Brief introduction to the organization
The XX Group is a strategic sourcing partner for its product portfolio consisting tea, spices, desiccated coconut and cashew. Running throughout past thirty five years of its tea history it holds the tenth place in the Sri Lankan tea export market.
In addition to its head office being located in Colombo and its ability to source fine quality teas from Sri Lankan Tea Auction, XX also has strategically positioned offices in Uganda and Malawi, for the access of African teas from Uganda, Malawi, Mozambique, Tanzania, Uganda, Zaire and Zambia.
As at today XX is the Umbrella to eleven different companies which are diversified in to various industries such as hotel, tourism, real state, manufacturing and e-marketing at present.
Background of the issue
The financial year 2014 – 2015 had not been at all a favorable year for the company XX teas Uganda Ltd which in turn affected the mother company XX teas Pvt.Ltd , Colombo in a massive scale.
The company recorded the biggest fraud in its factories, approximately a loss of 3.5 Million US dollars. Accounting to 4.5 Billion Sri Lankan rupees. Few of the key managerial personnel within Uganda Ltd were convicted upon misappropriating the stock worth 3.5 Million Rupees.
The issue had been so dramatic that it hit the XX’s organizational culture to turn upside down, overnight. As well the implications of the stock fraud had left more room for discussions on week management, control processes, lack of sophisticated and advanced IT , ERP systems, and other HR issues inside the company board room. Stock fraud being the main reason, the company is now in the process of reviewing the control systems and procedures in order to prevent management fall outs in the future. Investigations so far revealed of many other signs of contrivances that has let the company susceptible to fraud since a long period of time.
Brief description of the issues
From the three offshore companies Uganda, Malawi and Vietnam the Ugandan company was the biggest contributor to the group revenue in 2012. And it showed a tremendous growth and a momentum for its sales. The management decided to send its most talented entrepreneurial spirit Mr. Praveen Pathirana, who was just twenty seven years then, to be employed in its Ugandan Branch.
The trust, confidence placed upon Mr. Praveen was so much that during his visits to Sri Lanka he used to stay at the company’s MD’s personal residence (As per the other employees in the company)
At XX it is more like a family. When you live with the company for a while the more you are attached and bonded by informal and close relationships. At times it is good for the company where the employees would be dedicated to work and take care of the company as their own. Yet at times it could be deleterious as well.
Too much of trust placed on the employees; negligence to put proper control procedures in place together with other management inadequacies let Mr. Praveen and few other employees in Ugandan company to fraudulently trade its’ stocks to outsiders.
Significance and justification of the incidents / issues you identified
Checks and controls form a major part of everyday’s business. Humans by nature are opportunistic. (McCain., 2009. Therefore it’s vital to keep the required balance of control mechanisms in place.
Concerning the above portrayed incident, the loss to the company was tremendous.
- The loss was 1,250,000 Kgs of tea, which was nearly 1250 tons of tea.
- In value it was a 2,500,000 USD loss, approximately Rs. 362,500,000
- That is around 362 million Sri Lankan rupees.
- The interest cost that the company had to bear on the stock loss was around 700,000 USD as the company transactions are 100% funded by the borrowings.
- Opportunity cost of lost stock, lost orders and lost profit.
Studying the organizational mechanisms and procedures it evidenced that this was not just an incident but everyday phenomenon. Lack of proper information flows and tight controls made loopholes in the system so that dabblers could escape without being detected easily.
Therefore it’s very significant to look in to the systems revise the systems and to place proper internal controls upon these systems.
Few other incidents that were recorded during past few months which have again stressed the significance of proper controls, could be listed as follows.
- The tea stock robbery in the Welisara, Colombo warehouse in July
- Labor inefficiency problems due to lack of close monitoring
- Loss of records and physical availability of blend gains
(Blend gains are an additional residue of tea towards the company after processing a client order As the company had not incurred a cost against these residue it is considered a gain. Yet due to lack of supervision employees have been continuously sealing these additional residues)
Plan of action and the objectives
All the issues aggregated let the management decision to formulate a special committee, Internal controls committee in January 2016 to look after analogous failures organization wide.
In March 2016 the head of the “internal controls committee” chose to appoint the researcher to oversee the control procedures in the Ugandan company.
Currently with the consultation of the committee I am in the process of overlooking in to the issues and other sloppy areas in the Ugandan company where it needs much more attention.
The overall action plan formulated by the researcher for analysis can be briefly described as follows.
- Map the process flows; establish blue prints for each and every company, process and department within the organization.
- Analysis of the process maps to see the points of vulnerability where it may cause human malpractices.
