Chicken Run

MAF680 CASE: CHICKEN RUN GROUP MEMBERS AFIQ IZDIYAD BIN IBRAHIM 2008368767 AHMAD SABRAN JAMIL BIN MOHD AMIN 2008555807 MUHAMAD RUZAINI BIN AB RAHMAN DAYANG CASANDRA ASMALIA BT SAIDI ILI NAZIEERA BT MOHD SOHED 2008383779 2008333715 2008318359 CONTENTS Page Introduction 1. What were the problems/issues facing the company? 2. Who are the stakeholders and what their stakes are? 3. How were the affairs of the company managed? 4. How would you describe the system that existed within the company? 5. How would you assess and rate the financial health of the company? 6. What are the possible salvage plans? 7.
What would you suggest as appropriate course of actions? 8. How would an external auditor perform his work in this company? 9. If you are appointed as the auditor to handle the work of this company, describe an appropriate audit programme on Trade Receivables of the company? 10. How should a professional member conduct himself/herself in commerce and industry? 11. What are the roles of professional accountants in relation to their compliance to the By-Laws of the Malaysian Institute of Accountants as in this case? 12. List 6 critical success factors for small and medium size enterprise. 3 3 4 5 5 6 6 7 8 9 11 11 2 Chicken Run Introduction Encik Selamat, a Certified Public Accountant (CPA), had been the General Manager of Excel Poultry & Meat Sdn Bhd (EPM) since 2005. EPM was established in 1998 to carry on chicken farming and supplying of whole chicken to various outlets in Malaysia. Now, EPM had more than 200 employees within the organization and started positioning itself amongst the top 5 chicken suppliers, in the mid -tier producers in country. The company was able to maintain its operations and started to make profits in the poultry and meat industry since the demand for chicken buoyant.
However, the company had facing problem in 2008. The issues arose includes the management of trade receivables, in dealing with superiors, subordinates and customers as well as in handling credit control. The case became worse with a situation faced by general manager of the company who took opportunities and capitalized on his past connections while assuming office. The issues also highlighted the leadership style, lack of adequate internal control system on sales and collection processes, flaws in internal reporting channel as well as issues on professional ethics and conduct of an accountant.

Besides, it was also related to situation when accountants would be required to act when information might not readily be available. 1. What were the problems/issues facing the company? Since 2008, the company has been facin g the problem of increased chicken feed cost which has risen to RM88 from RM54. 50 (an increase in almost 61. 5%). The increase in feeding cost has ultimately increased the company¶s production cost to about 56. 5%. The increase of feeding cost has affected t he whole industry. Thus, FLFAM has called for higher chicken prices in order to protect producer¶s earnings in the face of feed cost hike.
However, members of the FLFAM had seen a drop in demand of the chicken. Since the event of the feed cost hike, the company discovered that they have systematically low operating cash. In that event, the company resorted to borrowing short -term loans from the bank in order to meet operating obligations. This in turn increased i ts financial obligations in terms of interest payments. The aging analysis of the customers of the company had turned out that one of the major customers ± Cold Gold Sdn. Bhd. has gone over the company¶s credit limit, yet marketing department continued to supply products to the company. Another problem faced by the company is that the company¶s General Manager, Encik Selamat has close relationship with one of the executive directors of Cold Gold Sdn. Bhd. , Encik Azman. This relationship has enabled Cold G old to extend its credit limit with authorisation from Encik Selamat and not the Credit Controller (Ms. Choy). Encik Selamat also has personal interest in the deal with Cold Gold Sdn. Bhd. The deal was if Encik Selamat extended the credit limit of Cold Gol d Sdn. Bhd. , he will personally benefit from the deal. Encik Selamat did not disclose this matter to the Board.
The company also faced a decrease in net profit within 3 years of its operation in year 2006 ± 2008. The decrease of net profit is mainly becaus e of the feeding cost hike and also undiscovered irregularities in the accounts. The figures in the balance of the accounts of the company do not tie up to the confirmations given to their debtors and creditors. This proves that the company¶s accounts are not in proper order and there is possibility of misstatements in their accounts. Another problem disco vered during the aging analysis is that in EPM¶s books, a retailer, Mr. Siva¶s account had outstanding balance.
This was in contrast with the books of Mr . Siva, where he claimed to have paid all outstanding balance and the cash payments had been made to Encik Munir (one of the former personnel in finance department). 2. Who are the stakeholders and what their stakes are? Customers are one of the important people that help a company grow. Without them, a company cannot sustain its operations. That is the importance of customers to the company. In turn, customers also have stakes in the company. Customers rely on the supply of products, in this case, poultry supply for their daily sales and consumptions.
