Flight of Funds

Executive Summary:
In 2006, Malaysian Travels Sdn. Bhd., a subsidiary of a public listed company,
purchased 40% equity in Turkistan Global Servies Sdn. Bhd. The acquisition was
completed through a Memorandum of Understanding (MoU). Although it
allowed for the exclusive rights for MTSB to handle logistic arrangements and
business promotions between the two countries, there was no further
documentation to allow the investments to support the acquisition. To solve
this problem, a new Chief Executive Officer was appointed. The newly
appointed CEO was Mr. Idris Bin Junid and he was appointed by Travel
Investment Holdings Bhd. which was the holding company of MTSB. TIH was
one of the biggest government linked public listed companies in Bursa
Malaysia. It was also the holding company of some other major groups of
logistics and travel related businesses. Due to a global economic downturn in
2009, TIH had suffered some major losses. By looking into the company, Mr.
Idris Junid found that it was short on funds. Furthermore, the company had not
been paid their salaries on time or their bonuses for some 2-3 years. Idris
immediately requested the Corporate Finance Dept. to submit a report detailing
what had happened to the company in MTSB on the Turkistan Global Service
Project. The job was outsourced to an external auditor, Mr. Agoos Bagoos, a
consultant form a Big Four accounting firm.

1.0 Case Description

1.1 Definition
Subsidiaries
International Accounting Standard 27 (IAS 27) defines a subsidiary as A subsidiary is
an entity, including an unincorporated entity such as a partnership, that is controlled by
another entity (known as the parent).
Subsidiary is an entity which is controlled by another entity. The control means that the
parent company can govern the financial and operating policies of its subsidiaries to
gain benefits from the operations of subsidiary. Control can be gained if more than 50%
of the voting rights are acquired by the parent and usually done by purchasing more
than 50% of the shares of subsidiary.

Joint Ventures
International Accounting Standard 31 (IAS 31) defines a joint venture as A joint venture
is a contractual arrangement whereby two or more parties undertake an economic
activity that is subject to joint control.
Joint control means that the parties to the joint venture agree to share control over the
economic activities of the joint venture. This means that unanimous consent of the
parties involved is required to make strategic decisions.

Associates
International Accounting Standard 28 (IAS 28) defines an associate as An associate is
an entity, including an unincorporated entity such as a partnership, over which the

investor has significant influence and that is neither a subsidiary nor an interest in a joint
venture.
Significant influence means that the party has power to participate in the decision
making of financial and operating policies but do not have control over them. Significant
influence is usually acquired by purchasing more than 20% of voting power but less
than 50%.

Travel Investment Holding Bhd. (TIH)

1.2 Company Structure:

Figure: 1

Turkistan Global Services Sdn. Bhd

(TGS)

Malaysian Travel Sdn. Bhd. (MTSB)

Malaysian Turkistan Travel Sdn

Bhd.(MTT)

60%

40%

In hierarchy, TIH is the main holding company or the parent company. Its subsidiary
company is MTSB. MTSB is fully controlled by TIH because it owns more than 50% of
MTSBs voting stock. MTSB set up a joint-venture with TGS, where MTSB owned 40%
shareholding to MTT. This relationship allows for the three companies to pool all their
resources for the purpose of accomplishing their tasks. All profits, losses and costs
associated with this joint-venture are under the responsibility of all its participants. The
MTT company is a joint venture company between MTT and TGS.

1.3 Appointment of Agoos Bagoos:

The appointment of Mr. Agoos Bagoos was an important decision made by Mr. Idris
Junid. Upon arrival, the external auditor found that the company was not only lacking of
funds, but was lacking the manpower in its management office. Although, he did not
manage to find any relevant documents regarding the MTT investment, his appointment
capitalized as he managed to find the initial project paper for the MoU between MTSB
and TGS. There were also documents on the projected financials as well as meetings
minutes in the company. Upon investigation, he found that the missing funds were less
than a million. The findings would salvage the companys image in the media. Mr. Idris
Junid would certainly need the expertise of Mr. Agoos Bagoos to ensure that the

company is in its best efforts to restore these problems. This will help gain trust from
TIH, MTSBs parent company and solidify its position in the Bursa Malaysia.

