Flat cargo berhad free essay sample

Flat Cargo Berhad(FCB), an air cargo company that was listed in Bursa Malaysia on the 15th of September 2001 was one of the largest airfreight companies in Malaysia. The company servicing several government linked companies including Freight Malaysia Berhad and other private company like Citylink,Nationwide Express and Nippon Express. It was registered as an investment holding company with several subsidiaries with principal activities ranging from air freight services and ground handling services. One of FCB’s major shareholder in 1997 was Bangor Berhad, which it was part of a diversified international family owned conglomerate, the Miri Group. Within their reputation and have wide range of customer worldwide, the Company absolutely can maintain its financial operation atleast for five consecutive years. However, in this case, Mr Chuah Mun Soong, an auditor from Kencana Associates have discovered several suspicious and questionable results which is indirectly lead to a delay in finalizing the auditor’s report. Hence, the main problem faced by Mr Chuah believes there might be a high possibility that FCB is involving in fraud. At the same time, identification of problem faced by FCB is needed and solution should be implemented which can give immediate effect in order to avoid devastating FCB reputation as well as allowing FCB remained as the nation’s leading air cargo carrier. Issue Uncollectible debts, improper sales transaction, incorrectly recorded debtors’ account and abnormal transaction had caused Air Flat Cargo involved the possibility of fraud in a financial audit engagement. Problem Identified in Flat Cargo Berhad In 2006, during a routine financial audit, the auditors identified several suspicious findings in Flat Cargo Berhad that resulted in a delay in finalizing the auditor’s report. It had been thought that Flat Cargo Berhad involving the possibility of fraud in a financial audit programme. Below has shown some of the problem that face by Flat Cargo Berhad. First and foremost, several debtors’ confirmation letters were returned because the addressees had changed their mailing addresses. The several debtors’ confirmation letters were returned because of wrong mailing address had caused Flat Cargo Berhad could not recognized the revenue since the debts could not be collected. However, due to the rise of high revenue from 2001 till 2005, this can be assumed that FCB has recognized these revenue where there are contingencies associated with the transaction that have not yet been resolved. Once the debtors have not paid the debts to Flat Cargo Berhad, these debts should not be recognized as revenue. In addition, it had also shows that a large sum of sales transactions was found with no supporting documents. Most of these transactions involved small clients. For sales transactions which have no supporting documents, the revenue should not be recognized. Then again, these sales transactions have been recognized by FCB which had lead to the misinterpretation of their high revenue. FCB have recorded fictitious revenue which should be immediately be amended in their accounts. Every sales transaction required a proof to shows that the transaction had been occurred in that period of time or been known as transaction history then the company can only recognized it as a revenue. Furthermore, a loan received from a Hong Kong based company was found to be incorrectly recorded in the debtors’ account. Here, FCB did not record this transaction correctly which has lead to misrecognize of revenue. FCB received loan from another company should be a debt to FCB and not revenue because this loan will need to be given back to the Hong Kong based company in the near future. Therefore, this amount is not supposed to be recorded in Account Receivables. In spite of that, this amount should be recorded in FCB’s liabilities although it has increase cash on the assets side. Then, it is clearly stated in Principle 2 in Malaysian Code on Corporate Governance 2012; Strengthen composition which is purposely to balance of executive director and non-executive director. If we refer to Board of Director structure in FCB, it is unbalance due to more number of Non-Independent Executive Director compare to Independent Non-Executive Director. Last but not least, it also found that Flat Cargo Berhad had several abnormal transactions involving the purchase of aircrafts and offsetting the debtors’ accounts were found in FCB’s books. Recognizing inappropriate amount of revenue from swaps, round-tripping, or barter arrangements might cause FCB has extremely high recorded revenue which are not true. It is not parallel with ‘Malaysian Code on Corporate Governance’ because Principle 5 mentions about uphold integrity in financial reporting, from our group discussion there are many accounting error with their financial statement. Recommended Solutions To put a stop in involving in fraud, initially FCB should overcome its misleading high revenue. One of the reason that give rise to Sale Revenue and also to the asset Accounts Receivables is due to that the company might be selling its goods or services to customer on credit. However, consider a person makes a purchase with no intention of paying for it will cause the company as making no sales at all. No revenue was actually earned and nothing valuable was added to the asset Accounts Receivable, which gives rise to the Sales Revenue and in Account Receivables, both of these