Chicken Run Case Study: En Selamat

Key assumptions 1. En Munir had conducted cash skimming in the company which leaded to his resignation. 2. En Selamat has personal benefit from the deal with Cold Gold Sdn Bhd. Therefore although CG did not pay within the credit term, En Selamat did not stop the marketing department to continue supply products to the company. 3. There is possibility that the irregularities in the account balances is due to illegal transferring of a particular debtor’s balances to another debtor. 1. Financial • Cash flow not liquid. • Financial ratio analysis. • Apply for short term borrowings from bank and financial assistance → Skim Pembiayaan Perniagaan MARA, TEKUN. • To increase sales (new market, fully utilized=sell chicken poop and bulu ayam) → not only sell the meats. 1. Meats 2. Eggs 3. Fertilizer (poop) 4. Livestock (sell the chicks/breeds to other farmer) 5. Feathers • Improve marketing → use En Selamat’s skill in marketing. • Send reminder to debtor. • Give good credit term. • Cut cost → feed and labour expenses (hire relative). 2. Leadership • Autocratic → laissez faire. • Recommendation: democratic. 3. Conflict of Interest

• Possible of fraud → Encik Selamat (has power. 4. Recommendations: • Establish a clear set of policies and procedures within the company. esp. In which this encourages fraud to happen in the company. → access to Ms. Azman). • Ms Choy: To persuade BOD that the issues in the company can lead to a deterioration of the company’s performance. • Ensure the independency of the management team. • Account balance not tied up → may be due to Pn Azura’s carelessness. Choy information system. Choy’s authorization. • Develop a whistle blowing policy. Munir → had not disclosed the receipt of payments from customer and the matter was pending investigation. Internal control • EncikSelamat → had responded to unrelated tasks to him. BOD support and benefited from connection with En.• En Selamat and En Azman (“personally benefit from the deal”). financially. • Conduct internal audit or investigation activities. → approved the credit limit of CG without Ms. • En Selamat and BOD. • En. → Left the company after committing fraud. .

a Certified Public Accountant (CPA). Choy do? Analysis: 1) SWOT analysis S – STRENGTHS | W – WEAKNESSES | . operating business of chicken farming and supplying chicken throughout Malaysia. Puan Azura to do the same. She can execute and monitor implementation and performance of employees under her responsibility and convince her friend. Johor.ANOTHER ANSWER. However. she can then reveal the issue to the auditor. Excel Poultry & Meat Sdn Bhd (EPM) was a SME located in Kluang. and expansion of chicken industry. she can convince Board of Directors about En. ~Analysis: 1) SWOT analysis 2) Fishbone diagram 3) Financial evidence ~Alternatives ~Recommendation and Action Plan Executive summary: 1998. This subsidiary of PCK holding since 2005 was managed by Encik Selamat. high chicken consumption by Malaysian. EPM operating cash was low and severe. cost of poultry production increased. Decision Maker: Credit Controller Ms Choy is the decision maker as she has the responsibility to make the right decision regarding unethical conduct of Encik Selamat. in 2008. What should Ms. besides mentioning to the auditor the lack of segregation of duty in the business operation. If she failed to convince BOD to take action. Selamat. Other problems were also identified.4). It became one of top 5 chicken suppliers within midtier producers in the country due to increasing demand in year 2000 from superstores and fast-food chains. that it “had puzzled Encik Selamat” (p.