2.0 Case analysis

2.1 Problem statement
A) Travel Investment Holding Bhd (TIH)
1. No position or portfolio that catered to the monitoring of MIT or any of
MTSBs

other subsidiaries.

2. Lack of internal audit members.

Consequences:

No control or monitor of MTSB and its subsidiary documentations and

informations provided.

Fraudulent of management might occurred.

Internal audit members could not investigate deeper due to lack of members.

B) Malaysian Travel Sdn Bhd (MTSB)

1. There are no relevant documents pertaining to the MTT investment.
2. No effort to contact MTT was ever made.

3. The office manager had been instructed to inform the auditors that MTT
was an associate company accounted for using the equity method and
the amount invested from a group point of view was immaterial for
consolidation.
4. Investment made by the investor amounting RM800, 000.00 is unclear.
There is no recording can be traced in the company.

Consequences:

Investment transactions could not be identify or recognized between MTT and

MTSB.

Lack of communication and relationship to get further information.

C) Malaysian Turkistan Travels Sdn Bhd (MTT)

1. No audited account and audit report for MTT had been issued to the shareholders
since 1 July 2006
2. There are no any filing made with the Company Commission of Malaysia since
2004.The only thing have is only project paper for the future plan.
3. Possibility of lack in commercial justification and proper procedural practice that
led to undesirable consequences because of relation based transaction.
Consequences:

The account which not been audited will occur doubt among the users and
opposite the concept of accounting. The account should be present with true and
fair view.

2.2 Root cause of problem

1) MTSB financial distress
During the visit of Agoos Bagoos at MTSB, there were only 4 people in the office. Due
to the lack of fund to hire more number of employees, MTSB needs to focus only on
marketing and have to outsource pilgrimage service to independent subcontractors.
Because of the cash flow distress, the company unable to pay salaries and bonuses on
time since 2007. This had lead to low staff morale and motivation, and resulted to high
number of employees turnover.

2) Lack of competence from management

Deficiency of competence from management of the parent company (TIH), and MTSB
lead to obstruction of the company progress. TIH has resources required but the staffs
are not efficient enough in monitoring the company needs and opportunity of their
subsidiaries and sub subsidiaries. Furthermore, the manager of MTSB should carried
the duty with adequacy, by keeping up to date with MTT progress especially in term of

documentation. From the amount of investment made by MTSB, the company should
bring advantages and brighter future despite of financial distress.

3) Conflict of interest
Relationship based transactions can be a major concerned in conducting business.
MTT was initially set up by Omar Yatim, a board member of TGS and Yatim nor,
executive director of MTSB. Both of them are father and son. This has proven the
existing of connected relationship, and we cant reject the fact that it might lead to
undesirable consequences. Any business transaction need to be conducted truthfully
and verily.

2.3 Remedial action plan

1. To Audit the companys account.

The need to audit the MTSBs account becomes imperative because it was discovered
that no audited account was given to the shareholders. Ms. Goh who is the Chief
Finance Officer of Travel investment Holdings Berhad (TIH) discovered that other than
the annual audited financial reports, there had been no other information as relates to
the account provided by MTSB. It was also revealed that was actually no position or
portfolio that carted to the monitoring of Malaysia Turkistan Travels Sdn. Bhd. (MTT)
and MTSBs other subsidiaries.
According to Securities Commission Malaysia, any public listed company is expected to
have internal auditors who report to audit committee. MTSB has no such internal
auditors.
The account of MSTB should be audited to ascertain how healthy or sick the company

is. The CEO Mr. Idris Ben Junid summed it up when he implored Agoos to carry out
auditing of the country, obtain some relevant information he will present to the audit
committee and the Board who will then what to report to Bursa Malaysia. The auditing of
the account will help the CEO to know where the money went, who is responsible for it
and if there is anything left to salvage.

