What are the issues in this case study and the solution for the issues.

Case 26 Restoring Trust in Corporate Governance: The Case of Hongwei Holdings Berhad Corporate governance . Strategic management . Auditing . Financial reporting . Financial statements analysis Strategic review Now that the condition in Hongwei Holdings Berhad (Hongwei) is getting worse day by day, Gary Menon, the executive chairman of this conglomerate. has set up a meeting with Jasmine Kaur, the chief executive officer (CEO), at a coffee shop near their company. They sat down and started discussing and analysing their company's performance, as well as the subsidiaries and areas of growth. The following is an excerpt of an exchange between Gary Menon and Jasmine Kaur: Chairman: Look! Everything is a mess! I don't know what you are doing to ensure that our company can survive in this business world. The share price keeps dropping, and employees are sending in their resignation letters. Now, what's left? CEO: Wait. Err. Hold on! Nothing will change if we keep saying the same things over and over again. I'm trying my best to think of a way out of this problem. I have asked for help from the auditors as well. We plan to meet up later in the evening Chairman: to further discuss this issue. What about the annual report? Did the auditor manage to finalize it? Scanme180 Integrated Case Studies for Accounting CEO: Err .... Chairman: Solve all the unresolved problems in our company. I give you a month's time to settle everything or you can choose to leave. That conversation between the chairman and the CEO of Hongwei Holdings Berhad didn't seem to have ended well. After that meeting, Jasmine Kaur walked back to the office with a huge burden on her shoulders thinking of strategies and ways to solve all the problems in Hongwei Holdings Berhad. Background Hongwei was established in 1993. It is a Malaysian-based company engaged in footwear production, specializing in shoe soles. Gary Menon is the founder of the company and has been appointed as the executive chairman since 2008. The office is currently located in Seri Kembangan Industrial Area, Selangor. The premise is built on a 600 square metre sized land with the factory cum office built-up of 1000 square metres. Hongwei has five subsidiaries-Red Shoe Material Ltd, Jinjiang Shoe Material Ltd, Evidoma Ltd, Greenate Investment Lid and Zente Trading Ltd. Hongwei started off as a humble family-run business that was known as a small shoe soles manufacturer, but as years passed by, Hongwei has become a well-known brand of high quality footwear. Over the last 20 years, Hongwei had striven to become one of the key players in Malaysia's footwear industry, progressing alongside the history and development of the local demand. The company is committed to its philosophy of producing comfortable and high-quality shoes at affordable prices. Even in the early stages, it continuously strove to seek technical breakthroughs to ensure its customers satisfaction by producing more comfortable and trendy designs and quality products, as this is its top priority and commitment. Its target customer bases are mainly the young and middle-age working adults where its shoe soles can meet the demand of these demographics. Company's milestones The company started off in 1993 by producing rubber (RB) shoe soles, followed by the production of thermoplastic rubber (TPR) shoe soles in 1995. In 1999, Hongwei's subsidiary Jinjiang Shoe Material Lid took over the entire business of developing, manufacturing and selling shoe soles. By 2000, Hongwei developed in-house production of TPR compound pellets to improve its quality control of raw materials, to lower the production cost as well as to reduce its subsidiaries' reliance on third-party suppliers. Other than that, it also established an internal research and development department in order to strengthen the design of its shoe soles.Case 26 Restoring Trust in Corporate Governance 181 The production of new ethylene vinyl acetate model (EVA MDI) shoe soles. TPR and RB components began in 2003. EVA MD2 shoes were produced next in 2006. In this particular year, Hongwei had successfully managed to develop EVA MDI and EVA MD2 soles with enhanced elasticity and shock-absorbing characteristics. By 2008, Hongwei took another step to develop in-house production of EVA compound pellets to reduce its production costs, to increase its profit margin and to eliminate reliance on third party suppliers. In 2009, Hongwei was finally listed on Bursa Malaysia. Vision and mission Hongwei aspires to be a leading name in the footwear industry in the near future and the most targeted platform for the footwear industry players to showcase, feature and promote its quality footwear. Objectives Among the objectives of Hongwei in maintaining its business in the footwear industry are: . to improve