RESTORING TRUST IN

CORPORATE GOVERNANCE:
THE CASE OF HONGWEI
HOLDINGS BERHAD
Group Members:
NURUL AMIRA AZLIN BINTI SAZALI
INTAN SHAFIRA BINTI MD SAAD
NUR IZZATI BINTI NOZULAN
NURUL SAKINAH BINTI MOHD SHOKOR
NUR NAJWA BINTI MOHD HAWARI
EXECUTIVE
SUMMARY
• Hongwei is a Malaysian based company that engaged in
footwear productions, specializing in shoe soles was
established in 1993. It started as a family-run business till it
currently well known as a high-quality footwear brand.
• This business has their own target market which are middle-
age working adults where the soles can meet the demand of
these demographics.
• Hongwei has produced 4 types of shoes which are
• Thermoplastic rubber (TPR) shoe soles
• Rubber (RB) shoe soles
• MD1 shoe soles
• MD2 shoe soles.
• Hongwei keep doing great in the market despites of the slow
growth of the global footwear industry.
• However, Hongwei started to have problems when the company cannot provide
audited report to the Bursa, as the annual report was delayed in 2015. The
audit work cannot be done as the auditor cannot reach their subsidiaries to
confirm on few things which given the significant amount to the company. Due
to unresponsive subsidiaries, the auditor unable to complete the audit report.
There also can be risk that this happens due to fraud, where the auditor cannot
obtain disclosures from the managements. The auditor also informed that there
were legal claims on Jinjiang Shoe Material Ltd; the main subsidiaries, however
the claims were unsure due to incomplete information provided. Due to these
problems, it had cast the significant doubt about the group and the company’s
ability to continue as going concerns, and the auditor unable to determine
whether the use of going concern assumptions is appropriate.
• Due to worsen conditions of Hongwei, they decided to appoint the new
directors. 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
Malaysian Code on Corporate Governance 2012 and the main market listing
requirements of Bursa Malaysia Security Berhad.
 PROBLEM
STATEMENTS
 Employees send Unable to submit
resignation letters Rising price of raw the annual report
& resignation of materials lead to Bursa on-time
Share price keep
board members towards reducing due to delay of
dropping
without prior the growth of audit work done
notices footwear industry for the accounts