2. To call for meeting with MTSB

Emergency meeting between the parent company TIH and the subsidiary MTSB is
necessary. During the meeting there are so many questions to ask that requires
precise answer to them. For instance; the CEO of TIH the parent company should ask
the following questions;
a. What invest had been made in MTT to be able to know who the true shareholder in
the company is.
b. Who are the independent subcontractors in MTT that have all the information?
c. Where are the files related in the transaction with MTT?
d. Who and who constitute the owners of the MTT Company?
e. Who is responsible since the inception of the joint venture?
The CEO should ensure that that whoever is responding should not use subterfuge and
bluff to respond as witnessed in the first briefing with the senior staff. He should
demand for apodictic answers and response.

3. MTSB to provide report on the status of investment made in MTT

MTSB as a joint partner is oblivious of any other business MTT is doing or investing on.
From the foregoing it is noticeable that the establishment of MTT is done under
fraudulent arrangement. MSTB as a subsidiary of TIH is not much interested in what is
going on in MTT because the establishment of the company is relationship based. The

CEO should investigate the business run by MTT to ensure that there is such business
or just a ploy to manipulate the joint venture activity.
Independent investigation should be carried on Omar and Omar Yatim to determine
their main motive in the establishment of MTT. It is important to recognise the person
who is in charge of the company to root cause paid up the capital issue. If there is
evidence that can prove the existing of fraud, they should report the issue to the
authority so that further action can be taken.

4. MTSB to explain the reasons why the project was not implemented.
The CEO of TIH should demand explanation from MSTB why MTT could not stand the
test of time. From the MOU document, it is obvious that the intention is good and from
the aforesaid there are no enough documents to say that MTT is a failure. However, it
is astonishing to discover that there is no filing by MTT with the Companies
Commission of Malaysia which suggested that the reason behind its operation is to
commit fraud.
If at the end of the day it was discovered the fraud was committed as it seems
apparent, the CEO should take the necessary action to see that whoever that is
responsible is prosecuted by the SPRM.

2.4 Propose solutions

MTSB Balance Sheet:
Balance Sheet
Assets

Liabilities

Cash
+800,000
(100,000 shares x RM8)

Owners equity
Common Stock
+ 200,000
(100,000 x RM2)

Paid in Capital
+600,000
(100,000 shares x RM6)

1. Disposal of 40% Equity Interest in MTT

No.

Particulars

Amount (RM)

1.

Projected Net Earnings

2.

Business Goodwill

750,000.00

3.

Value of Licenses (inbound, outbound &

ticketing)

250,000.00

4.

Value of MM2H License

250,000.00

Total

1,108,935.00

2,358,935.00

40% Share

943,574.00

Offer after 15% discount

800,000.00

MTSB would be required to dispose its 40% equity interest in MTT. Based on the
projected balance sheet for MTT (2007 to 2009), the accumulated retained earnings
should stand at RM1,108,035.00.

Based on the proposed paid-up capital of MTT which was RM250,000.00, the
theoretical value of the company stands at RM8.00 per share. The proposed stake
of 40% shareholding was expected to be valued at RM8.00 x 100,000 shares =
RM800,000.00.
TIH has approved the acquisition of 40% equity valued at RM800,000.00 by MTSB
for the above business plan.
MTSB is now required to provide the actual value of their share in MTT. They will
have to salvage whatever value left based on MTT current financial position.
This initiative will enable MTSB to improve their cash flow and expand on their main
business activity which is pilgrimage (umrah) as well as inbound and outbound
travel services.

2. Focus on Main Business Activity

With the liquidation of the equity in MTT, MTSB will have the capital to revive their
main business activity which is pilgrimage (umrah) and travel services.
MTSB must perform the contracts awarded by their clients for arranging the
pilgrimage group themselves instead of contracting out the jobs to other subcontractors.
A business plan needs to be drawn with specific target, schedule and workforce.

