1. Introduction

Chicken run

This case is about small and medium sized enterprise (SME), Excel Poultry & Meat Sdn Bhd (EPM). Since 2005, EPM is a subsidiary of PCK Holding. Encik Selamat, a Certified Public Accountant (CPA), had been the General Manager of this company that located in Kluang, Johor. This case shows that EPM face management, production, financial and internal control problems. Besides that, this case also shown the conflict of General Manager with the main debtors of the company. Since 2008, this company faces bad financial performances because of lack of internal control. Other than that, this case also shows the external factors for the production process that cause "chicken run" crisis.

Excel Poultry & Meat Sdn Bhd (EPM) was establish in 1998 as Small and medium sized enterprise (SME). EPM was started their business with an initial capital of RM 3.6 million and starting with twenty (20) employees. Their Core business is chicken farming and supplying to various outlets in Malaysia such as hypermarkets, restaurants, hospitals, hotels as well as university colleges. Currently EPM had more than two hundreds (200) employees within the organization and started positioning itself amongst the top five (5) chicken suppliers, in the mid-tier producers in the country. SMEs is the most important for Malaysian economic growth, so for that purpose we need make sure our SMEs had the excellent management in their financial and internal control.e would Bbe

2. Organizational chart

[pic]

3. Issues arise in the case of

Chicken run:

3.1 increasing financial obligation

The first issues in this mini case study, chicken run is whether the financial of the EPM is in a good condition or healthy? In late 2008, the operating cash of EPM was systematically running low. When this problem happen, the company had to resort to significant increase in the short-term borrowing in order to meet its operating obligations. This may lead increase its financial obligations in terms of interest payments. According to the performance analysis of the company for the past three (3) years, starting from 2006 until 2008, showed the declining trend in its profit which is getting worse. From 2006 to 2007, the cost of sales and expenses had increase RM2.4 million and RM0.3 million as well as from 2007 to 2008, the cost of sale had increase RM19.99 million and RM0.5 million respectively. EPM facing this problem when Federation of Live-stock Farmers' Associations of Malaysia (FLFAM) issued a statement depicting a stark contrast in local poultry production costs between 2006 and 2008. The chicken feed price has increase from RM54.50 to RM88.00 between 2006 and 2008, an increase of almost 61.5%. Increasing in price of chicken feed has lead to increasing in chicken price from RM3.22 per kilogram on 2006 to RM5.04 on 2008, the estimated production cost had risen about 56.5%. However, FLFAM complained that they had seen a drop in demand when the sellers of chickens in Malaysian markets did increase the retail price.

The solutions and recommendations for this problem is in order to reduce the cost of sale and expenses, the company should reduce the feed cost. To reduce the feed cost we must mix the chicken feed with different types of ingredients since the price of chicken feed is expensive such as worms and egg shells. Worms is the healthy feed because worms are high in protein. An easy way to collect worms is to crack an egg in one corner of the worm farm. Return a day later and that corner will be full of worms ready to collect. Chicken also need calcium for strong egg shells. One option is to give them shell grit, but a cheaper option is to feed them egg shells. EPM should collect the egg shells, dry them in the sun for a week and then crush them. So, with this alternative, we can reduce the feed cost and also can feed the chicken with the healthy foods. EPM also can reduce the transportation cost and labor cost. To reduce the transportation cost, EPM should calculate freight, duty, brokerage, and inventory carrying costs to support these lengthened supply chains. EPM also can reduce the labor cost by hire semi-skills workers or relatives.

In order to overcome the issue of low operating cash that may lead to the problems in cash liquidity, EPM should increase the chicken production type and increase revenue by expanding market share. EPM should not focus only to supply the raw chicken meat but try to fully utilize the chicken and selling all of it useful parts. EPM can raise the chicken eggs either for consumption or to breed more chicken to sell. EPM also can sell the chicken not only for consumption but also to customers who would like to buy chicken as feed. The chicken feathers also can be use to sell to the handicraft makers. Chicken poops itself can be a fertilizer and can sell it to farmers.

3.2 leadership style

The second issues in this mini case study is whether the leadership style practice by the EPM was lacking and suitable or not? The major issue in this case is unorganized management which leads to bad performance of the company. EPM faced problem as it fails to get commitment from senior management. As a leader, Encik Selamat was lacking of expertise in poultry industry, and actively involved in social and community work instead of focusing more on business operation like, had conflict of interest while handling credit limit issue. Director himself had shown lack of leadership skill and ethical awareness as he kept silent regarding the unethical conduct. Besides, management of EPM is lacking of coordination in control and reporting. This can be seen from the insufficient cash flow which noticed only when significant borrowings had been made, high expenses and loss incurred. Lack of segregation of duty also had given wide opportunity for misstatement by employees. Finally, EPM fails to predict environment changes regarding cost of production and make any preparation or back up plan to overcome such problems.