the quality of Malaysian-made footwear . to enhance the competitiveness of the footwear industry in Malaysia . to increase the brand exposure and markets of Malaysian footwear both locally and internationally . to ensure the long-term growth and sustainability of the footwear industry. Activities Some of Hongwei's main activities include: . organizing trade missions to overseas exhibitions, trade fairs and factory visits . maintaining good relationships with other footwear associations in the world by participating in annual conferences that consists of representatives from other countries such as Hong Kong, China, India, Indonesia, Korea, Japan, Taiwan, Thailand, USA, Vietnam and the Philippines . maintaining an annual dialog with MITI for issues concerning the footware industry . organizing a footwear design competition in Malaysia to encourage young talents to join the footwear industry . participating actively in shoe fairs worldwide.182 Integrated Case Studies for Accounting Products manufactured by Hongwei Holdings Berhad Hongwei Holdings Berhad mainly produces shoe soles. There are four types of shoe soles produced by Hongwei in the past 20 years, which are: 1 Thermoplastic rubber (TPR) shoe soles TPR shoe soles are a physical mix of polymers-a rubber and plastic. It combines the functional properties of rubber and the easy processability and recyclability of thermoplastics. TPR-based sports shoe soles are durable, lightweight, flexible and provide good traction even under cold conditions. noiezim one net 2 Rubber (RB) shoe soles RB shoe soles are produced using natural and synthetic rubbers. They are highly resistant to wear and tear, possess the highest tensile strength, provide good traction as well as being waterproof and weatherproof. However, they provide less dimensional stability, cushioning and shock-absorption capabilities. 3 MD1 shoe soles The main components of MD1 shoe soles are ethylene vinyl acetate (EVA) and rubber. EVA-based sports-shoe soles are soft, lightweight, flexible, elastic, resistant to wear and tear, and are dimensionally stable with adequate cushioning, thus serve as excellent shock-absorbers in sports shoe soles. 4 MD2 shoe soles The main components of MD2 shoe soles are similar to MD1 shoe soles but are produced using a distinct production process with equipment that is more technologically advanced than MD1 shoe soles and therefore has greater variability in design and improved quality control. Organizational structure Hongwei is led by Gary Menon who is the executive chairman as well as its founder. He has more than 20 years of experience in the shoe sole production industry. Gary Menon is the person responsible for the formulation and execution of the overall business strategies and policies of the company as well as implementing management policies and overseeing the production and operation, marketing, quality control, public relations, and research and development of the company. He is helped by Jasmine Kaur, the CEO of Hongwei Holdings Berhad. Apart from her, there are another three independent non-executive directors and one non-independent executive director in the company. There are also audit committees, a nominations committee, a remuneration committee, a secretary, registrar officers and auditors.Case 26 Restoring Trust in Corporate Governance 183 Subsidiaries wfoot end? ni sham Hongwei has five wholly-owned subsidiaries (Figure 1). It holds a controlling interest in all of them. 1 Red Shoe Material Lid Red Shoe Material Lid is an investment holding company founded in 1998. It is headquartered in Hong Kong. The company's line of business includes the wholesale distribution of footwear as well as making private-label shoes to be distributed outside of Hong Kong. 2 Jinjiang Shoe Material Ltd Jinjiang Shoe Material Lid designs and manufactures footwear and shoe materials in China. It specializes in EVA MD1 and MD2 injection molding shoe sole, TPR sole and RB sole products. It also produces high quality shoes for different market segments including for women, children and labour workers. The company was founded in 2004 and is based in Jinjiang, China. It is the main subsidiary of Hongwei. 3 Evidoma Ltd The predecessor of Evidoma Lid was set up in Hong Kong. Currently, the principal activities of the company are property investment for rental purposes, hotel operations and investment. The company was founded in 2003. 4 Greenate Investment Ltd Greenate Investment Ltd was founded in 2001. It focuses on investment in agriculture, wholesale, manufacturing, retail trade construction and transportation. 