BAC4674 INTEGRATED CASE STUDY

Trimester 3, 2017/2018

CASE: OUTSOURCING FIASCO

Submission date: 25.4.2018

Facilitator: Madam Saleha Binti Abdullah

Prepared by:

Name Student ID Contribution % Signature

ONG XIN TING 1132700042 20%
CHU WEN LIN 1132700352 20%
FAN RUI CHING 1132701786 20%
KHOO KIM SIANG 1132701957 20%
NIRAINJANI SELVAM 1142701495 20%
TOTAL 100%

To be completed by the lecturer

Marks awarded for the following
Poor (1) Satisfactory (2) Good (3) Excellent (4) Score
Some of the
Stakeholders not All stakeholders All stakeholders
stakeholders
identified and identified but identified with
Case analysis identified and
problem not clearly problem not clearly clear problem
problem not clearly
defined defined definition
defined
Decision is clearly
Decision not clearly Decision not clearly Decision is clearly
articulated but
Decisions articulated and articulated and articulated and
reasoning can be
reasoning is faulty reasoning is unclear well-reasoned
improved
Alternatives fully
Some alternatives Alternatives fully
Alternatives poorly explored and
Evaluation explored and some explored but impacts
explored impacts fully
impacts considered not fully considered
considered
Decision made
Decision made Decision made
fully justified and
Decision poorly justified but justified but
Action Plan implementation
justified implementation plan implementation plan
plan
can be improved reasonable
comprehensive
Report is less Report is organised Report is well Clear evidence
Format and organised with with minor organised with proper that report is
Presentation obvious grammatical grammatical and formatting and use of prepared carefully
and structured errors structural errors languages and thoughtfully

Total marks
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Declaration by group leader

(This section is to be filled in the student’s own handwriting.)

I hereby declare that all group members’ names are correctly included in the above section. I
hold a copy of this assignment which I can produce if the original is lost or damaged. I certify
that no part of this assignment has been copied from any other student’s work or from any
other source except where due acknowledgement is made in the assignment.

Group leader’s signature : _____________________________

Group leader’s name : _____________________________

Group leader’s student ID : _____________________________

Date : _____________________________
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Case analysis

STAGE 1

Issues
Explain the main issues underlying the case. Place extra attention on the what, why and when.

1. The main issue is whether to outsource the internal audit service or to establish their own audit
department in the company.
- When the Securities Commission requested all the listed companies to have an internal audit
function, Malik from sales department who has no experience in internal auditing, was appointed as
the internal auditor. Then, board members said out their opinion that Malik is not qualified to be an
internal auditor.
- So, the board members decided to outsource the service from their external auditors, MAC & Co.
This is ethically wrong because the external auditors who evaluate the company’s state should not
evaluate the company’s internal controls too. Furthermore, the internal audit report’s content was
not prepared as required by the Bursa Malaysia.

2. The Board of Directors of Mentara Bhd are family-related and friends.

- They are not independent of the company because it is their family business and have financial
interest in the company.

3. The Audit Committee supposed to be independent of the company.

- The members should be non-executive directors according to Bursa’s requirement. However, the
CFO of the company and brother of Dato Johan, Jalil is in the committee. Moreover, an independent
director among the Audit Committee supposed to be the Chairman of the Audit Committee. But,
Datin Jamilah, Marketing Director and wife of Dato Johan, is the Chairman of the Audit Committee.
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Key players
Based on the issues identified above, determine the key players involved, their position/roles and the
main decision that they have to make.

Num. Who? Position/roles Main decision

1 Dato Ir Johan  CEO of Mentara Bhd
Arshad (Johan)  Founder of the company
2 Jalil  CFO of Mentara Bhd
 Audit Committee member
 Dato Johan’s brother
3 Tan Sri Abdullah  Chairman of the company
Musa  Dato Johan’s uncle
1. Whether to employ new
staff to be responsible for their
own internal audit department
2. Whether to promote Malini
internally to be responsible for
the department
3. Considering Zainal for the
position
Whether to select appropriate
company for outsourcing
Whether to outsource or
establish the internal audit
department
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STAGE 2

PART I: Decisions
For each decision that need to be made by each key player, identify the criteria that should be
considered and the decision alternatives that are available

Key player Dato Ir Johan Arshad (Johan)

No. Main decision Decision criteria Alternatives

1. Reliability, qualification
and experience
Whether to hire new staff 2. Internal control state
1. Employ new staff
to be responsible for the 3. Objectivity
1 2. Zainal
internal audit department 4. Bursa compliance
3. Internal promotion – Malini
or via internal promotion regulation
5. Cost & time to be
incurred

Key player Jalil

No. Main decision Decision criteria Alternatives

1. Cost & budget
2. Audit period and charge 1. Outsourcing the service
Whether to select the
3. Competency and 2. Malini as Chief Internal Audit
1 appropriate company for
qualifications Executive
outsourcing
4. Compliance of Bursa
Requirements

Key player Tan Sri Abdullah Musa

No. Main decision Decision criteria Alternatives

1. The costs 1. Outsource internal audit
Whether to outsource or
2. Quality & capability department
1 establish the internal
3. Threat of independent 2. Establish own internal audit
audit department
4. Bursa compliance department
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PART II: Evaluations

Evaluate each available alternative based on the decision criteria.

