Stakeholders were told that SOSA Berhad (SOSA) almost certainly became insolvent in the first half of 2019. What is interesting is that it was about six months later before the directors appointed administrators to take control of the company. According to financial statements prepared by the administrators Faris Hussein, the company went from a positive cashflow of RM207 million from its operating activities in its 2018 accounts to a deficit of almost RM20 million in the first half of 2019. Their cashflow had grown significantly over eight years of operation. SOSA first emerged as a significant player in the childcare industry in 2015. They were running 327 childcare centres by June 2015. The company experienced significant growth and expansion since it had listed on the XYZ Stock Exchange in 2012 with only 43 centres. Faris noted in its report to creditors that its analysis showed a 'significant deterioration' in the net cashflow from its operations in the last few months of its corporate life. Faris moved into SOSA in November 2019, days after its board concluded the company had insufficient cash to pay its debts. Its banks, who were owed nearly RM1 billion, called in receivers immediately. The administrators believed SOSA's failure was due to a combination of factors including:

'inadequate focus' on day-to-day practices and procedures

Inadequate attention and monitoring of results of operations

Lack of strategy to integrate businesses it bought over seven years

A dependency on compensation payments, liquidated damages and fee guarantees from developers to provide revenue

Too high a reliance on debt to fund acquisitions and to support a shortfall of cash from operations.

The administrators said the company's business model became 'unsustainable'. It is difficult to ascertain which factors played a more significant role and what exactly tipped the business over the edge and caused it to fail. Further investigation, including an examination of former directors and management is needed to help determine the detailed causes of the company's failure.

Requirements:

3.1. Explain the importance of cash flow to ensuring the ongoing operation of a company.

3.2.

Discuss the corporate governance and board mechanisms (in accordance with the Malaysian Code on Corporate Governance (MCCG, 2017) that could have served to reduce the chances of corporate failure in the case of SOSA Berhad.