They need reliable supply of poultry in terms on quality, price and time of delivery of the poultry. Government is also one of the stakeholders of the company. At this point of time, Malaysian government is promoting the integrated chicken production in the East Coast Economic Region (ECER). Therefore, the government relies on the poultry industry to succeed in this project. This includes EPM as one of the top five chicken suppliers in Malaysia. The major creditor in this case is the bank. The company has been facing low operating cash which resulted in the company to resort in borrowing short -term loan from the bank.
The stakes of the bank in the company is to be assured that the company has consistent cash flow to pay for their monthly commitment of bank loan instalment to the bank. 4 Another stakeholder of the company is the employees. As employees, they are concerned about not losing their jobs (i. e. job security). They need to be assured that their time and energy spent on the company are worth it. Therefore, they need to be assured that the company is doing well so that they do not have to find another job that has higher job security. 3.
How were the affairs of the company managed? There are several affai rs faced EPM. First, the company faced operational crises when the cost of production rises in 2008 by about 56. 6%. Fortunately, Federation of Livestock Farmers¶ Associations of Malaysia (FLFAM) increase the price of chicken to protect producers¶ income. However, demand for chicken decreased. Then, EPM faced another problem relating to the development of the company in late 2008 as the note of a report indicates that the operating cash was systematically running low.
The company managed to resort to signifi cant increase in short -term borrowing in order to meet its operating obligation. The company¶s Credit Controller, Ms Choy has discovered from the aging analysis of customers that the credit limit of its major customer, Cold Gold Sdn Bhd had reach its leve l but still the marketing department continued to supply chicken to the company. She managed to inform the matter to Encik Selamat and he went for a meeting with one of the executive directors of Cold Gold Sdn Bhd to settle it.
Puan Azura, the Accounts Exe cutive and Ms Choy also send reminders to all customers with outstanding balances in respect of their accounts. However, a few weeks later, Mr Siva, one of the retail customers with a small account came by the office to complain to Ms Choy about the incorr ect figures on the statement of accounts sent to him. She found out that Encik Munir, a former staff who received the cash payment from Mr Siva, had not disclosed the receipt of payments from customers. Then she reported the matter to one of EPM directors. 4. How would you describe the system that existed within the company?
In account receivable system of Excel Poultry &Meat Sdn Bhd, marketing department send a copy of sales invoice of each sales transaction to the accounting department. The account receivable division in the accounting department will set credit limit for every customer to 5 make sure there is cash inflow to the company. Then, accounting department will send timely reminders to customers with outstanding balances in respect of their account s. Then the department will produce aging analysis of customers and the credit controller will report customers who have reach their credit limit to Encik Selamat.
Customers will then pay the amount payable by them to the finance department. After that, fi nance department will send a copy of the payment receipt to the accounting department to update the customers¶ accounts. 5. How would you assess and rate the financial health of the company? Generally, the financial health of Excel Poultry & Meat Sdn Bhd (EPM) is getting worse year by year. It was getting worse because the net profit of EPM is decreasing since year 2006. Even the company had growing in revenue in which cause by the demand in the poultry and meat industry, the company still cannot gain hig her operating profit.
It was mainly pertaining to significant increase in cost of sales. The company had to incurred higher feeding cost because the increasing in purchase price of a bag of feed. The increasing affect on the company¶s cost of sales. The financial position becomes worse as the company continued supply products to their customers even though their customer credit limit had already exceeded. The customers had difficulty in paying the debt which leads to long outstanding debts. Therefore, ther e are increasing in trade receivables as well as trade creditors. The increasing in trade creditor caused of low operating cash.
So, the company had to resort to significant increase in the short-term borrowings in order to meet its financial operating obl igation. 6. What are the possible salvage plans? One of the possible salvage plans for the company is managing cash flow system. The company offers the customers to purchase their products by credit. Before approving the customers to engage with the com pany, the company should screening the customer credit and relationship. This is to avoid personal interest in the company¶s management team. The company should prepare a contract that includes the redit term period (e. g. 90 days, 120 days or 180 days) in collecting the debt. The customer will not have long outstanding which could affect on the company cash flow. The company can send reminders to customers with outstanding balances in respect of their accounts. So, the customers can avoid paying higher debts and pay at specific time. 6 In order for the company avoid in having risk of customers purchase with credits, the company probably can look for potential customers that purchase their products by cash. The customers can be small -medium sized company or s mall groceries stores.
The income of the company can be increased and higher operating cash flow. The company can apply for banking facilities in order to meet their financial obligations. The money they received can be used for improving the cash flow of the company. The company can purchase additional raw materials in order to supply their products to their customers. Besides, they can use the money for encouraging their customers in paying the debt. For example, provide reminders and improve the company debt collection. 7. What would you suggest as appropriate course of actions?