Key player Dato Ir Johan Arshad (Johan)

Main Whether to hire new staff to be responsible for the internal audit department or
decision via internal promotion

Decision criteria
Reliability,
No. Alternative Internal Bursa Cost & time
qualification
control Objectivity compliance to be
and
state regulation incurred
experience
Varies based
on
1 Employ new staff Varies Unfamiliar Yes competency High
and
experienced
Lack of High as
No because
experience requires a
2 Zainal Inexperience Unfamiliar CEO’s
on practical lot of
nephew
knowledge trainings
Yes except for
Internal promotion Yes, training Trainings
3 Familiar finance Low
– Malini needed needed
department

Preferred alternative & predicted outcomes:

Given the circumstances in the case, explain the preferred alternative and discuss the possible
outcomes that may result from the decision. Support the possible outcomes with supporting notes or
evidences.

The preferred alternative is the internal promotion specifically Malini from finance departments as
it was strongly recommended by Jalil whom is the CFO of the company. Additionally, she had the
experienced of auditing background, and being the company accountant and knowing ins and outs
of the company. However, Malini have no proper exposure on internal auditing thus a proper
training could be conducted to enhance her exposure in internal auditing. To assist her, it is better
to hire a couple more experienced and qualified employees alongside with her to be part of the
internal audit team.

There is a limitation factor where the internal auditors in auditing the finance department as
Malini was previously managing the accounts of the company. A proper measure needed to be
taken where a different internal auditor supposed to be in charge when comes to auditing that
particular business function. The cost and time to be incurred for internal promotion will be lesser
because the company only need to spend on the trainings where it is much lower than the
outsourcing services.
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Key player Jalil

Main
Whether to select the appropriate company for outsourcing
decision

Decision criteria
No. Alternative Competency Compliance
Cost & Audit period and
and of Bursa
budget charge
qualifications Requirements
Period : Specified
1 Outsourcing the service High Yes Varies
Charge : Higher
Period : Throughout
Malini as Chief Internal Trainings
2 Low the year Yes
Audit Executive needed
Charge : Lower

Preferred alternative & predicted outcomes:

Given the circumstances in the case, explain the preferred alternative and discuss the possible
outcomes that may result from the decision. Support the possible outcomes with supporting notes or
evidences.

The preferred alternative for Jalil is the Alternative 2 which is to support the internal promoting
Malini to be the Chief Internal Audit Executive as of for now as she had the proper qualifications
and experienced to handle the Internal audit process. The costs of promoting her would be
significantly lower than outsource but additional costs may incurred for the trainings of internal
auditing and perhaps the right certifications of attaining the specified knowledge in internal
auditing and listing requirement by Bursa Malaysia.

Having an own internal audit function is advantageous in the long term because the team could
keep tracking on the controls and processes throughout the year. For outsourcing, the internal
audit only done within a specific time period and yet there are so much areas to be covered. So it
is definitely a good choice if Mentara Bhd choose to promote Malini and establish an internal
audit function.
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Key player Tan Sri Abdullah Musa

Main decision Whether to outsource or establish the internal audit department

Decision criteria
No. Alternative Quality & Threat of
The costs Bursa compliance
capability independent
Judgement Highly Varies but unable to
based on dependent on know the report till
Outsource internal
1 Higher company supplier final report is issue
audit department
backgrounds or trouble
and portfolio communicating
Have own Able to review the
Establish own Varies, but Having the
audit staff particular report
2 internal audit lower than control to
and easily and guiding the
department outsourcing decide
accessible team beforehand

Preferred alternative & predicted outcomes:

Given the circumstances in the case, explain the preferred alternative and discuss the possible
outcomes that may result from the decision. Support the possible outcomes with supporting notes or
evidences.

The preferred alternative is to establish the internal audit department whereby the costs would be
lower and having control who will be in the particular team through interviewing the potential
candidates itself. Through a proper interview process, the company able to choose a person that is
competent and qualified for the job. The company can also choose internal promotion of its own
staffs where in the case Malini, displayed a strong potential candidate that matched all the
requirements to be the Chief Internal Audit Executive. Trainings are needed and a team of
auditors are required to audit every scope and area of risks of Mentara Bhd.