This issues also arise when Encik Selamat crossed his boundaries as a General Manager power. He instructed the marketing department to keep supplying the products to Cold Gold Sdn Bhd, one of its major customer although it had exceeded the credit limit. This shown that the marketing department follows the order blindly and not questioning the order from Encik Selamat even though it was clearly wrong. The action of Encik Selamat may affect the decrease in stock as well as increase in account receivable that result in low of cash. Encik Selamat also practiced delegation style with high trust to En.Kassim while he focused on the expansion strategy. There is possibility En.Kassim will do mistake or wrong decision.

The solutions and recommendations for this second issues are segregation of duties. Segregation of duties is the concept of having more than one person required to complete a task. Segregation of duties is separation by sharing of more than one individual in one single task is an internal control intended to prevent fraud and error. Duties of director based on this issues is to set strategy and structure. Director must review and evaluate present and future opportunities, threats and risks in external environment and current and future strengths and weaknesses relating to the company. Director also determine the business strategies and plans and ensure that the company's organizational structure are capable and appropriate for implementing the chosen strategies. Director must delegate authority to management and choose the right person to be the general manager such as someone that have experience in poultry industry.

Another recommendation to this issue is to set a security controls in the management. Security controls are safeguards or counter measures to avoid, counteract or minimize security risks such as something that may affect the financial statements of the other company, the prospect may require successful audit reports of policy controls. The company may design the security control into three classifications which are preventive, detective and corrective controls. In general, the preventive control will take place before the event as example, the management should locking out unauthorized intruders. The detective control is during the event which is to identify and characterize an incident in the progress. The corrective control is after the events means to limit the extent of any damage caused by the incident. All those types may applicable in three different situations.

3.3 conflict of interest

The third issues that in this mini case is whether they have conflict of interest between Encik Selamat, Encik Azman and Board of Directors? Issues of conflict of interest arise when Encik Selamat had a meeting with one of the executive directors of Cold Gold Sdn Bhd, Encik Azman who was his best friend during college days. Both of them have personal deal within the company’s interest. Cold Gold Sdn Bhd was one of the major customers in EPM, the relationship between Encik Selamat and Encik Azman may affect the judgment of Encik Selamat as a General Manager of EPM. He on his dialogue with his friend, ask him to possibly pay part of the payment, if not full settlement of the overdue account. From their conversations, it is clearly that Encik Selamat gives permission to the marketing department to supply the chickens to Cold Gold Sdn. Bhd even though it credit limit had gone into its level. The reason behind this is because Encik Azman is his friend and he does not act honestly to the company. Conflict of interest also arise between general manager and the Boards of Directors of EPM. In this case, Credit Controller Manager, Ms Choy brought the matters to the one of the directors, however he reluctant to take action on Encik Selamat because he was very "well-connected" and had good reputation at the previous company.

The solutions and recommendations for this issue is to bring the matter internally to the board of directors with sufficient evidences and justifications together with any solutions to board of directors. For example, EPM should establish policies for clear ethical conducts, job scopes and management of EPM to solve the ethical problems. Whistle blowing policy also seems to fit to solve this problems. A whistle blower is a person who reveals any wrongdoings or malpractices that are taking place within an organization. A whistle blower policy is a significant means of detecting fraud and corruption and should be part of an overall control framework. A whistle blower may file complaints with reasonably believes evidences if there is any violation of a law, rule or regulation occurred. In this case, Credit Controller Ms Choy should become the whistle blower as she has the responsibility to make the right decision regarding unethical conduct of Encik Selamat. Ms Choy also needs to persuade Board of Directors to take action to conduct investigation by hired the third party such as external auditor to make an investigation to know who is right and who is wrong. By doing this, they are not biased in order to make a decision. Ms Choy has the ability to straightforward report it to the PCK Holding and let them managed this issues.

According to Section 220 of MIA By-Laws, the professional accountant shall take reasonable steps to identify circumstances that could pose a conflict of interest. Such circumstances may create threats to compliance with the fundamentals principles. Encik Selamat who a Certified Public Accountant (CPA) should have integrity which Encik Selamat need to be straightforward and honest in all professional and business relationships. Encik Selamat also needs to be objectivity which not to allow bias, conflict of interest or undue influence of others to override professional or business judgment. Besides that, Encik Selamat need to have professional behavior which he need to comply with relevant laws and regulations and he should avoid any action that discredits the professions such as making a false statement.

