company’s size and risk profile, also in respect to risk management and remuneration. When committees of the board are established, their mandate, composition and working procedures should be well defined and disclosed bythe board. Besides, in order to fulfill the responsibilities given, the boards should have access to accurate, relevant and timely information. In the case of the Transmile, the boards had formed the Audit Committee to assist them in term of the statutory duties and responsibilities relating to accounting and reporting practice of the company and subsidiaries.

The committee also play a role in serving as a bridge in the communication network between internal and external auditors and the boards. However, the committee had fail to fulfil their responsibilities where they the committee have been informed about the serious accounting issues found in the company’s unaudited 4th quarter of 2006 report on 14th and 15th February of 2007 and they hide this from the boards. The boards only know the issues on 4th May 2007 via a letter from external auditor. This end up that the boards had fail to fulfil their responsibilities in 4

overseeing the performance of the company and the company had breached the Listing Requirement of the Exchange. The reputation of the company also affected as the public was believe that the boards with the assistance of Audit committee will ensure for the quality of reporting. However, it was not as what the public expected.

The boards have the responsibilities to oversee the risk management system to ensure the internal control of the company. The boards of Transmile had passed the responsibilities to the Audit committee to determine the adequacy of the company’s internal control system. Since year 2014, Transmile had outsource the internal control function however the sales and finance division was not under the service of the internal control. It was happened since year 2014, the boards of Transmile had fail to fulfil their responsible in risk management.

The sales and finance division are vital division related to revenue. The boards should have to make sure adequate internal control on the divisions and also the whole company. The fraud was happened since year 2014 where the sales is overstated from year 2014 to years 2016. Inadequate of internal control in sales and finance division should be one of the reason that letting a chance for the fraud to be conduct. The boards fail their responsibilities in risk management in the company and fail to appoint a committee which are competence in carry out the responsibilities given.

In conclusion, the boards of director have the responsibilities on the fraud that occurred. The boards play an important role in overseeing the management and performance of the company. They have to ensure and implement adequate internal control for the company to prevent any fraud. “Prevention is better than cure”, even though the BOD have formed a special audit to investigate the issues found after informed by the external auditor. However, it have been late for them to notice.

We are recommend that the BOD should practice the principles of corporate governance. The boards should carry out their responsibilities at their own instead of pass all the responsibilities to the agents. The boards should have the self-awareness in carry out their duty and be more proactive in communication with the audit committee, internal and external auditors. The boards have to make sure the 5

information reached is relevant and in a right timing. The boards have to make sure the audit committee and auditors being appoint are competence in carry out the responsibilities given. Evaluation of the boards should be implemented too to ensure for the quality of monitoring of the management of the company.

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3.0

Audit Committee

The members of audit committee in Transmile Group Berhadare: 

Mr. Chin KeemFeung, the head of the audit committee



Mr.Shukri bin Sheikh Abdul Tawab, independence non- executive of Transmile Group



Mr.Khiudin bin Mohd@ Bidin, former executive director ofTransmile Group

Under Section 320.5 Companies Act an audit committee is required for all companies listed on the Bursa Malaysia Securities. Under the Bursa Malaysia requirements, the audit committee should comprise at least three directors, and all members must not be executive directors of the company or any related corporation.

Section 94 of the Companies Act determines that the audit committee must consist of at least three members who must be directors of the company and not:  be involved in the day to day management of the company for the past financial year;  be a full-time employee for the company for the past 3 financial years;  be a material supplier or customer of the company such that a reasonable and informed third party would conclude in the circumstances that the integrity, impartiality or objectivity of that director is compromised by that relationship; and  be related to anybody who falls within the above criteria. The audit committee can consist of as many members as the company wishes to appoint (but at least three), but each member must meet the criteria and must be a director of the company. The audit committee may utilise advisors and obtain assistance from other persons inside and outside of the company. The audit committee may also invite knowledgeable persons to attend its meetings. However, the formally appointed members of the audit committee entitled to vote and fulfil the functions of the audit committee will have to meet the criteria (non-executive independent directors) in accordance with the prescribed requirements.

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3.1 Role of Audit Committee Audit committee is a selected number of members of a company’s board of directors whose responsibilities include helping auditors remain independent of management. Audit Committee in Transmile play a lot of roles rather than only carrying their statutory duties and responsibilities relating to accounting and reporting practices of the company and its subsidiaries. Based on the Annual Report in 2005, audit committee also evaluates and monitors the financial process. They also provides assurance that financial information provided by management is relevant, reliable and timely. Besides, audit committee also determine the adequacy of the company’s internal control system.

3.2 Issues about the Integrity of Audit Committee Integrity is one of pre-require in auditing. It is essential that auditor act, and are seen to act, with integrity, it is only need an honesty, it needs a broad range of related qualities such as fairness, candour, courage, intellectual honesty and confidentiality.