If the company establish own internal audit department, they will have the high task control on
their own internal audit staff where any new information about the reporting can be updated
quickly rather than dependent on outsource internal auditor. They are able to review the
particular report and guiding the team beforehand. This could also help to avoid the problem of
confidentiality as the important information will not leak to outside company.
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PART III: Action & Implementation Plan

Specify the action plan related to the decision made.

Who Dato Ir Johan Arshad (Johan)

What Via internal promotion – Malini

How Explain how the decision shall be implemented (action plan). The action plan should be in
chronological order, detailed and clearly explained.

1. Dato Johan can talk with the HR manager, Adam to gain more perspective in getting
the right person for the job and approach him to seek the staff that is qualified and
experienced for internal audit department.
 First, list out all the entry requirements for each job positions.
 Post job advertising through newspaper or online website such as Jobstreet,
Graduan as well as social media like Facebook and Instagram to attract more
qualified and capable people to apply for the relevant job position.
 The company can also offer attractive salary, incentive, comfortable working
environment and benefits such as dental, medical benefits for their staffs.
 He can invite Zainal to attend interview in order to decide whether Zainal is
qualified and suitable for that job position.

2. Johan should send Malini for trainings and examinations regarding to internal auditing
and especially familiarising with Bursa listing requirements.
 The training programmes such as Continuous Professional Education (CPE) is to
consistently update and refresh their technical knowledge, skills and ethical
standards.
 Malini is required to participate in Certified Internal Auditor (CIA) examination
which will test on her knowledge and ability regarding the current practice of
internal auditing. It enables her to adapt to professional changes and
challenges. The CIA examination offered in three parts which include Internal
Auditing Basics, Internal Audit Practice, and Internal Audit Knowledge
Elements.

Who Jalil
What Supporting Malini to be promoted as Chief Internal Audit Executive
How Explain how the decision shall be implemented (action plan). The action plan should be in
chronological order, detailed and clearly explained.

1. As a CFO of Mentara Bhd, Jalil has to delegate the task his team to list down the
costing to be incurred for new department.
 He is accountable for the cash inflows and outflows as well as cash
management. He may ask his team to draft out the spending.
 Each and every time when incurring a lump sum cost, he has to verify it to
make sure that it is used for the new department. He should also try to control
the spending by wisely deciding because the higher costs would lead to lower
profit.
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2. Then Jalil need to monitor the progress and control the budget as to avoid the
overspending.
 He need to appoint one of his staff to prepare a cost-benefit analysis for him as
to have a clearer picture on each spending and ensure that it is on the right
track.

Who Tan Sri Abdullah Musa

What Establishing an internal audit department
How Explain how the decision shall be implemented (action plan). The action plan should be in
chronological order, detailed and clearly explained.

1. Tan Sri should consult accounting and finance department about the cost budget that
can be used for setting up a new department to avoid overspending.
 Get the quotations from various vendor regarding to the new department such
as office renovation, equipment, furniture and fittings, computers, audit
software and so on.
 For example, computers, photocopier machine, office chairs and tables,
cupboards, and facilities to perform their job like Wi-Fi.

2. He can organize the seminar about the process of internal audit in order to enhance
the staff’s understanding on internal audit areas and make sure that the staffs can
carry out the job more efficiently.
 He may invite the Institute of Internal Auditors Malaysia (IIA) to give a talk
regarding to the internal audit techniques and issues.
 Tan Sri may reward the staffs, for example, incentives as to encourage them to
attend for the seminar or talk.

3. Tan Sri should also set up the policy and corporate governance of the company for the
internal audit and control purpose to ensure that there are adequate policies and
procedures to guide the work of internal audit functions.
 In order for him to develop the internal audit operations manual, he may use
the book such as “Essentials: An Internal Audit Operations Manual” as the
reference in generating the policies and procedure for the company.
 Then, announce the policies and procedures to the staffs as to ensure that they
have a clear indication about what they should follow and fulfill.
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Missing information:
1. The company's need of having a person to be internal auditor or a team
2. Restricted amount of cost to be incurred or budget to set up new internal audit department or to
outsource the service
3. Areas where internal auditing should be conducted
4. Gross turnover or total assets of the company as well as the total operating expenditure

Assumptions:
1. Based on the case, the company requires a team of experienced and expertise in the field to be
internal auditor
2. The company do not restrict the budget to establish the internal audit function as to ensure the
quality and long-term benefits.
3. Areas where internal auditing should be done:
a. In all 11 branches of Mentara Bhd’s hypermarket (eg. stocks, cashier, security)
b. Company’s office (eg. security to access of important information)
4. The gross turnover of the company is high as MAC & Co. charged a high internal audit fees.

Time taken to complete this chart: 6 hours