Air Cargo Industry is a highly competitive with low profit margin industry operated by 85 operators within Malaysia and the Asia Pacific region. Flat Cargo Berhad (FCB) was one of them with several subsidiaries related to this industry. FCB was recognized as one of the biggest air freight companies in Malaysia. With the flourishing of e-business and secured agreements with well-established companies (i.e UPS, Nationwide Expressway, Citylink, Nippon Express etc), the boom of Flat Cargo Berhad was obvious. Even it was expected, FCB would have likely remained as the nation’s leading air cargo carrier if the scandal has not appeared. Things have started to get out of shape for FCB when the external auditor Kencana & Associates came across several suspicious findings that may suggest fraud. So we as consultant/advisor have noted down the problem and came up with the possible solutions in order to handle such suspicious circumstances.
Problem 1
The auditors were unable to verify the aircrafts claimed to have been purchased by FCB in 2005. The audit team found a non-functional rundown aircraft barely worth RM231 million in the hangar. FCB claimed to have purchase aircrafts in 2005, but there were no documentation found to support the claims of FCB that the purchasing ever took place which implied that fraud might have took place.
As shown on the fleet information above, (Appendix B) there were two Boeing 727 and five Mcdonnell Douglas MD-11F (which later was no longer used for freight purposes) purchased by FCB in 2005 that were in “Active” status, but when inspected by the audit team, found Mior, Asif, Stephanie, Rohanna only a rundown non-functional aircraft in the hangar which suggested inconsistency in the claim made by FCB.
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Solution 1
The audit department could take some measures to verify the claim made by FCB regarding the purchase of the aircrafts by:
1) Referring to the aircraft manufacturers regarding receipts, purchasing documents, invoices , contracts
2) Checking any related internal documents about the aircraft activities like schedules and activities of aircrafts i.e. engineering department for maintenance of aircraft.
3) Verify with the staffs of the company i.e. pilots, engineers regarding the aircrafts claimed to be purchased
4) Checking on leasing companies if there were any business activities from FCB (which would suggest obvious fraud since FCB claimed to have purchase the aircrafts)
5) Verify the registration and licensing of the aircraft at the Department of Civil Aviation Malaysia (DCAM)
And if this aircraft was actually purchased as claimed, the management should encourage these solutions to avoid future confusions 1) Update bookkeeping regularly (transactions on purchases, sales, receipts and payments by an individual or organisation)
Problem 2
Several debtors’ confirmation letters were returned because the addressees had changed their mailing addresses
Due to this issue it will have a major impact on accounts receivable thus to cash flow. However this will lead to further problem as follows 1) No exact debtor figure available for reference
2) Possibility of bad debt
3) Weak debt servicing ability by company
Mior, Asif, Stephanie, Rohanna
Solution 2
Some measures could be taken by auditor to solve this issue by 1) Investigate the identity of the debtor or organization from reliable sources (Suruhanjaya Syarikat Malaysia (SSM) for organisations, Jabatan Perdaftaran Negara (JPN) for individuals)
2) Find supporting documents of debt to rule out chances of fraud The management team could take these measures to avoid this problem by 1) Create an efficient system for debt servicing 2) Create a system of verifying the claim of debtors to make sure fraud does not take place
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3) Create a database for debtors and keep an updated portfolio on them for future use and reference
4) Create a department in the organization that deals solely with debt servicing (provided that they have a lot of debtors)
Problem 3
A large sum of sales transactions was found with no supporting documents. Most of these transactions involved small clients. This problem will mostly affect the revenue. In addition, it could lead to:
1) poor book-keeping process
2) manipulation on the revenue figure (RM 550 million)
3) manipulation of the shareholders interest in terms of dividend declared
4) balancing the closing process for the year of 2005 manually
5) complication on debt collection therefore the possibility of bad debt in future
Solution 3
As far as we are concerned, the auditor can request the engineering department to provide the document on clients who are using their courier services and counter-check it with the Custom Department to verify the figure. We assume every activity must be reported to the Mior, Asif, Stephanie, Rohanna. DCAM. Therefore, from the backward process, the auditor would be able to verify the turnover figure.
Problem 4
A loan received from a Hong Kong based company was found to be incorrectly recorded in the debtors’ account
This issue will have the major influence on liabilities. It has violated the matching principle. The following problems can be determined due to these mistakes.
1) The impact on liabilities of the FCB will be decreased whereas assets increase due to the error on double entry process
2) The financial cost (interest expense) will decrease resulting increase of profit before tax
Solution 4
Counter-check and verify the Loan agreement between the FCB and Hong Kong based company. After verifying, the auditors will correct the double entry according to accounting standard by MASB.
Problem 5
Several abnormal transactions involving the purchase of aircrafts by FCB and offsetting the debtors’ accounts were found in FCB’s books Following abnormal transaction is strictly against the process of accounting system. It violates many principle of accounting system i.e. principle of non-compensation, principles of sincerity and principles of consistency*. Abnormal transactions could lead to multiplier faults in the financial statement like
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1) Overstated/Understated assets
Usage of cash or credit was not determined properly
Cutting down the overall debtor amount
2) Fail to determine bad debt
3) Fail to determine the true figure of debtors
Solution 5
Actions that could be taken by auditors
1) Reconciliation of book keeping related to purchases of abnormal transactions
2) Cross proof each and every documents related to purchases and debtor
3) If possible ensure debtors confirmation letter
Actions that could be taken by management
1) Not to mix up purchases with debtors
2) Debtors can be offset upon receiving money or against bad debt
Conclusion
In conclusion, these issues above could be avoided provided that delegation and segregation of duties were made to ensure accountability in bookkeeping and minimisation to fraud. The company could also hire an internal auditor to regularly inspect the financial condition and activities of the company. Accountability and counter-checking between one another is also crucial to minimize mistakes and deceit. It is such a shame that a company with such great Mior, Asif, Stephanie, Rohanna potential (to be the leading cargo company in Malaysia) should suffer a fate such as this due to trivial avoidable mistakes and fraud. It is best that PLCs to work towards transparency within the company so that mistakes/problems could be detected and solved before it gets out of hand.
References
Ready Ratios. Generally Accepted Accounting Principles (GAAP), Available:http://www.readyratios.com/reference/accounting/generally_accepted_accounting_ principles_gaap.html.
Last accessed 4th Feb 2014
