FLAT CARGO BERHAD: AN AUDITOR’S CONUNDRUM
The case portrayed Flat Cargo Berhad (FCB), a public listed company which known as one of the largest air freight companies in Malaysia. FCB was registered as an investment holding company with several subsidiaries where the subsidiaries primarily provides air freight services and aircraft ground handling services. As the only Intra-Asian overnight express cargo operator based in Malaysia, FCB provides air freight transportation involving aircraft charter and leasing. Due to landing rights in Asia Pacific region, FCB has the opportunity to provide express air services to international integrators, freight forwarders and major airlines within the Asian region. Thus, secure its major landing rights throughout countries in Asia.
Moreover, FCB also has well-established customers and offers air freight forwarding services to its major shareholder, Cargo Malaysia Berhad and Bangor Berhad. Meanwhile, FCB was engaged with expansion plan to handle large shipments by expending freighter fleet size in order to cater customers demand. In 2005, FCB’s turnover is expected to be higher than year 2004 due to its expansion plan. However, FCB has higher gearing ratio and weak debt servicing ability. Besides, FCB has governance structure which adhered to the Malaysian Code of Corporate Governance in configuring its Board of Directors.
Based on the case, Mr. Chuah Mun Soong is identified as a protagonist where he is one of FCB’s audit team from Kencana & Associates. The main problem here is the dilemma of Mr. Chuah Mun Soong where he thinks that there is a possibility of fraud in FCB. This is because they have identified the suspicious findings during the routine financial audit. As an auditor, he needs to be skepticism and he tried to access the fraud by doing some research on the company. He decided to consult legal department for the advice. He is unwilling to risk his firm reputation by having client that has scandal. However he hopes that FCB is not a problematic company as they have a good business model and also a well-known company.
The problems faced by Mr Chuah Mun Soong were due to the inconsistencies in the accounts of Flat Gargo Berhad (FCB) that was reported by his subordinates. The first issue that was identified as inconsistent was despite very good reviews made by various investments houses and also great turnover and dividend payout reported, Rating Agency Malaysia (RAM) has only rated FCB’s Medium Term Notes to AA3. This indicates that FCB has a very weak ability to pay back their debt. As according to the FCB’s Audit Working Papers for 2005, there are few inconsistencies found which significantly bother Mr Chuah. Firstly, the auditors were unable to validate the existence and purchases procedures of the aircrafts that were reported to have been purchased by FCB in 2005. Besides, a non-functional abandoned aircraft roughly costs RM231 million was found in a hangar. In addition, few of confirmation letters for debtors were returned due to changes of their mailing address and a large numbers of sales transactions that engaging to small clients were identified without supporting documents. FCB also mistakenly recorded a loan received from Hong Kong based company in the debtors’ account. Lastly, there were also few unusual transactions of aircrafts’ purchases and offsetting the debtors’ accounts were identified in FCB’s books of account.
The case has provided appendices comprising crucial of information which could help the auditors to detect the possibility of fraud. Firstly, appendix A shows the financial statements of the company which includes the income statement and balance sheet of the company in five years’ time. Thus, they could identify any inconsistency in the FCB account. The appendix B reveals the fleet information of the FCB group where it lists out all the aircrafts’ types and details until 2005. This information could be used for physical assets verification. Next, appendix C provides the five years group financial highlights where it consists of the important aspects for the auditors to identify any possible fraud. Graphs are presented to make it easier to compare the value from year to year. The appendix D shows the organizational structure of the company where it listed down the name and role of the board of director, the Audit committee and the top management team. This is important to know the responsible person for each particular work. Besides, appendix E shows the information on corporate governance in Malaysia. This is also important to know whether FCB follow the Malaysian Code of Corporate Governance because FCB is the public listed company where they are mandatory to comply with the code.