How would you perceive Hongwei Holdings Berhad’s internal controls?
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Question
How would you perceive Hongwei Holdings Berhad’s internal controls?
Transcribed Image Text:Profit/(Loss) for the year attributable
Financial position of Hongwei Holdings Berhad and
income for the year ended 31 December 2016.
Hongwei had been making losses for a few years since 2013. Even though
reporting breaches and permitting the conglomerate to commit corporate
governance breaches, foreign listing requirements breaches, disclosure
breaches and the non-compliance with Bursa Malaysia Securities' Directives,
Jasmine Kaur was fined RM1,600,000 for causing Hongwei to commit
financial repurting breaches and permitting it to commit the corporate
governance breaches, foreign listing requirements breaches, disclosure
breaches and the non-compliance with Bursa Malaysia Securities'
Directives. Aside from that, two out of five board members resigned last
month due to personal reasons without any prior notice. The company
also had lost its company secretary and agent. This has left the company
without a proper functioning board with all non-executive directors and
the chief financial officer resigning, leaving only Gary Menon and Jasmine
Kaur as the board. On top of that, Gary Menon and Jasmine Kaur had failed
or refused to communicate with either the regulators or the new board in
Malaysia and following Bursa's enforcement action, fines of RM1,600,000
each had been imposed on them.
All these problems led to the going concern of Hongwei Holdings Berhad.
The issues raised indicated that the existence of a material uncertainty
that may cast significant doubt about the group's and company's ability to
continue as going concerns, and due to the auditors' inability to contact the
management of the subsidiaries, they were unable to determine whether
the use of the going concern assumption is appropriate.
doancial position of Hongwei Holdings Berhad and
its group
Group
RMB'000
Company
RMB'000
10 equity holders
egwej had been making losses for a few years since 2013. Even though
Horoup was making profits, the company itself was continuousiy making
eses. Appendices 1 and 2 contain the company's and group's statement of
ancial position as well as the consolidated statement of comprehensive
ome for the year ended 31 December 2016.
906,732
(28,783)
Application Questions
Appointment of new directors to resolve problems
as part of corporate governance
As the condition of, Hongwei worsened by the day, new directors were
appointed so as to recognize the importance of corporate governance
in running the operations of the company and group and of the trust
and expectations placed upon their shoulders by the shareholders and
stakeholders. In fulfilling the respective fiduciary duties, the principles
of transparency, integrity and professionalism should rightfully be
incorporated into all levels of the group's corporate hierarchy.
The appointment of the new independent directors was to safeguard
the interest of shareholders and ensure proper governance in Hongwei.
However, the newly appointed directors had not been able to establish
control over the operations of the group (which are in China) since their
appointment and, as such, were acting without a funetioning organization.
The newly appointed board of directors had taken steps to comply with
the best practices of principles of good corporate governance as set out in
the Malaysian Code on Corporate Governance 2012 and the main market
listing requirements of Bursa Malaysia Securities Berhad. It was with this
in mind that the new directors reported their findings to the shareholders
in the manner of application of the principles contained in the code to the
best of their ability and with the limited information available on hand for
the financial year ended in this report.
Hongwei Holdings Berhad has been in the footwear industry for
more than 20 years. Even as the global growth of the footwear
industry is becoming slower day by day, Hongwei is still able to
maintain its competitiveness in the industry. However, the position
of Hongwei in the industry today is worrying due to the internal
and external problems that it faces.
Chairman Gary Menon had passed the duty to solve all the
company's problems to CEO Jasmine Kaur. The first task that
Jasmine Kaur should do is to detect all the issues and weaknesses
in the organizational structure of Hongwei and ways to correct the
structure so that a better structure could be developed. Other than
that, an overview of the overall performance of the company and
group should be done to determine the position of the company in
the industry and whether the company is still attractive to be in the
business.