Incomplete audit
work due to Internal control Significant doubt
unresponsive was also problem about the group and
subsidiaries; unable Making loses for
that lead to the company’s
to contact the few years since
inability to obtain ability to continue
management of 2013, although the
sufficient as going concerns,
subsidiaries, group was making
assurance that and the auditor
ownership and profits, but the
recoverable amount there were no unable to determine
company itself was
of subsidiaries could material weakness whether the use of
going concern continuously
not be determined, in the systems of
assumptions is making loses
cannot provide internal accounting
proper evidence for controls appropriate.
inventory amounts.
 QUESTION 1
Identify and explain the issues and
weaknesses in relation to corporate
governance of Hongwei Holdings Berhad.
1. Hongwei facing a big problem where the release
of its December 2015 annual report is delayed
Based on Company Act 2016 Section 259 :
• The Company Act 2016 decoupled the submission
of the financial statements from the annual return.
• Section 259 CA 2016 requires a company to lodge
its financial statements and reports (collectively
called ‘the accounts’) with the Registrar of
Company (ROC).
• For a private company, it must be done within 30
days from the day the accounts are circulated to
the members (s259 (1) (a)).
• The accounts must be circulated to the members
within six months from the end of its financial year
(section 258).
• In the case of a public company, the accounts
must be lodged with the ROC within 30 days from
its annual general meeting (‘AGM’).
 Hongwei facing a big problem where the
release of its December 2015 annual report is
delayed because of additional work to be
done by the auditor as part of the process of
investigating and verifying the expenditure
incurred and the bank balance
• Because of that board had agreed to notify
Bursa Malaysia on the development and set a
new deadline of no later than two month
from the year ended.
• But Hongwei still failed to meet the new
deadline and was unable to submit the
annual report.
• Due to this Hongwei‘s share price has started
to drop tremendously in trading and their
share price has been dropping each year.
 2. Issues on arising around Hongwei
regarding its subsidiaries and inventories.
Based on Company Act 2016 Section 266 (power duties
of auditor ),subdivision (1) and subdivision (4) :
• (1)Every auditor of the company shall report to the
members on the financial statement and on the
company’s accounting and others records relating to
those financial statement if it is holding company for
which consolidated financial statement are prepared
shall also report to the members on the consolidated
financial statement.
• (4) An auditor of a company has a right of access at
all reasonable times to the accounting and other
records, including registers of the company and is
entitled to require from any officer of the company
and any auditor of a related company such
information and explanations as he desires for the
purposes of audit.
• In order to complete the delay audit report the auditor had to
meet up with the management teams of all the subsidiaries to
solve problems
• The auditor was unable to contact the management of the
subsidiaries and there were no commitment given by the
management teams of subsidiaries.
• Auditor not able to complete the audit report because they not
determine whether all significant events occurring after the
reporting period had been adequately dealt with the financial
statement with respect to disclosures, presentation and
adjustment.
• There were also risks that due to the fraud where the auditor
could not obtain disclosure from the management of the
subsidiaries regarding the result of their assessment of the risk
whether the financial statement may be misstated as a result of
fraud.
• The auditor was unable to obtain appropriate evidence from its
subsidiaries, Greenate investment and Evidoma Ltd. To ascertain
whether the group still had ownership over the inventories.
 3. Issues led to the inability to obtain sufficient
assurance that there were no material weaknesses in
the system of internal account controls
Based on Company Act 2016 Section 246 (system of internal control ),subdivision (1) paragraph (b) :
• All the transaction are properly authorized and that the transaction are recorded as necessary to enable the
preparation of true and fair view of the financial statement of the company.
• Auditor also informed that there were legal claims that appeared to have been brought by certain parties against
Jinjiang shoes material Ltd.
• Auditor has not completed their investigation due to some limitation and was currently unable to provide the
required information and comprehensive legal advice and auditor were unable to assess the completeness of the
legal cases extending liabilities, including contingent liabilities that might arises.
• Gary Menon was charged RM 1,600,000 and Jasmine was fined RM 1,600,000 for causing Hongwei commit financial
reporting breaches and permitting the conglomerate to commit corporate governance breaches ,foreign listing
requirement breaches, disclosure breaches and non –compliance with Bursa Malaysia Securities’ Directives.
• Due from that, two out of five board members resign last month due to personal reason without any prior notice.
• On top of that Gary Menon and Jasmine Kaur had failed of refused to communicate with either the regulator or the
new board in Malaysia and following the Bursa‘s enforcement action fines of RM 1,600,000 each had been
imposed to them.
• The issues raised indicated that the existence of the material uncertainty that may cast significant doubt about the
group’s and company’s ability to continue as going concern
• 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.
4. These problems because of the lack of experience of the ceo
that does not know the importance of corporate governance

Section 213 (1), (2) and (3) of Companies Act 2016 – Duties and responsibilities of
directors

• (1) A director of a company shall at all times exercise his powers in accordance with
this Act, for a proper purpose and in good faith in the best interest of the company.
• (2) A director of a company shall exercise reasonable care, skill and diligence with –
(a) the knowledge, skill and experience which may reasonably be expected of a
director having the same responsibilities; and
(b) Any additional knowledge, skill and experience which the director in fact has.
• (3) A director who contravenes this section commits an offence and shall, on conviction,
be liable to imprisonment for a term not exceeding five years or to a fine not exceeding
three million ringgit or both.
5. The CEO also does not know how to make a
trust upon their shareholder and stakeholders.

