Mega Alliance is doing insurance trading business for 20 years and has just recently become a listed company. In accordance with corporate governance principles Mega Alliance maintains a small internal audit department. The directors feel that the team needs to increase in size and specialist skills are required, but they are unsure whether to recruit more internal auditors, or to outsource the whole function to their external auditors, Ahmad Fuad & Associates.

Mega Alliance is required to comply with corporate governance principles in order to maintain its listed status; hence the finance director has undertaken a review of whether or not the company complies. Badrul Hisham is the chairman of Mega Alliance, until last year he was the Chief Executive Officer (CEO). Badrul is unsure if Mega Alliance needs more non-executive directors as there are currently three non-executive directors out of the eight board members. He is considering appointing one of his close friends, who has retired from a construction company, as a non-executive director.

The finance director, Barbara Low, decides on the amount of remuneration each director is paid. Currently, all remuneration is in the form of an annual bonus based on profits. Barbara is considering setting up an audit committee, but has not undertaken this task yet as he is very busy. A new sales director was appointed nine months ago. He has yet to undertake his board training as this is normally provided by the CEO and this role is currently vacant. There are a large number of shareholders and hence the board of directors believe that it is impractical and very costly to hold an annual general meeting of shareholders (AGM). Instead, the board has suggested sending out the financial statements and any voting resolutions by email. The shareholders can then vote on the resolutions through email.

a) Explain four advantages and disadvantages for Mega Alliance and two advantages and disadvantages for Ahmad Fuad & Associates of outsourcing the internal audit department.

b) In respect of the corporate governance of Mega Alliance:

Identify and explain FIVE corporate governance weaknesses and provide a recommendation to address each weakness.