Transcribed Image Text:the management team of
the subsidiaries. Due to
that, the ownership and
recoverable amount of
the subsidiaries could not
Current global trends in the footwear industry
Over the years, the global footwear industry has diversified across different
geographic regions such as in Europe, Asia Pacific, North America and
Latin America. The global footwear market is driven by a number of factors
including the growth of the fashion industry, increasing demand for new
designs of footwear and awareness about a healthy and active lifestyle.
The increase in today's population and tendency of people to spend more
have also become contributing factors in the growing demand for footwear
across the global market.
However, the growth of the global footwear industry is becoming
slower day by day. This is due to many external and internal factors.
The main factor that contributes to the decline is the rising price of raw
materials. Due to the high price, many footwear companies today face
difficulties in getting raw materials at cheaper prices, thus they do not
have any choice but to increase their selling price to cover the increasing
cost per pair of shoes. Other than that, factors such as the increase of
environmental concerns, rising cost of local labour, the price war and
also fierce global competition have also contributed to the slow growth of
the footwear industry. This then left the companies with no choice but to
switch to cheaper grade materials and low quality production as they need
to ensure they are able to bear the cost.
However, despite the slow growth, there is still opportunity in the
footwear market far the companies. This can happen when there are
changes in customers' lifestyle and fashion trends, the emerging role of
e-commerce, and the increasing new brands in the market that would
be determined which led
to incomplete audit work.
On top of that,
Hongwei
problems
inventories. The auditors
were unable to obtain
аppropriate
from
faced some
with
the
evidence
its subsidiaries,
Greenate
Investment
Ltd and Evidoma Ltd, to
ascertain whether the group still had ownership over the inventories. Due
to this, audit work could not be completed.
Auditors were also not able to complete the audit report as they could
not determine whether all significant events occurring after the reporting
period had been adequately dealt with in the financial statements with
respect to disclosures, presentation and adjustments. There were also risks
that occurred due to fraud where the auditors could not obtain disclosure
from management of the subsidiaries regarding the results of their
assessment of the risk whether the financial statements may be misstated
as a result of fraud.
Furthermore, internal control was also another problem that led to the
inability to obtain sufficient assurance that there were no material weaknesses
in the system of internal accounting controls or that there was no risk that
the financial statements may be materially misstated as a result of fraud.
The auditors were also informed that there were legal claims that
appeared to have been brought by certain parties against Jinjiang Shoe
Material Ltd. The auditors have not completed their investigations due to some
limitations and were currently unable to provide the required information
and comprehensive legal advice. The auditors also were unable to assess
the completeness of all legal cases, extent of liabilities, including contingent
liabilities, that might arise. The company received information from the
government of the People's Republic of China's website that indicated that
there were litigation cases involving the company's aperating subsidiary in
China, namely Jinjiang Shoe Material Ltd, but the company was unable to
confirm the information. The details of the 10 lawsuits were on the website;
however, the names of the parties to the suits were not available.
In addition, fines were imposed on the both directors, Gary Menon and
Jasımine Kaur, as they were named as the defendants to the claims. Gary
Menon was charged RM1,600,000 for causing Hongwei to commit financial
enhance the demand of footwear in coming years.
Current problems in Hongwei Holdings Berhad
Hongwei is now facing a big problem where the release of its December
2015 annual report is delayed. This is because there is additional work to
be done by the auditors as part of the process of investigating and verifying
the expenditure incurred and the bank balances. However, the board had
agreed to notify Bursa Malaysia Securities Berhad on the development and
progress of the matter, and set a new deadline of no later than two months
from the year end. But Hongwei still failed to meet the new deadline and
was unable to submit the annual report in the agreed time. Due to this,
Hongwei's share price has started to drop tremendously in trading. The
share price has been dropping each year.
Besides, there are many other problems arising around Hongwei
and its subsidiaries. In order to complete the delayed audit report, the
auditors had to meet up with the management team of all the subsidiaries
to solve the problems. However, the auditors were unable to contact the
management of the subsidiaries. There were no commitments given by
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