These employees contribute significantly towards the operation of EPM especially in the finance sector. Even though he was especially worried about the current unfavorable condition of EPM. Selamat need to gain skills and expertise in the industry. there was cash flow issue and the company had to resort to short term borrowing which subjected to higher interest payment obligations. Moreover. Selamat’s lack of expertise in poultry and meat industry * 2008’s operational crisis * Lack of focus of business operation * Cash flow issue * Conflict of interest * Possible error/ fraud/fictitious transaction * En. EPM has capable key employees.5% * Drop in demand * Credit limit of Cold Gold | The company has strong position in the industry as it is one of top 5 chicken suppliers. Encik Kasim and a reliable Credit Controller. Occupied with good promotional strategy. Besides. This means that EPM has a big portion of the market share in the industry. En. EPM had more than 200 employees. Next. Selamat’s lack of expertise in poultry and meat industry contributed a negative element in EPM as En. which two of them are a qualified accountant. EPM had been able to maintain its operations and started making profit since the buoyant demand of chicken consumption.* One of top 5 chicken suppliers * Continuing profitability and growth * Good promotional strategy * Qualified accountant (Encik Kasim) * Reliable Credit Controller (Ms Choy) * Encik Selamat’s reputation in community | * En. Besides. EPM was lack of focus of business operation as it was at the infant stage and yet to mature in a proper method of management.6 million and starting with 20 employees. In addition. with initial capital of RM3. He was a public figure that will be contested in the local city council. Selamat away from a smooth career track as recorded before 2008. EPM’s management team seized every opportunity in the industry. 2008’s operational crisis of EPM placed En. his experience in this industry may not be sufficient. now. Encik Selamat’s reputation in community is a strong influence of EPM towards the society where EPM was based. EPM also is strong for its sustained profit and growth. There was conflict of interest between Encik Selamat’s personal deal with Encik . Selamat’s connection | O – OPPORTUNITIES | T – THREATS | * Malaysians’ highest consumption rates * Popular quick-service restaurants * East Coast Economics Region (ECER) * Emerging of giant superstores * Institutional retailing | * Production cost had risen about 56. Ms Choy. within EPM.

for chicken (32. Cold Gold was one of EPM’s major customers. where En. Selamat might be able to secure his position in EPM despite the problem he created without facing any punishment. However.and there were no dietary prohibitions (during these years) and religious restrictions against chicken consumption. This has significant effect to the company as Cold Gold is one of EPM’s major customers multiplied with the other issues faced by EPM.5 kg) and eggs (298 units) . Emerging of giant superstores and institutional retailing also enhanced the bright future of the industry. Besides being the recognized poultry exporter. a few possible error/ fraud/fictitious transactions were detected. especially the irregularities in debtors’ account. This relationship may impair En. Another threat was the credit limit of Cold Gold Sdn Bhd which had exceeded its level. the industry was supported by the government through the East Coast Economics Region (ECER) as the poultry sector was part of the plan. EPM faced threat of chicken feed which resulting the production cost to rise about 56. In addition to household and traditional delicacies demand.5%. Selamat’s connection with parent company of EPM. Malaysia was having one of the highest per capita consumption rates in the world . when the sellers did increase the retail price. Federation of Livestock Farmers’ Associations of Malaysia (FLFAM) made a call for higher chicken prices in order to protect producers’ earning in the face of feed cost hike. En. In EPM. former college mate which was one of the executive of Cold Gold and the company’s interest. The symptoms lead to a conclusion that it was caused by the former employee of EPM. Selamat’s judgment. some producers complained that they seen a drop in demand. Another factor that can be considered as EPM’s weakness point is En. the surge of popular quick-service restaurants from outside Malaysia and home-grown fast food chains intensified the market. PCK Holding. The industry is in quite a potential market where Malaysians’ highest consumption rates of poultry and meat product. Despite the favorable situations in the market. Munir.Azman. Increment in production cost Drop in demand Low cash flow High interest expense .

and had under table deal with the client. leadership is doing the right things”. As a leader. high expenses. management of EPM is lacking of coordination in control and reporting. This can be seen from the severity of insufficient cash flow which was noticed only when significant borrowings had been made. Lack of segregation of duty also had given wide opportunity for misstatement by employees. the major issue in this case is unorganized management which leads to bad performance of the company. Finally. EPM faced problem as it fails to get commitment from senior management. EPM .INABILITY TO PREDICT ENVIRONMENTAL CHANGE & FORCAST CONSEQUENCES: LACK OF COORDINATION IN CONTROL AND REPORTING: Credit limit control Debtor confirmation Misstatement Lack of segregation of duty LACK OF COMMITMENT FROM SENIOR MANAGEMENT: Lack of expertise Lack of focus Conflict of interest Unethical behavior Reluctance in taking action LOW PERFORMANCE 2) Fishbone diagram According to Peter Drucker. Besides. and loss incurred. Thus. “management is doing things right. actively involved in social and community work instead of focusing more on business operation like. Encik Selamat was lacking of expertise in poultry industry. Director himself had shown lack of leadership skill and ethical awareness as he kept silent regarding the unethical behavior of Encik Selamat and had more concern on reputation than ethical conduct. had conflict of interest (agency problem) while handling credit limit issue.

