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why there is material uncertainty in the company?

why there is material uncertainty in the company?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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why there is material uncertainty in the company?
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: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.
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
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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