FACULTY OF BUSINESS AND ACCOUNTANCY

GROUP ASSIGNMENT

CASE STUDY 26
Restoring Trust in Corporate Governance
The Case of Hongwei Holdings Berhad

COURSE NAME : INTEGRATED CASE STUDY

COURSE CODE : PAS 3183
SEMESTER : NOVEMBER 2020
LECTURER NAME : PROF MADYA DR. AZA AZLINA MD KASSIM
GROUP :5

STUDENT NAME MATRIC NUMBER

MUHAMMAD AZIZ FITRI BIN ZULKIFLI 4154006971

SANJEVEE A/L KAMALA NATHAN 4151001391

NURUL SYAFIQAH BINTI JAAFAR 4155003641

TIVYA ROOPINI A/P SUBRAMANIAM 4163007191

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TABLE OF CONTENT

Page
Content
Number
Question 1

Identify and explain the issues and weaknesses in relation to corporate 3-5
governance of Hongwei Holdings Berhad

Question 2
6
Suggest some strategies on how to improve corporate governance in the
company

Question 3

Analyse the position of Hongwei Holdings Berhad in the industry in 7-9

terms of whether its business is attractive or not

Question 4
10
How would you perceive Hongwei Holdings Berhad’s internal controls?
Question 1
Identify and explain the issues and weaknesses in relation to corporate governance of
Hongwei Holdings Berhad.
Corporate governance is the system of rules, practices and processes by which a firm is
directed and controlled. Corporate governance essentially involves balancing the interests of
a company’s many stakeholders, such as shareholders, senior management executives,
customers, suppliers, financiers, the government and the community. Since corporate
governance also provides the framework for attaining a company’s objectives, it encompasses
practically every sphere of management, from action plans and internal controls to
performance measurement and corporate disclosure.
Based on this case study, Hongwei started to have problem 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 the subsidiaries to unresponsive subsidiaries, the auditor
unable to complete the audit report.
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 concern.

1. Hongwei facing a big problem where the release of its December 2015 annual report
is delayed.
i. Based on the 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 tp lodge its financial statements and
reports (collectivity called ‘the account’) with the Register of Company (ROC).
 For a private company, it must be done within 30 days from the day accounts are
circulated to the members.
 The accounts must be circulated to the members within 6 months from the end of its
financial year.
 In the case of public company, the accounts must be lodged with the ROC within 30
days from annual general meeting (AGM).

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ii. 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 incured 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 2 months 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.

i. Based on Company Act 2016 Section 266 - Power duties of auditor, subdivision(1)
ans subdivision (4) :
 (1) every auditors of the company shall report to the members on the financial
statement and the company’s accounting and others records relating to those
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 companyand is entitled to
require from any officer of the company and any auditor of a related company such
information and explainations as he desires for the purposes of audit.

3. These problems because of the lack of experience of the CEO that does not know
the importance of corporate governance.
i. Section 213 (1), (2) and (3) of Companies Act 2016 - Duties and responsibility of
directors :
 (1) a director of a company shall at all times exercise his powers in accordance with
the 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 dillegence with
 (a) the knowledge, skill and experience which may reasonable be expected of a
director having the same responsiblities and
 (b) any additional knowledge, skill and experience which the director in the 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 5 years or to a fine
not exceeding 3 millions ringgit or both.

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4. The CEO also does not know how to make a trust upon their shareholders and
stakeholders.
 In Malaysia 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.

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Question 2
Suggest some strategies on how to improve corporate governance in the company.
1. Monitor Organizational Performance
Monitoring organizational performance is an essential board function and ensuring
legal compliance is a major aspect of the board’s monitoring role. It ensures that
corporate decision making is consistent with the strategy of the organization and with
owners’ expectations. As a board, the directors should establish an agreed format for
the reports they monitor to ensure that all matters that should be reported are in fact
reported.

2. Appoint Competent Board Members

The nominating committee should devote adequate time to identify board members
who have skills and industry knowledge to assist the board. What is important for a
board is that it has a good understanding of what skills it has and those skills it
requires. A board candidate should also be evaluated on his or her interpersonal skills
since board interactions and relationships will be important to overall board
performance.

3. 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 information is provided to the board. If a board member
requests information, the management team of the company must respond promptly to
the request.

4. Recognise that good governance is not just about compliance

Boards need to balance conformance (i.e. compliance with legislation, regulation and
codes of practice) with performance aspects of the board’s work (i.e. improving the
performance of the organisation through strategy formulation and policy making). As
a part of this process, a board needs to elaborate its position and understanding of the
major functions it performs as opposed to those performed by management. These
specifics will vary from board to board. Knowing the role of the board and who does
what in relation to governance goes a long way towards maintaining a good
relationship between the board and management.

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Question 3
Analyse the position of Hongwei Holdings Berhad in the industry in terms of whether its
business is attractive or not.
Hongwei Holdings Berhad is a Malaysian-based company engaged in footwear industry,
specializing in shoe soles. It has 5 subsidiaries which mostly based in China and not only
focus on footwear only but also the subsidiaries involved in property investment, investment
on agriculture and wholesale and retail businesses.
Nowadays, global footwear industry is highly competitive due to few factors such as growth
of fashion industry. This is because the rapid changes in innovation of design of the shoes in
the industry. People nowadays tend to spend more on the shoes that have highest quality. This
will be the opportunity for the footwear industry to meet the customer satisfaction.
It is a business analysis model that helps to explain why various industries are able to sustain
different levels of profitability. This five forces are frequently used to measure the
attractiveness of the company in the market or industry.