- Ensure timely and adequate supporting documents are available to cross check the information and process flow.
- Establish the demand for more information needs where necessary.
- Revise and implement new procedural controls
- Continuous reviewing and monitoring
The committee works in a way that it analyses the control procedures company wise. Once a particular system is correctly in place within one company then the measures are put forward to adopt the same control procedures across all the companies universally in an appropriate manner.
Methods of data collection
The research phase is crucial to analyze the issues and their implications before developing rectifying procedures. The research mainly aims at collecting data using two approaches for problem solving, A reactive approach and A proactive approach.
- First is to collect information of the past bad experiences faced by the company, and reasons for such incidents.
- The second is to investigate current process flows companywide to explore the current situation, pitfalls in the company and to take precautionary measures.
- Informal chats with employees
- Fact finding through management reports (special report by the auditors upon the stock fraud )
The main focus of this study is to look in to the areas where the current procedures have created susceptibilities for internal control failures within the organization specially within the XX Teas Uganda Ltd.. Having found these inadequacies in internal control procedures, the same seemed more vulnerable to be ignored. Therefore the whole effort of this study will be to make the internal controls sounder within the organization.
In spite of that few of the major issues that were identified would be briefed in this section along with recommendations and solutions to be followed sequentially.
Committee of Sponsoring Organizations of the Tread way Commission COSO identifies five major elements in internal control mechanism ; Control Environment, Risk assessment, Control activities, Information and communication and Monitoring.
It covers the controls over each and every aspect of the organization. The COSO framework would be used here in this section to methodically elaborate and entwine the present issues and recommended solutions in a comprehensive manner.
- Control Environment
The internal controls environment would reflect whether the organization is a good breeding point for tight internal controls. It would encompass values and integrity of employees, management attitude, authority and responsibility and commitment from the employees.
At XX the motive for internal controls is in its infancy yet is making bewildering changes after the greater repercussion of stock fraud they faced in 2014. And also there seemed an inadequate management motive for internal controls within the company as well. Though the attitude and enthusiasm aroused with the aforementioned stock misappropriation in 2014, with time there seemed a fall in the interest in the management towards internal controls.
Even the employees within XX especially in the Ugandan office are a major restraints to change and development. Their attitudes are so hard that its really difficult to be challenged and amended.
Sometimes there seemed some instances where it seem the company lacks necessary key personnel to implement changes within the organization. There seemed the need for external ODPs to change the organization sometimes.
- Risk Assessment
Under risk assessment comes whether the company has taken steps for risk assessment and analysis and in turn strategies to mitigate them. And the companies have to continuously monitor the environment to assess the risks within the environment around it.
At XX adequate levels of risk assessments are seen with regard to the external environmental factors such as legal environment the political climate of the overseas market and the financial and economic conditions in the economy.
Company focuses on the cash flow requirements, change of transnational governmental policies and sanctions among countries when it comes to risk assessment. Yet a formal approach to risk mitigation cannot be observed at XX.
- Control Activities
Control activities are the most flawed areas which needs attention within XX. As the emphasis is placed on dealing with the external environment and far reaching trust placed on its employees has caused company have a lose grip upon its internal controls.
The controls places on its operations can be simply breakdown under three headings as follows.
- Controls over Assets
- Controls over accurate and reliable information
- Controls in achieving business objectives
- Controls over Assets
At XX Teas Uganda Ltd, the most critical asset is its tea stock. It holds stock worth around USD 5.5 Million at any given point of time. So the significance of its stock is of top priority. Same way its equally tedious to control and monitor the XX Tea stock. The reason being unlike other raw materials the tea leaves are easily subjected to theft.
Even cash the company has to put tight controls in order to record the cash inflow and outflow in a regular basis.
Even the stock misappropriation in the Ugandan company too was due to the poor internal controls that were adopted in the company. The foremost reason behind this issue were mainly,
- The stocks being physically distant away from the mother company
- Stocks being in the possession of a third party (outsourced ware house keepers) which made it more vulnerable stock being in the hands of outsiders to the company
- No proper information and communication towards a third party who sits separately aside from the Ugandan staff.
The analysis of the underground issue well portrayed that the lack of a proper system for the controls and inadequate information requirements has led to the 3.5 Mn USD loss in the XX teas Uganda Ltd.
A basic model for stock controls can be established as thus shown in figure1.6
|Area of control||Purpose||Method of controlling / Reports and other supporting documents requested|
|Regulating stock movement|
|Regulating stock outs|
Table 1.6 Stock control system
As such the Uganda Ltd can streamline its information flows in order to prevent possible loss of data aiding fraudulent activities within the company.