In Malaysian code corporate governance it said

that the board should promote effective and
timely communication with its stakeholders.
The procedures in this regard should include
how feedback received from its stakeholders is
considered by the company when making
business decisions. Considerations in this
regard are provided.
 QUESTION 2
Suggest some strategies on how
to improve corporate
governance in the company.
 Appoint Competent
Board Members Monitoring
organizational
The nominating performance is an
committee should
essential board
devote adequate time function and ensuring
to identify board
legal compliance is a
members who have major aspect of the
skills and industry
board’s monitoring
knowledge to assist role. It ensures that
the board. What is
corporate decision
important for a board making is consistent
is that it has a good
with the strategy of
understanding of what the organization and
skills it has and those
with owners’
skills it requires. A expectations. As a
board candidate
board, the directors
should also be should establish an
evaluated on his or her
agreed format
Monitor for the
Organizational
interpersonal skills reports they monitor
since board Performance information is provided to the
to ensure that all
interactions and matters that should be
relationships will be
Ensure Timely
Information
Timely information results in
better decision-
making. Management team
has to provide timely
information to ensure proper
board supervision and
direction.  Board members,
however, should not be
overwhelmed with
information.  There is a
balance which needs to be
achieved between necessary
information and irrelevant
information.  Interactions
between management team
and the board are critical to
ensuring that adequate
board.  If a board member
requests information, the
 QUESTION 3
Analyse the position of Hongwei
Holdings Berhad in the industry in
terms of whether its business is
attractive or not
 Demographic
Segmentation:
Segmentation according to
demography is based on consumer-
demographic variables such as
age, income, family size, socio-
economic status, etc.
Mainly Hongwei targets:
However, the
In this - young consumers
global case, the Hongwei - middle-age working adults
footwear position uses Both of their main target contribute
industry has of different a huge profit where its shoe soles
been types of can meet the demand of these
The shoe experiencing Hongwei demographic.
segmentati
industry rapid Holdings on to break
is cyclical expansion, Berhad in a bigger Psychographic
driven by
in nature. rapid the market into Segmentation:
A method used to group prospective,
demand for industry small current or previous customers by their
innovative is customer shared personality, traits, beliefs. value
footwear groups. Hongwei
and otheruses psychographic as one of
factors.
attractive their main segmentation.
worldwide.
. - To create comfortable and high-quality
shoes at affordable prices, they
continuously strove to seek technical
breakthroughs to ensures its customers’
satisfaction.
Producing more comfortable, trendy
design and superior quality products
Helps the brand target its desired
customer segments and become top
priority and commitment.
 QUESTION 4
How would you perceive Hongwei
Holdings Berhad’s internal control?
 Opinions about the company’s internal control
No Proper
Standard Lack of proper
Director’s Sufficient
Operating documentatio
responsibility Standard (SOP) or assurance
n
Regulations
• The board of • Affect the • The company was • Examples:
directors are management unable to obtain • The inability to
clearly not doing team’s ways of sufficient assess the
their responsibility conducting works assurance that: completeness of
• Commit commit a • Examples: • there were no all legal cases
lot of breaches • A lot of people material and the extent of
regarding were resigning weaknesses in liabilities that
corporate without any prior the system of might arise
governance, notice internal • Also unable to
foreign listing • A refusal to give accounting unable to
requirements, commitment to control determine
disclosures and the the auditors • There was no risk whether all
compliance with regarding the that financial significant events
the Bursa Malaysia confirmation of statements may occurring after
Securities’ ownerships and be materially the reporting
Directives. recoverable misstated as a period had been
• refuse to amount for result of fraud adequately dealt
CONCLUSIONS
 In conclusion, there are several things that Hongwei should taking
care of, in managing the business; a big business that been listed
in Bursa Malaysia. In managing the business, Hongwei have a clear
objectives and visions, that make them lead the footwear industry,
but to stay remain in the market Hongwei should beware of their
subsidiaries doing, to ensure that they can cooperate in audit
progress, so that a true and fair view of audited report could be
done.
Hongwei also should choose the good board of directors, that
would stay in the business in any states of the business conditions.
THANK YOU.