3. Corporate Governance
Definition:

The framework of rules and practices by which, a board of directors ensures

accountability, fairness and transparency in a companys relationship with its all
stakeholders (financiers, customers, management, employees, government and the
community).
The corporate governance framework consists of:
1. Explicit and implicit contracts between the company and the stakeholders for
distribution of responsibilities, rights and rewards.
2. Procedures for reconciling the sometimes conflicting interests of stakeholders in
accordance with their duties, privileges and roles.
3. Procedures for proper supervision, control and information flows to serve as a
system of checks-and- balances.
TIH must ensure the implementation of Corporate Governance in all subsidiaries
with special attention given to MTSB.
In order to apply the framework of the corporate governance, TIH shall adopt these
procedures:
1.

Job Description and Code of Conduct

MTSB must clearly spell out the Job Description of each employee and the
Code of Conduct to be adopted in the company.
Each employee is required to acknowledge and sign their agreement on the
document.

2. Termination of the Executive Director (Yatim Nor)

Yatim Nor had indicated his incompetency as an Executive Director for not
being able to manage the project with MTT effectively. He had also
demonstrated a conflicting business relationship with TGS, whom his son, Omar
Yatim was the board member when forming a joint venture in MTT. The
appointment of a new executive director is to take place.
Sometimes, it is necessary for a board to fire the executive director. In instances
of embezzlement or unethical behavior, the need to terminate is clear to
everyone.
A national compass point study in 2006 found that nearly 30% of departing
executive directors ere either fired or forced out.

3. Quarterly Report
To ensure that the actual business operations are running in accordance with
the business plan, TIH must ensure quarterly reports are provided by MTSB.
MTSB has to be transparent in disclosing the information about their Income
Statement, Balance Sheet and Cash Flow to TIH.
Regular meetings and analysis of financial condition and results will enable TIH
to exercise control, supervise the performance and provide the necessary
assistance where required.

With the implementation of the above strategies and the support from a strong parent
company, we believe that MTSB will be able to revive their business operation. Moreover,

it is also significant for the organization to have a proper documentation and record
keeping. By having proper documentation, any fraudulent in management can be easily
trace and help the company to maintain its reputation.

References
Abu Bakar, M., Norhashim, M., & Mohamed Ghows, A. (2011). Flight of Funds. Asian
Journal of Case Study, 4, 27-44.
Copy

of

Flight

of

Funds.

(n.d.).

Retrieved

March

1,

2015,

from

https://prezi.com/pwxy1x0vspr4/copy-of-flight-of-funds/
Flight

of

Fund.

(n.d.).

Retrieved

March

1,

2015,

from

http://www.scribd.com/doc/152256737/Flight-of-Fund#scribd
FLIGHT

OF

FUND.

(n.d.).

Retrieved

March

1,

2015,

from

https://prezi.com/aw9vtmphxxft/flight-of-fund/
Joint Venture (JV) Definition | Investopedia. (2003, November 23). Retrieved March 1,
2015, from http://www.investopedia.com/terms/j/jointventure.asp
Special Purpose Vehicle/Entity (SPV/SPE) Definition | Investopedia. (2003, November 26).
Retrieved March 1, 2015, from http://www.investopedia.com/terms/s/spv.asp
Subsidiary Definition | Investopedia. (2003, November 26). Retrieved March 1, 2015, from
http://www.investopedia.com/terms/s/subsidiary.asp
www.businessdictionary.com, retrieved 28/02/2015
www.blueavocado.org, feb. 13, 2011, retrieved 28/02/2015.
https://prezi.com/aw9vtmphxxft/flight-of-fund/
https://prezi.com/pwxy1x0vspr4/copy-of-flight-of-funds

 http://www.readyratios.com/reference/accounting/subsidiaries_joint_ventures_and_associa
tes.html , retrieved March 1, 2015
https://www.scribd.com/doc/229111412/Flight-of-Fund
http://www.nbc.com.my/blog/submit-annual-returns-audited-accounts-ssm-face-penalty/

retrieved March 1, 2015

http://www.termpaperwarehouse.com/essay-on/Flight-Of-Funds/184500retrieved March 1,

2015