5 Zente Trading Ltd Zente Trading Ltd was established in 2002 in China. It focuses on wholesale and retail of textile, garments, shoes, hats, toys, sporting goods, daily necessities, handicrafts, electrical products, metal products, machinery and equipment, building materials and chemical products (excluding dangerous chemicals). Hongwei Holdings Berhad Red Shoe Material Lid Jinjiang Shoe Material Lid Greenate Investment Evidoma Lid Zente Trading Lid Lid Figure 1 The structure of Hongwei Group Scanned by Ta184 Integrated Case Studies for Accounting Current global trends in the footwear industry du Over the years, the global footwear industry has diversified across different geographic regions such as in Europe, Asia Pacific, North America and Latin America. The global footwear market is driven by a number of factors including the growth of the fashion industry, increasing demand for new designs of footwear and awareness about a healthy and active lifestyle. The increase in today's population and tendency of people to spend more have also become contributing factors in the growing demand for footwear across the global market. However, the growth of the global footwear industry is becoming slower day by day. This is due to many external and internal factors. The main factor that contributes to the decline is the rising price of raw materials. Due to the high price, many footwear companies today face difficulties in getting raw materials at cheaper prices, thus they do not have any choice but to increase their selling price to cover the increasing cost per pair of shoes. Other than that, factors such as the increase of environmental concerns, rising cost of local labour, the price war and also fierce global competition have also contributed to the slow growth of the footwear industry. This then left the companies with no choice but to switch to cheaper grade materials and low quality production as they need to ensure they are able to bear the cost. However, despite the slow growth, there is still opportunity in the footwear market for the companies. This can happen when there are changes in customers' lifestyle and fashion trends, the emerging role of e-commerce, and the increasing new brands in the market that would enhance the demand of footwear in coming years. Current problems in Hongwei Holdings Berhad Hongwei is now facing a big problem where the release of its December 2015 annual report is delayed. This is because there is additional work to be done by the auditors as part of the process of investigating and verifying the expenditure incurred and the bank balances. However, the board had agreed to notify Bursa Malaysia Securities Berhad on the development and progress of the matter, and set a new deadline of no later than two months from the year end. But Hongwei still failed to meet the new deadline and was unable to submit the annual report in the agreed time. Due to this, Hongwei's share price has started to drop tremendously in trading. The share price has been dropping each year. Besides, there are many other problems arising around Hongwei and its subsidiaries. In order to complete the delayed audit report. the auditors had to meet up with the management team of all the subsidiaries to solve the problems. However, the auditors were unable to contact the management of the subsidiaries. There were no commitments given byCase 26 Restoring Trust in Corporate Governance 185 the management team of the subsidiaries. Due to that, the ownership and recoverable amount of the subsidiaries could not be determined which led to incomplete audit work. On top of that, Hongwei faced some problems with the inventories. The auditors were unable to obtain appropriate evidence from its subsidiaries, Greenate Investment Lid and Evidoma Ltd, to ascertain whether the group still had ownership over the inventories. Due to this, audit work could not be completed. Auditors were also not able to complete the audit report as they could not determine whether all significant events occurring after the reporting period had been adequately dealt with in the financial statements with respect to disclosures, presentation and adjustments. There were also risks that occurred due to fraud where the auditors could not obtain disclosure from management of the subsidiaries regarding the results of their assessment of the risk whether the financial statements may be misstated as a result of fraud. Furthermore, internal control was also another problem that led to the inability to obtain sufficient assurance that there were no material weaknesses in the system of internal accounting controls or that there was no risk that the financial statements may be materially misstated as a result of fraud. The auditors were also informed that there were legal claims that appeared to have been brought by certain parties against Jinjiang Shoe Material Ltd. The auditors have not completed their investigations due to some limitations and were currently unable to provide the required information and comprehensive legal advice. The auditors also were unable to assess the completeness