Integrity needs an auditor not affected, and not seen to be affected by conflict or interest. Conflict may arise from personal, financial, business, employment and other relationships which the audit engagement team, the audit firm or its partners or staff have with the audited entity and its connected parties.

Integrity is very important since the director and management are rely on auditor information obtained during the auditing since it is confidential. Without integrity, there is danger that director and management will fail to disclose such information to the director and the effectiveness of the audit will thereby be impaired.

In Transmile case, one of the audit committee is the former executive director of the company. This is against the Act of Companies, which will have conflict interest that will affected the independent of the member. The audit committee were alerted several times by external auditor which is Deloitte & Touch about the accounting issue found in the company’s unaudited 4th quarter of 2006 report. Even though the audit committee knowing the external auditor’s concern, they are still 8

ignore the concern and went to seek board of director consideration to release unaudited annual report. What making the situation more worst is, audit committee and top executives did not inform the BOD about the unaudited report. Here, we can see that the audit committee have no integrity, they have failed in perform their fiduciary duties to alert the board.

3.3The issue of Effectiveness and Independence Independence in auditing means taking an unbiased viewpoint in the performance of audit tests, the evaluation of the results and issuance of audit reports. For example if an auditor is an advocate for the client, a banker or anyone else, he or she cannot be considered independent.

They are two type of independence in fact and independence in appearance (Section 290.6, MIA Law). Independence in fact existed when the auditor is actually able to maintain an unbiased attitude throughout the audit, whereas independence in appearance is the result of other’s interpretation of this independence. The value of auditing depends heavily on the public perception of the independence.Theauditors not only must be independence in fact, but they must also be independence in appearance. If auditors are independence in fact but users believe them to be advocates for the client, most of the value of the audit function will be lost.

In this case, public believe with the present of the independence director in audit committee, the quality of monitoring would be increased but what happen is opposite, that is the independence auditor had knowingly permitted the making of misleading statements to Bursa Malaysia which breached the Listing Requirement of the Exchange when the unaudited report on fourth quarter of financial year ended has been released.

3.4 Issue of Competency Competence is closely related to due care in the performance of professional duties. Competence requirement means that a member should have formal education in accounting, adequate practical experience for the work being performed, and continuing professional education. While due care means that member is a 9

professional responsible for fulfilling his or her duties diligently and carefully. Due care includes consideration of the completeness of the working papers, the sufficient of audit evidence, and the appropriateness of the audit report. As a professional, the auditor must avoid negligence and bad faith, but the auditor is not expected to make perfect judgments in every instance. Under MIA law Section 410, the law implies an accountant to observe the professional’s technical and ethical standards, strive continually to improve competence and the quality of service through Continuing Professional Education (CPE) and discharge professional responsibility to the best of his or her ability.

The audit committee have been assign to determine the adequacy of the internal control of the Transmile. Prior to year 2004, audit committee was helping the Internal Audit Department in overseeing the internal control system. Beginning from the middle of year 2004, the internal audit function of Transmile have been outsource. The internal service that been outsource was not cover the sales and finance division and also reviewing of the financial statement. As the audit committee of a listed company, the member should be have the competency in overseeing the internal control. The audit committee should have the ability and knowledge in determine the adequacy of internal control in the company. However, the audit committee had failed to meet the competency. They should know the lack of internal control in the sales and finance division. They have failed the responsibilities being given.

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4.0 Internal Auditor In middle of 2004, Transmile had outsourced its internal audit function to Moores Rowland Risk Management Sdn Bhd, which is an independent professional firm. Prior to 2004, the Audit Committee was assisted by the Internal Audit Department in overseeing the internal control system of the company.

The role internal audit is to provide independent assurance that includes detecting and preventing fraud, testing internal control, and monitoring compliance with company policy and government regulation. Internal auditor reports to the board and senior management who are within the organizations governance structure. A small business might not be able to afford to have an own internal auditor but for Transmile, it came to question why a large capitalized company to outsource its internal audit works to a third party, Moores Rowkland Risk Management Sdn Bhd against norm of having it done internally. Accordance to International Standard for Professional Practice of Internal Auditing (IPPF), engagements must be performed with proficiency and due professional care (IPPF 1200).

From IPPF 1220 – Due Professional Care Internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor. Due professional care does not imply infallibility.

IPPF 1220. A1- Internal auditors must exercise due professional care by considering the:  Extent of work needed to achieve the engagement objectives  Relative complexity, materiality, or significance of matters to which assurance procedures are applied  Adequacy and effectiveness of governance, risk management and control processes  Probability of significant errors, fraud, or noncompliance, and  Cos...