There are several problems faced by EPM. The first problem of EPM is which indicated that the operating cash of the company was systematically running low. The problem emerge d during the financial year 2008 ± the economic turmoil. As a result of recession, with high inflation in the market, the price of a bag of feed increase, hence the increase of cost of production. At the end of the day, EPM without hesitation, have to incr ease the price of chicken to maintain their sustainability. The consumer accepts such increase negatively, the demand of whole chicken drop.
The situation described was the initial part of the problem which later on gets much worst. With the drop of demand of the chicken, EPM indicated that the operating cash was systematically running low. EPM later, planning to increase the short-term borrowing in order to meet its operating obligation. Having to service the high interest rate currently in the market make s absolutely a bad idea, however they was left with no choice. Everyday the business of EPM went from bad to worst. The management team tried everything to bring the business on track.
In the process, they discovered that, well from the aging analysis of c ustomers that the credit limit of Cold Gold Sdn Bhd, one of their major customers had gone into its level and yet the marketing department continue to supply products to the company. This exacerbated the existing operating loss faced by the company. I am here suggesting that the appropriate course of action is to have a proper guideline in selecting customer. The guideline need to clearly reveal the requirement needed in accepting customers, the financial stability of the customer so to speak.
A good screen ing of customer such as credit check will definitely benefit the company in the long run; upon each credit terms of each of the client come due. As the problem of EPM being analysed deeper, we discover that there is conflict of interest involved. Encik Selamat was curiously caught single -handedly by EPM¶s Credit Controller, 7 Ms Choy. Encik Selamat said to have a µdeal¶ between him and one of the director in Cold Gold Sdn Bhd (highly likely to be En Azman). If this was the case, looking at the bigger picture, this conflict of interest somehow can be one of the factor of the financial fiasco faced by EPM.
In handling this proble, again, EPM need to have a proper guideline or policies and procedures so to speak in handling conflict of interest. Implementing a p olicy to ensure the members of EPM to disclose any conflict of interest in any of their client is to be made compulsory. This is a good first step in moving EPM in a better direction, a company which does not tolerate with any such behaviour. My next sugge stion in handling this problem in much quicker and more serious, is to have interference of Board of directors seem appropriate before the situation gets much worst. At least to have En Selamat being transferred to other subsidiary.
The successor however n eed to be an experienced person in poultry industry to turn EPM around. In a bigger picture, the subordinates of En Selamat will view of the action(transferring En Selamat to other subsidiary) to be a serious measure shown by the Board of Directors to not tolerate with greediness and putting self interest beyond the interest of the company. 8. How would an external auditor perform his work in this company? As an external auditor of this company, they have to fulfil all the duties and rights of an auditor which are laid down under Section 174 of Companies Act 1965.
The normal audit works have to be performed for the normal financial statements with no issues arise. For example, under Section 174(2), the auditor shall consider all accounting records are properly kept. However, there were issues arose in the financial statements of the Excel Poultry & Meat Sdn Bhd. The auditor must react from these issues that had been arisen. The main issue faced by the company is rega rding its trade receivables. It has been supported by general manager who took opportunities and capitalized on his past connections while assuming office.
Hence, the main focus here pertaining to the reaction of the auditor reflected by the issues in the financial statements. As the auditor had discovered this kind of irregularities, he has to report to the board of directors. But, Encik Selamat who is the general manager of the company and also the key person involved in this main irregularity has strong connections with board members at the parent company. Hence, there is a possibility that the board may not adequately deal with the problem after having brought to their attention. As a result under Section 174(8) which stated that require auditor to repor t the matter in writing to the CCM.
Thus, this reaction has to be done by the auditor in performing audit works in this company. 8 9. If you are appointed as the auditor to handle the audit work of this company, describe an appropriate audit programme o n the Trade Receivables of the company? In designing the tests of details of balances in trade receivables of the company, the auditor must satisfy eight accounts receivable balance -related audit objectives which are as follows: 1. Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger. Detail tie -in) 2. Recorded accounts receivable exist. (Existence) 3. Existing accounts receivable are included (Completeness) 4. Accounts receivable are accurate. (Accuracy) 5. Accounts receivable are properly classified (Classification) 6. Cutoff for accounts receivable is correct (Cutoff) 7. Accounts receivable is stated at realisable value. (Realisable value) 8. The client has rights to accounts receivable (Rights) After all of these eight objectives have been achieved, external confirmation are given to the accounts receivable.
The primary purpose of accounts receivable confirmation is to satisfy the existence, accuracy and cutoff objectives. When sending in confirmations, there are basically two types of confirmations: positive and negative. Positive confirmation is a confirmation requesting the debtor to confirm directly the amount stated in the confirmation is correct or incorrect. Negative co nfirmation is a confirmation addressed to the debtor but requests only to responds if debtor disagrees with the stated amount.