Ms. | Days to collect AR | 365/AR turnover ratio | 84.6542 | 1. Stock in 2008 was higher due to lower demand.0667 | 28. 3) Financial Evidence on the operation of EPM: Financial Ratio Ratio | Formula | 2006 | 2007 | 2008 | Interpretation | GP ratio (%) | (GP/Sales)*100 | 5.16% corresponds with increment in cost in that year.8808 | EPM takes around 3 months to collect its debt in 2006. cost increased while revenue did not increase much.7441 | 107.3071 | 3. | AR turnover ratio | Net sales/AR | 4. This might be due to interest payment made for short-term borrowing.6774 | 36. while it takes more than 4 months in 2008. . This will benefit in saving the reputation of the company in public as well as the General Manager. Encik Selamat to secure his reputation in the coming city council election.4962 | EPM is turning over its inventory on average.fails to predict environmental change regarding cost of production that leads to low profit making as EMP did not make any preparation or backup plan to overcome such problems.49 | 126. Increment in trade receivable may not be the true amount as there were cases of misstatement. Alternatives available to the protagonist: Option 1: Ms.3957 | 2. and operating loss was recorded as retail price was only increased in August 2008. Choy can choose not to disclose the issues that she managed to investigate within EPM.4845 | 1. Besides.0814 | Due to increment in COGS. increment of revenue from in 2008 by 36. Thus. Expenses took 30% of operating profit in 2006 while it took almost twice the operating profit in 2008. 3 times per month in 2007 while this reduces to twice per month in 2008. EPM is profiting only 1 cent for every dollar of product sold in 2008 | Inventory turnover ratio | COGS/Inventory | 16.702 | | Description of case exhibit (Account abstract): %Increase | 06to07 | In 2007.

As for the long term. En Selamat and Ms Choy need to face the huge impact of being nontransparent to the stakeholders. Besides. Ms Choy’s responsibility to report to public is passed to auditors and the problem is most likely will be solved. In the end. Recommendation and action plan: . If the auditor is not satisfied with EPM’s condition. The drawbacks of this choice are ethical aspect and long term impact towards the company as a whole. Besides. the reputation of Encik Selamat will be highlighted by the public and media. However. the public will find out the reality of the company as time goes because the auditors are likely to question the irregularities and Ms Choy will be interrogated. By this. she had found evidences to support her claims about the low performance of EPM. subsequent of the auditors’ disclosure. this aggressive decision will affect EPM severely in terms of drop in share price and reputation. Option 3: Ms Choy can opt to disclose the matter internally to the board of directors. Choosing not to disclose the facts is an unethical behavior on Ms Choy’s part. This decision may result in impairment of EPM’s and PCK’s reputation and share prices but the impact will be lower than the second option above. justification of ratification can be made and EPM will not be punished with qualified financial reports. Option 2: Ms Choy has the right to disclose her findings straight to the external auditors as she has no direct authority to take any action towards the misappropriate culture in the company as well as the director which she had approached was hesitated to do so.Choy can justify her action of not bringing the matter up as Encik Selamat is an important staff of EPM and she had done her part by approaching one of the directors who was reluctant to take action against Encik Selamat. Furthermore. the share price of the parent company will be affected too and the dropping trend will continue for a long time. the company. The benefit that EPM will gain from her disclosure is to ratify the problem before the auditors’ visit the following month. which is not favorable.

job scopes and management of EPM especially to solve ethical and agency problems c.Based on analysis above. not giving bonus etc. Ms. Set up and appoint an independent committees of directors to monitor the performance and compensation of staffs b. salary cut. If no written guideline is established. Bring the matter with sufficient evidences and justifications together with possible solution to board of directors 2.) 3. Establish a whistle-blowing policies to encourage staffs to report any irregularities d. and absorb them as the EPM’s corporate culture to be shared within the organization. . Communicate and implement guidelines and policies across levels of management. Establish policies for clear ethical conducts.g. Check whether EPM has a written guideline relating to these issues and take proper actions against these issues (e. Suggested steps to follow are: 1. in case to avoid similar situation in the future. it is recommended for Ms Choy to choose Option 3 which is to disclose the matter internally to the board of directors. a. Choy should suggest for EPM to.

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