Chicken Run Case Study: En Selamat (Kluang)

Introduction of the company and the poultry industry.

Issues, assumptions and recommendations:◦ Financial perspective◦ Management style◦ Internal control

Conclusion

Excel Poultry & Meat Sdn Bhd (EPM) was established in 1998 as a small and medium enterprise (SME).

20 200

Actively involved in chicken farming and supplying of whole chickens.

High demand in chicken meat. E.g. Fast-food restaurants and Malaysian

delicacies. Cheapest source of meat protein in

Malaysia.

Issue 1:Issue 1:

• Late 2008, operating cash was systematically running low problems in cash liquidity

RATIO 2006 2007 2008

Profit margin 5.484% 1.654% 1.081%

Inventory turnover ratio 16.677 36.067 28.459

Account receivables turnover ratio

4.307 3.396 2.881

The percentage of increase/decrease in the account balances:

Particular/Year 2007 2008

Revenue 0.567% 36.157%

Cost of sales 4.642% 36.950%

Operating profit/(loss)

(69.670%) (10.989%)

Expenses 37.500% 45.455%

Net profit/(loss) (108.636%)

(315.789%)

Trade receivables 27.559% 60.494%

Stock (51.613%) 73.333%

Trade creditor 62.162% 50.000%

Recommendations:1. Increase the chicken production types

Organic eggs Meat Fertilizers

- Chicken poop- Sell to farmers

Feathers- Sell to handicraft makers

Livestock- Sell the chicks (breed more) - Sell to other customers (hobby)

3. Offer discounts and send reminder to debtors

2. Increase revenue by expanding market share• Sell to neighboring countries.

Increase in cost of sales and expenses.

Recommendations: 1. Reduce the feed cost : Mix the chicken feed with different types of ingredients.2. reducing transportation cost and labor cost.

Issue 2:Issue 2:

(B) Management Style

Issue 3:Issue 3:

Autocratic

Laissez-faire

Benefits DrawbacksIncredibly efficient Increase staff

turnover and absenteeism

completely control over the operation

One way communication between leader and subordinates

Group members focus on specific tasks

Benefits Drawbacks

Group member is given autonomy

Possible damages to the company

High satisfaction and productivity

Few guidelines from the leaders

Benefits Drawbacks

Group members are encouraged to share ideas and opinion

Time taken to make decision is long

Increase the job satisfaction and productivity

Develop a high sense of personal growth for employees

(C) Internal Control

Issue 4:Issue 4:

Encik Selamat ~ Conflict of interest

Unethical actions

Assumptions :1.En. Selamat used the company’s funds illegally.2.He instructed Pn. Azura to prepare the accounts in a way to conceal his acts.

Recommendations:- Clear set of policies and

procedures.- PCK Holding needs to monitor its

subsidiary.- Whistle blowing policy.

BOD was reluctant to take action against Encik Selamat.

Recommendations: ~ Ms Choy : To persuade BOD to take action.

- Conduct investigation. (3rd party)- Fiasco in EPM can lead to worse

company’s performance.~ To report to PCK Holding.

Issue 5:Issue 5:

Issue 6:Issue 6:

En. Munir had committed fraud (cash skimming) based on a few indicators:

“former staff” – already resigned. Encik Selamat was also involved in the case of En.

Munir. (mentioned by the director)

Action Explanations and example

Proper documentation

essential to ensure adequate accounting records and source documents is maintained.To ensure effective documentation, the receipts should be: Pre-numbered consecutively . Prepared at the time of the transaction. Create a user-friendly format.

Internal audit outsourcing

Responsibility – testing, monitoring company’s policy and internal control.Eg: focus on Account receivable auditing-Purpose: to detect a variety of audit risks Purpose: to detect a variety of audit risks related to acc. receivables and to detect the related to acc. receivables and to detect the possibilities of fraud.possibilities of fraud.

En. Selamat crossed his boundaries as a General Manager.

He instructed the marketing department to supply products to Cold Gold Sdn. Bhd. although it had exceeded the credit limit.

Issue 7:Issue 7:

1. Segregation of Duties- Purpose: To help minimize risks and fraud,

maximize inventory and supply protection.

Recommendations

22. Security Controls- To deter or prevent unauthorized access to

sensitive materials.

Take OrderTake Order

Check Inventory

Availability

Check Inventory

Availability

Approve Credit

Approve Credit

CustomerCustomer

ordersApprove orders

Rejected Orders

Acknowledgement

Customer3. Authorization procedures

Credit Sales Cycle

1. Financial Perspective Increase revenue – chicken products Increase revenue – expand market share2. Management Style• Democratic Leadership3. Internal Control• Clear set of policies and procedures, whistle blowing policy.•Persuade the BOD to investigate.•Report to PCK Holding.•Segregation of duties.•Proper documentation.•Internal audit outsourcing.•Authorization procedures.

The main issue in this case study is EPM’s weak internal control.

Implications of the issue: Opportunities to commit fraud, business performance affected.

Based on the recommendations that we had made to improve the internal control, in our opinion, there are 3 main things that should be carried out: - segregation of duties- proper documentation- hiring of internal auditors