When there are non -responses in the first confirmation sent, second and third requests of confirmation are sent. Even with these confirmations, debtors still does not respond to the confirmation, subsequent test are necessary. For example, subsequent cash receipts, duplicate sales invoices, and shipping documents. 10. How should a professional member conduct himself/herself in co mmerce and industry? A professional member in commerce and industry should always comply with the Companies Act 1965, Accountants Act 1867, and other regulatory bodies constituting its responsibilities.
MIA By-Law has distinguished the responsibilities be tween professional member in the public practice and professional members in business. However, both parts require a 9 professional member to always act with integrity, objectivity or the good reputation of the profession and as a result would be incompatibl e with the fundamental principles. A professional accountant shall comply with the five main fundamental principles. The first fundamental principle is integrity. A professional accountant should be straightforward and honest in all professional and busi ness relationships.
A professional accountant should also be objectivity. He is not allowed to be bias, have conflict of interest or undue influence of others to override professional or business judgments. A professional accountant must be competence and due care to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards.
A professional accountant is also required to act with confidentiality. He must respect the confidentiality of the information acquired as a result of professional and business relationships and, th erefore, not discloses any such information to third parties without proper and specific authority, unless there is legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties. A professional ccountant must act with professional behaviour that complies with relevant laws and regulation and should avoid any action that discredits the profession. As a professional member of public practice and commerce, one should alway s avoid threats to the compliance of the fundamental principles. The first threat is self -interest threat. This threat is the threat that a financial or other interest will inappropriately influence the professional accountant judgment or behaviour. The se cond threat is self -review threat.
This is the threat that a professional accountant will not appropriately evaluate the result of a previous judgment made or service performed by the professional accountant, or by another individual within the professiona l accountant¶s firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service. The third threat is advocacy threat. This threat is the threat that a professional accountant will promote a client¶s or employer¶s position to the point that the professional accountant¶s objectivity is compromised.
The fourth threat is familiarity. This is the threat that due to a long or close relationship with a client or employer, a professional accountant wil l be too sympathetic to their interests or too accepting of their work. The final threat is intimidation threat ± the threat that a professional accountant will be deterred from acting objectively because of actual or perceived. 10 11. What are the roles of professional accountants in relation to their compliance to the ByLaws of the Malaysian Institute of Accountants as in this case?
In this case, all the accountants of EPM are considered professional members in business. Professional members in business an d public practice both must comply with the fundamental principles in Section 100 in the MIA By -Law. It also stated that all professional members of the public and business must eliminate or reduce threats to an acceptable level. Encik Selamat is a Chartered Professional Accountant . According to section 100. 8 of the MIA By-Law, he is facing the self -interest threat because he is accepting personal benefits when he extended the credit of Cold Gold Sdn. Bhd.
Self -interest threat is a threat that a financial or other interest will inappropriately influence the professional accountant judgment or behaviour. Encik Selamat is supposedly to safeguard ± which is to eliminate or reduce this threat. According to Section 320 of MIA By -Law which regards to the preparation and reporting of information, a professional accountants shall take reasonable steps to maintain information for the professional accountant in business is responsible in a manner that firstly describe clearly the true nature of business t ransactions, assets or liabilities.
Secondly, classifies and records information in a timely and proper manner. And thirdly, represents the facts accurately and completely in all material respects. It also stated that threats to compliance with the fundame ntal principles, for example in this case intimidation threats to objectivity or professional competence and due care. Ms Choy is pressured to decide whether or not to raise the case of personal interest of the Encik Selamat, the General Manager of EPM. Th e significance of the threats will depend on factors such as the source of the pressure and the degree which the information is, or may be misleading.
It is the duty of Ms Choy and Pn Azura to reduce the significant threats to an acceptable level. If still Ms Choy and the other professional accountants cannot eliminate the threat of intimidation to the GM, they should disassociate themselves from the information that creates threat. The first way is that they should obtain legal information to report the ac tions of En. Selamat for his personal interest with Cold Gold Sdn. Bhd. Another way is to consider resigning. 12. List six critical success factors for small & medium size enterprise. 1.
People – The right people needed to be employed by the company to ensur e the growth of a company. 2. Price ± The right price of the product and services is crucial in attracting customers. The profit margin need not be too high and too low. 11 3. Place ± The place the business took place is very important as to make easy for the customer to come and do business. A place which too remote from the target customers or too near to other competitors will not be advisable. 4. Product ± A company must always bear in mind to not sacrifice the quality of their product in achieving high profit sol ely.
A company which is able to have loyal customer always a winner. 5. Prize ± A company may be successful in a short term but to maintain in a long run, to always reward the employees who worked hard day in day out will always enhance their working producti vity which at the end of the day benefits the company entirely. 6. Marketing ± A company need to have the right type of marketing (based on their respective industry) to ensure them to reach their target market and make known of their quality product and services at large. Failing to do that, a company may find them a ha rd way to expand or grow their business further. 12

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