accounts will be overstated including income for the period and owners’ equity at the end of the period. Therefore, to overcome this problem and avoid overstate of the Sales Revenue and Account Receivable, recognition of bad debts should be taking into account. FCB must make another entry to show that the amount debited to Account Receivables does not represent the amount of the additional asset and that shareholders’ equity has not in fact increased by the amount of the sales. Firstly, direct write-off method is one of the way FCB can make this adjustment where the accounting records are adjusted at the end of each accounting period to reflect this estimation. Accounts that are believed to be uncollectable are simply eliminated from the records by subtracting the amount of the bad debt from Accounts Receivable and showing the same amount as an expense item on the income statement. Another alternative way FCB can employ is the allowance method; the total amount of uncollectible accounts is estimated. This estimated amount is shown as a deduction from Accounts Receivable on the balance sheet and as an expense on the income statement. The balance sheet contra asset account for Account Receivables is called Allowance for Doubtful or Uncollectible Accounts. The Allowance for Doubtful Accounts is in the nature of a decrease in Account Receivables and Bad Debt Expense is the corresponding income statement account. This is done so that the reader can observe both the total amount owed by customers and that portion of the amount that the company believes will not be collected. With this, FCB revenue will not be overstated and will not give false information to the users. Secondly, FCB ought to understand that persuasive evidence of an order arrangement must exist before revenue is realized or recorded. The SEC appears to be willing to accept these practices as persuasive evidence of an agreement as long as there is some form of written or electronic evidence that a binding final customer purchase authorization, including the terms of sale, is in the hands of the seller before revenue is recognized. Thus, when FCB made sales transaction with its clients, it should have at least an invoice or receipt been given to prove for the sales transaction that had been occurred in that period of time. Thirdly, another fact that FCB have to be aware of is the conservatism and realization concept, where revenue should be recognized in the earliest period in which the entity has significantly performed what is required in order to earn income. In addition, the amount of income can be reliably measure and the related assets received can readily be converted to cash or claims for cash. Financial Reporting Standards (FRS) 118 Revenue on services given is recognised by reference to the stage of completion at the reporting date when outcome of the transaction can be estimated reliably. The outcome can be estimated reliably when the following conditions are satisfied. a The amount of revenue can be measured reliably. b It is probable that the economic benefits associated with the transaction will flow to the entity. c The stage of completion of the transaction at the reporting date can be measured reliably; and d The costs incurred for the transaction and the cost to complete the transaction can be measured reliably. When the outcome cannot be estimated reliably, revenue should be recognised only to the extent of the expenses recognised that are recoverable. As a result, FCB only can recognize revenue when performance or delivery is carry out and that customers have already acknowledge it. The need for recognizing bad debts, sales discounts, and sales returns and allowances arises because of one aspect of the realization concept. Revenues should be reported at the amount that is reasonably certain to be collected. This concept would seem to require that these amounts be subtracted from gross revenues in order to determine the net revenue of the period. Conclusion Generally, companies try to boost revenue by manipulating the recognition of revenue. Company usually recognize revenue before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void or delay the sale. Likewise, it is believe that FCB was trying to do the same thing as well, trying to heighten its revenue to look good in front of its stakeholders. In 2005, FCB’s counter was ranked 4th in terms of capital gains and dividends to shareholders. Its share price at 31 December 2001 had been RM1. 89, but by end of 2005, the share price escalated to RM 10. 60 per share. It was reported that FCB had been able to pay dividends at a steady 3% per annum for over 4 years. Conversely, FCB’s high upsurge posed serious concerns. Rating Agency Malaysia (RAM) rated FCB’s RM150 million Commercial Papers or Medium Term Notes to AA3/P1 and downgraded the company’s long term rating from stable to negative. The rating was due to the company’s high growth ratio and weak debt servicing ability. This dilemma was identified and resolution was recommended. The FASB has combined there criteria into a revenue recognition standard that states â€Å"revenue should not be recognized until it’s realized or realizable and earned. As a consequence, FCB have to modify its financial records in order to be able to remain its trustworthiness from its stakeholders. Meanwhile, Mr Chuah convinced himself that FCB was a reputable company with a good business model and the possibility of irregular activities in FCB was remote. Bibliography