of all legal cases, extent of liabilities, including contingent liabilities, that might arise. The company received information from the government of the People's Republic of China's website that indicated that there were litigation cases involving the company's operating subsidiary in China, namely Jinjiang Shoe Material Lid, but the company was unable to confirm the information. The details of the 10 lawsuits were on the website; however, the names of the parties to the suits were not available. In addition, fines were imposed on the both directors, Gary Menon and Jasmine Kaur, as they were named as the defendants to the claims. Gary Menon was charged RM1,600,000 for causing Hongwei to commit financial Scanned by186 Integrated Case Studies for Accounting reporting breaches and permitting the conglomerate to commit corporate governance breaches, foreign listing requirements breaches, disclosure breaches and the non-compliance with Bursa Malaysia Securities' Directives. Jasmine Kaur was fined RM1,600,000 for causing Hongwei to commit financial reporting breaches and permitting it to commit the corporate governance breaches, foreign listing requirements breaches, disclosure breaches and the non-compliance with Bursa Malaysia Securities' Directives. Aside from that, two out of five board members resigned last month due to personal reasons without any prior notice. The company also had lost its company secretary and agent. This has left the company without a proper functioning board with all non-executive directors and the chief financial officer resigning, leaving only Gary Menon and Jasmine Kaur as the board. On top of that, Gary Menon and Jasmine Kaur had failed or refused to communicate with either the regulators or the new board in Malaysia and following Bursa's enforcement action, fines of RM1,600,000 each had been imposed on them. All these problems led to the going concern of Hongwei Holdings Berhad. The issues raised indicated that the existence of a material uncertainty that may cast significant doubt about the group's and company's ability to continue as going concerns, and 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. Appointment of new directors to resolve problems as part of corporate governance As the condition of Hongwei worsened by the day, new directors were appointed so as to recognize the importance of corporate governance in running the operations of the company and group and of the trust and expectations placed upon their shoulders by the shareholders and stakeholders. In fulfilling the respective fiduciary duties, the principles of transparency, integrity and professionalism should rightfully be incorporated into all levels of the group's corporate hierarchy. The appointment of the new independent directors was to safeguard the interest of shareholders and ensure proper governance in Hongwei. However, the newly appointed directors had not been able to establish control over the operations of the group (which are in China) since their appointment and, as such, were acting without a functioning organization. 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 the Malaysian Code on Corporate Governance 2012 and the main market listing requirements of Bursa Malaysia Securities Berhad. It was with this in mind that the new directors reported their findings to the shareholders in the manner of application of the principles contained in the code to the best of their ability and with the limited information available on hand for the financial year ended in this report.Case 26 Restoring Trust in Corporate Governance 187 Financial position of Hongwei Holdings Berhad and its group Company RMB'000 RMB'000 Profit/(Loss) for the year attributable to equity holders 906,732 (28,783) Hongwei had been making losses for a few years since 2013. Even though the group was making profits, the company itself was continuously making losses. Appendices 1 and 2 contain the company's and group's statement of financial position as well as the consolidated statement of comprehensive income for the year ended 31 December 2016. Application Questions Hongwei Holdings Berhad has been in the footwear industry for more than 20 years. Even as the global growth of the footwear industry is becoming slower day by day, Hongwei is still able to maintain its competitiveness in the industry. However, the position of Hongwei in the industry today is worrying due to the internal and external problems that it faces. Chairman Gary Menon had passed the duty to solve all the company's problems to CEO Jasmine Kaur. The first task that Jasmine Kaur should do is to detect all the issues and weaknesses in the organizational structure of Hongwei and ways to correct the structure so that a better structure could be developed. Other than that, an overview of the overall performance of the company and group should be done to determine the position of the company in the industry and whether the company is still attractive to be in the business. 