i. Threat of New Entrants

New entrants absolutely can disrupt Hongwei Holdings Berhad. However, with the
products produced by them absolutely will lower the force within the industry. They
established an internal research and development department to strengthen the design
of shoe soles. High cost of brand development makes it difficult for new entrants to
succeed in competing them. Plus, Hongwei has become a well-known brand of high
quality footwear since they are already 20 years in the industry. Therefore, many
people had been recognized the brand as they are producing comfortable and high
quality of shoes at affordable price. This will lead to the difficulty of the new entrants
as Hongwei already a well-known brand in Malaysia compared to new entrants who
just started to create their brand names. In addition, Hongwei has their own
technology in producing their shoe soles. They kept improved their components in the
shoe soles where they started to upgrade their MD1 shoe soles to MD2. Both of the
shoe soles produced using the same main components but using upgraded distinct
production process which used more advanced technology than the previous one.
MD2 shoe soles have greater variability in design and improved quality control. New
entrants will find the difficulty to compete with them as they do not have the
technology like they have.

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ii. Threat of competitive rivalry
Competitors are a must in all industry. Competition determines how the business
maintains in the industry market. For Hongwei, it is a must to have a strong
competition in the industry. Most of the big brand produces different types of shoes
compared to Hongwei. Therefore, the company a little bit advantage as they are
specializing in the shoe soles. However, they have a very strong brand name in
Malaysia especially in order to be known by the customers. It is purposely designed
and made to meet the local demand compared to other big brands that are not based in
Malaysia. This is an opportunity and advantage as well to the company as they can
produce shoes according to the Malaysian’s preferences towards the sole shoes
especially.

iii. Bargaining power of suppliers

Suppliers basically are very important to the business as it will affect the business
since the business relies on the suppliers on the availability of the stocks. However,
for Hongwei, they did not depend much on the suppliers since they have their own
developed in-house production for their shoe soles. This will improve their internal
control of raw materials, lower the production costs and also to reduce the dependency
on the third-party suppliers. Plus, they are also producing other shoe soles for other
different segment. This is a low force to the business as they producing their own shoe
soles without depending on the suppliers. In addition, switching costs of the suppliers
are low as there are significant suppliers in the industry and the company can easily
switch to other suppliers for raw materials.

iv. Bargaining power of buyers

Buyer power gives customers the ability to squeeze industry margins by pressuring
company to reduce prices or increase the quality of services or products offered.
Buyer power will increase if the buyers can switch to other providers without any
difficulty and causing the company to provide a higher quality service at a good price
in order to retain the customers. As for Hongwei, they buyers or the customers comes
in retail and wholesale which targeted the young and middle age working adults. They
have distributed their footwear as well as making private label shoes in order to be
distributed outside Hong Kong. They just not only focus on retail. They more focus on
wholesale as it will low the switching cost and also power of buyers. In addition,
Hongwei are highly differentiated their products. Jinjiang Shoe Material Ltd, who is
the main subsidiary of Hongwei produce high quality of shoes for different market
segmentation including for women and children.

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V. Threat of substitute products
Substitutes may be a threat to Hongwei performance as key players in Malaysia’s
industry in order to fulfill local demand. In the footwear industry, there are low
substitutes of Shoe Company that specializing in shoe soles. Therefore, it has low
forces since different company focus on different types of shoes such as sport shoes
and more. This is not the suitable substitutes to Hongwei as they are specializing in
shoe soles. Plus, Hongwei has a lower threat in substitute products due to the brand
loyalty of the customers. As we know, the company had been operating more than 20
years and having own manufacturing shoe soles factory. Therefore, the company has
no doubt to have a brand loyalty from the customers ad they produce very high quality
of shoes. In addition, the company have their own R&D department in order to keep
innovate and adapting to new tends in the industry which led to the decreasing the
treat of substitute products.

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Question 4
How would you perceive Hongwei Holdings Berhad’s internal controls?
1. Improper Standard Operating Procedures. There are no standard regulations in the
company, where the people working there were resigning without any prior notice to
the company. This action internally will affect the management team to conduct their
works. Hence, the management team refuse to give commitment to the auditors
regarding the confirmation of ownerships and recoverable amount for subsidiaries.

2. Irresponsibility of directors. The board of directors Gary Menon and Jasmine Kaur
are clearly not doing their responsibility as the directors of the Hongwei Holding
Berhad. As a directors, they failed to meet the new deadline and unable to submit the
annual report in the agreed time. They also commit a lot of breaches regarding
corporate governance, foreign listing requirements, disclosures and the non-
compliance with the Bursa Malaysia Securities’ Directives. Besides that, they also
failed or refuse to communicate with the regulators and new board of Malaysia even
though it was one of the responsibilities as the directors, as stated in the corporate
governance.

3. Lack of proper documentation. One of the subsidiaries unable to confirm the

information about their businesses transactions that happened. They failed to provide
required information and comprehensive legal advice to auditors in where the auditors
were unable to assess the completeness of all legal cases and the extent of liabilities
that might arise. So the auditors unable to obtain appropriate evidence from the
subsidiaries. Moreover, auditors also not able to complete the audit report as they
were unable to determine whether all significant events occurring after the reporting
period had been adequately dealt with in the financial statements , due to the lack of
proper documentation.

4. Inability to obtain sufficient assurance. There are another internal control is that led
to the inability to obtain sufficient assurance that there were no material weaknesses
in the system of internal accounting control or there was no risk that financial
statements may be materially misstated as a result of fraud is also one of the internal
control problems.

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5. Material uncertainty. It indicates 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.

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