Plus the company lacks proper aggregated system (ERP system) within its premises. Complete and a comprehensive ERP system too would in turn facilitate internal controls within the organization.
- Controls over accurate and reliable information
In day today business what is necessary is reliable and accurate financial and other information. The inaccurate data and information may lead to devastating business decisions and may collapse the entire business overnight
At XX there recorder few instances where inaccurate information being circulated among the company boardrooms for decision making. Examples include,
- Not recognizing the revenues periodically leading monthly sales to fluctuate over the twelve month period of the year.
- Lack of controls over the debtor follow-ups
There are instances where the proper and accurate information are not received in to the company.
- Controls in achieving business objectives
Why we need internal controls in the first place is to ensure that organization would be able to ensure its continuity in the long run. For such purpose the company has to achieve its goals and objectives.
For this purpose the most critical is its workforce. The workforce as the ultimate engine which drives the company forward has to be awaked of the businesses’ log term goals and objectives. Af XX one of the biggest weakness is the lack of formal induction process and a proper training. The place is a resourceful organization for self learning most of the times. The biggest problem in that mechanism is that the staff takes more than the quite efficient level of time to explore and learn the things in the organization. Furthermore there is the risk of misinterpretations and misunderstanding of the organizations’ goals objectives, aims and cultural aspects.
- Information and Communication
Information and communication forms a vital part in the control system in the organization. Without proper track of information there could be many loopholes in the system for the dabblers to carry out their malpractices continuously.
For an example the Uganda Ltd has breakage in its information flow as illustrated below.
During stage 01 where the company has to purchase teas from the brokers the company records its teas in its system. And the same purchase list will be sent to Colombo.
During the second stage company pays for its tea stock. Then the third processing teas or value addition and dispatching.
The problem here seemed there were instances where the stocks will not be physically received in the warehouse while it would be recorded in the system. Further there were common mistakes such as paying the broker or the creditor twice. Further there were instances such as there has been wrong material dispatches out of the system which seemed intentional stock removal from the system.
Earlier the Ugandan company was not instructed to send the broker invoices and the bank payment confirmations to the mother company in Sri Lanka for cross check purposes. The better way is to employ a third party in the Colombo Company to track the purchase and payment functions to make sure everything is within the company’s control.
On the other hand keeping the mother company always informed of the every material information was deemed necessary for effective controls.
Monitoring is essential for consistence and sustainable internal control mechanisms. There would be no use in established procedures if no one is able to monitor and track the compliance. At XX though there is a fixed internal audit team for control mechanisms and monitoring purposes there seem a laxity when it comes to foreign operations. The remote controls have made the loopholes in the sytem which has caused difficulties in foreign operation.
Foreign expatriates to be employed in the Ugandan company. As said Ugandan staff are resistant to change
Proposals in Action
The analysis of the internal control issues has brought in lot of room for the discussions on the topic “internal auditing” within the board room of XX. And people were assigned to look in to the issues that the company would be facing with relates to the loopholes in the system.
- Among which following are the actual contribution of my proposal towards the company.
- Establishing a sound communication between the head office and the Ugandan company
- Demanding for additional reports from the Outsourced partners in Uganda to accurately monitor the in and out of the stocks which belongs to XX.
- Establishing tight controls over the debtor and creditor controls.
For the first time I developed a simple plan for the overseas companies to regulate their creditor payments system. The simple process flow suggested by me to establish proper controls over the creditor can be illustrated as thus.
The above steps Three and four in the figure 1.8 was not performed by the company earlier. Under my proposal and result of its implementation today the company is performing the steps three and four on a regular basis currently in order to have a proper control over the creditors.
This method has drawn in lot more attention due to it has helped in tracking duplicate payments and credit and debit note adjustments in a more coherent manner.
Limitations and reflection
- The stock fraud by Mr. Praveen is a great and a confidential issues within the company as its investigations have not still come to an end. Therefore it is crucial to adhere to the confidentiality of the content of this report.
- Mapping process flows for a foreign company is an extremely challenging without physically visiting the place.
- Resistance from the staff from Ugandan office –
By nature Ugandans are kind of ignorant, racially segregated and highly individualistic.
Collaborative work is highly unanticipated from a Ugandan employee.
In an overall sense this project could be described a real time organizational problem solving not just a research. Most of the findings divulged and the solutions generated are now in the implementation process. The biggest achievement could be named as the implementation proposal on the new ERP system Harvest Plus. Alongside many other manual controls too would facilitate internal controlled environment within XX.
All in all it could be said that
- McCain, R.A.(2009), Game Theory and Public Policy, Retrieved from Google books