3.4 poor management in trade receivables

Department

The fourth issues in this mini case study is whether the management in trade receivables department is poor? In chicken run case, there is a rise of issue on poor management in trade receivables department. The first problems arise under the poor management in trade receivables department is irregularities in debtor's aging analysis. If the debtor's aging analysis is irregularities, the figures on statement of the accounts sent to customer did not tied up with the balances in the accounts and it will lead to loss of future sales and may indicate possible theft of cash. Retail customer, Mr. Siva complaining that the figures on the statement of account sent to him were incorrect. He continued saying that the figures on the statement of accounts sent to him were incorrect and he also saying that he had no outstanding balance in his account as cash payments had been made to Encik Munir (one of the former staff at the finance department).

The solutions and recommendation for this problem to the company is always make a double check the statement of accounts before send to the customer. It is to make sure that the number tied up with the company record. It is important to reconcile the subsidiary accounts receivables with the general but the reconciliation should be done by another person. It is because, it's easier to catch someone mistake and irregularities. We also recommend to the company to used the accounting systems to record the transaction of the company such as Mind Your Own Business (MYOB), UBS Accounting Systems (UBS) and so on.

The second problems arise under this issues are weakness in cash collection process. Weakness in cash collection process arise because of customers selection and depends on relationship rather than business matter. This issue arise when Credit Controller, Ms Choy discovered from the aging analysis of customers that the credit limit of Cold Gold Sdn Bhd, one of its major customers had gone into its level and yet the marketing department continued to supply products to the company. Executives directors of Cold Gold Sdn Bhd, Encik Azman is best friend during college days of Encik Selamat, General Manager of EPM. EPM also have many outstanding debtors. This problem happens because EPM doesn't send the reminder to pay the debt to their debtor constantly in a certain period but they only send and remind their debtor at the end of the year in respect of their accounts and prior to the auditors' visit the following month.

The solutions and recommendation for the weakness in cash collection process is provide sales discount for the customer who buying on credit for a large quantity. But this sales discount only provided for the customer that make early payment. If the company provide sales discount for early payment, their customer will be motivated and make the early payment in order to get a discount that benefit to them. Besides that, EPM must sending the reminder to the debtor constantly for a certain period to remind them to pay the debt. EPM also should find potential clients which are profitable. For example, EPM find the new market and export their products to other countries. For the case depends on relationship rather than business matter, the management especially Encik Selamat which is General Manager should be stricter by knows the borders between friends and business matter. By follow this recommendation, EPM can reduce the credit limit if the management follow up the payment frequently and do the punishment for the inappropriate action. The upper management also needs to supervise the credit limit department in order to prevent them to supply the products to the customer who credit limit is over the level.

4. Conclusion

As a conclusion, the purpose of this report is to evaluate and analyze the current position of EPM after the occurrence of the problems in the case study and recommend few suggestions to resolve these issues as SMEs are one of the most important entities for Malaysian economic growth, so for that purpose we need make sure our SMEs had the excellent management in their financial and internal control. This report is also to provide an analysis and evaluation of the current and prospective profitability, liquidity and financial stability of EPM.

There are analyses on the issue that the company financial result become worse as there are increase in cost of chicken production. To overcome this problem, the company should find other alternative to feed the chicken and use the chicken shit as their side income. It is because most of the decision made by Encik Selamat had incurred cost to the company. Other than that, analyses the effect of abuse of general manager’s power by Encik Selamat and what types of management style that he used. Lastly, the analysis of poor management in trade receivables department that showed in irregularities in debtor’s aging analysis and weakness in cash collection process.

In our opinion, the major areas of weakness require further investigation and remedial action by management and recommendations discussed include develop more types of chicken products, change or mixed chicken feed with other feed, proper documentation and segregation of duties as well as establish policies by management to prevent any irregularities action.

5. References

1. Book

i. By-Laws (On Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants (Amended as at 1 November 2013)

ii. Auditing & Assurance Services (Second International Edition), Aasmund Eilifsen, William F. Messier Jr., Steven M. Glover & Douglas F. Prawitt

2. Internet

i. http://www.academia.edu/3842386/CHALLENGES_FACED_BY_THE_SMALL_AND_MEDIUM_ENTERPRISES_SMEs_IN_MALAYSIA_AN_INTELLECTUAL_CAPITAL_PERSPECTIVE

ii. http://psychology.about.com/od/leadership/a/leadstyles.htm

iii. http://mhlnews.com/transportation-amp-distribution/10-tips-reducing-supply-chain-logistics-costs

iv. http://www.moneycrashers.com/reduce-labor-costs-business/

v. http://en.wikipedia.org/wiki/Security_controls

vi. http://en.wikipedia.org/wiki/Separation_of_duties

vii. http://www.zeepedia.com/read.php?control_procedures_over_sales_and_debtors_fundamentals_of_auditing&b=25&c=24