1 Identify and explain the issues and weaknesses in relation to corporate governance of Hongwei Holdings Berhad. 2 Suggest some strategies on how to improve corporate governance in the company. 3 Analyse the position of Hongwei Holdings Berhad in the industry in terms of whether its business is attractive or not. 4 How would you perceive Hongwei Holdings Berhad's internal controls?188 Integrated Case Studies for Accounting Appendix 1 JbloH lowsnot to me Hongwei Holdings Berhad Statement of Financial Position Company Group 2016 2015 2016 2015 RMB'000 RMB'000 RMB'000 RMB'000 ASSETS Non-current assets Property, plant and 290,199 equipment Intangible assets 643 Land use rights 16,575 Subsidiaries 277,373 277,373 307,417 Current assets Inventories, at cost 11,338 Trade and other 36,869 174,174 receivables Cash and bank 26 75 26 496,480 balances 26 36,944 26 681,992 Total asset 26 314,317 26 989.409 icanned by TapScannerCase 26 Restoring Trust in Corporate Governance 189 mamoist2 batsbiloznod barhis# zanibloif TowgrioH Company Group 2016 2015 2016 2015 RMB'000 RMB'000 RMB'000 RMB'000 EQUITY AND LIABILITIES Capital and reserves Share capital 102,376 100,364 102,376 100,362 Reserves (105,448) 211,298 (105,448) 785,047 (Capital (3,072) 311,662 (3,072) 885,409 deficiency)/Total equity Current liabilities Trade and other 1 3,099 2,657 2920 3,099 90,871 payables realy Interest-bearing sendney Luncial Pills 11,500 bank borrowings Income tax 1,527 payable 3,099 2,657 3,099 103,898 Total equity and 27 314,319 27 989.307 liabilities Scanned by TapSea190 Integrated Case Studies for Accounting at mer Appendix 2 Hongwei Holdings Berhad Consolidated Statement of Comprehensive Income CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the financial year ended 31 December CHITLIN Group Year ended Year ended 2016 29viapa7 2015 46) RMB'000 RMB'000 Revenue 80,217 579,354 (828,201) Bes, TIS Cost of sales (79,310) (492,832) Gross profit Soo. (5 0. E) 907 86,522 Other income 423 Isto7\\( 2.478 Selling and distribution expenses (2,451) (55,550) Administrative expenses (12,324) (49,501) Other operating expenses red,s (893,104) 1910 (3,062) Finance costs (183) (734)4 Loss before taxation (906,732) Bait (19,847) Income tax expense agniWO (8,936) Loss after taxation representing total (906,732) (28,783) comprehensive loss attributable to equity holders of the company Dividends No dividend was paid and declared by the company since the end of the previous financial year. This has caused a significant discontent among major shareholders in Hongwei Holdings Berhad. Share price The share price of Hongwei Holdings Berhad was at a stable position as it kept increasing each year from December 2008 till December 2013 with RM8.60 per share at its highest. Then, the share price was e was stagnant for a period until December 2014 before dropping tremendously in 2015. The share price kept dropping the following year and beco a become only about RM5 per share in that particular year. This happened due to the delayCase 26 Restoring Trust in Corporate Governance 191 in submitting the annual report as the auditors faced several problems in producing the audit report. The drop in the share price had become a serious weak point for Hongwei in terms of maintaining its reputation in the eyes of investors. Figure 2 shows the share price of Hongwei from 2008 to 2016. RM 10 8.00 8:20 8.60 840 8.40 -7:20 7.50 6:00 5:00 N C Dec Dec Dec Dec Dec Dec Dec Dec Dec 2008 2009 2010 2011 2012 2013 2014 2015 2016 Figure 2 Hongwei Holdings Berhad's share price since December 2008 Directors' benefits the co Since the end of the previous financial year, December 2015, no director had received or became entitled to receive any benefit other than benefits included in the aggregate amount of emoluments received or due and receivable by the directors, or the fixed salary of a full time employee of the company by reason of a contract made by the company or a related corporation with the director or with a firm of which the director is a member, or with a company in which the director has a substantial financial interest. This includes the provision of pensions, life insurance and other benefits as well. The newly appointed directors also had not received any payment or benefits for their services from the date of their appointment to date. Neither at the end of the financial year, nor at any time during the financial year, did there subsist any arrangement to which the company was a party with the object of enabling directors of the company to acquire benefits by means of the acquisition of shares in or debentures of the company or any other body corporate apart from the issuance of the employees share option scheme. icanned by TapScanner