This disclosure, (iv) insider trading, and (v) the incorrect

This scandal was brought about largely due to: (i) an
inadequate risk management system, (ii) excess power given to an individual,
(iii) a lack of disclosure, (iv) insider trading, and (v) the incorrect
application of accounting principles (Farhan, 2014). Hence, I would recommend
the following changes to be made:

Strengthen the Risk Management System

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Firstly, CAO should strengthen its risk management system
through internal and external means. Internally, CAO can tighten its internal
control policies, strengthen its system of checks and balances, and put in
place an early warning system which would allow it to take proactive actions to
reduce its risks. The early warning system works by notifying Management should
any key factors which could lead to financial risks exceed a specific threshold,
allowing the managers enough time to find the root cause and respond
appropriately (Wu, et al., 2016). CAO could also
implement a whistleblowing system to encourage its employees to raise any improprieties
directly to the Board’s Chairman or to the Audit Committee (Lay Hong, 2009).

CAO should also emphasise the significance of risk
management to all its employees and instil a culture of integrity and honesty
in them. This can be done through educating them on the importance of upholding
high moral ethics and adhering to the spirit of the Code of Corporate
Governance. To best demonstrate the emphasis in safeguarding against potential
risks, CAO should initiate a risk-sensitive culture from the top down, starting
with the CEO and Management (Lay Hong, 2009).

On top of the existing committees, CAO can incorporate a
Risk Management Committee within the Board to examine and advise on the
formulation of risk policies and processes. The committee should identify and
determine the scope of the various risks essential to CAO’s business and set
out the relevant guidelines (Lay Hong, 2009). The Risk Management
Committee should also be independent to the Audit Committee to avoid any
conflict of interests since risk management processes are subject to internal
audit procedures (KPMG, 2017).

Externally, CAO can also engage external parties to aid in
ensuring that its finances are in order. For example, it could engage a team of
risk consultants to advise on its risk appetite, ensure its compliance with its
existing risk management system, and recommend measures to strengthen its
system. With the specialised expertise and knowledge, the risk consultants
would be able to provide more thorough pointers for improvement as compared to
the company’s Risk Department. Furthermore, the external consultants’
independence would allow them to have a better view of the policies and
processes without biasness (Lay Hong, 2009).

Ensure Equal Power Between the CEO and Board

To avoid placing too much power in the CEO’s hands, CAO
should ensure an equal level of power and authority between the CEO and the
Board. This policy would also allow the segregation of key duties to guard
against the risk of future frauds (Vance, 1983). Given that as the CEO, Chen
was able to make most of the decisions leading up to and causing the fraud, the
equality of power would have impeded his ability to carry out the scandal.
Furthermore, he also made use of his position as the MD to obstruct the free
flow of information to the Board, thus allowing himself to face no objections
from the Board given their ignorance to the situation. An equality in power
would allow the Board to have access to the same documents and information the
CEO has, thus substantially reducing the possibility of information obstruction
aimed towards the Board. Furthermore, to provide the Board with a more direct
access to its employees, CAO can emulate Keppel in delegating a room in the
office for Directors to contact and meet with any employee, without the Management’s
knowledge (Lay Hong, 2009).

Enhance the Disclosure of Financial Information

CAO should also disclose all its financial information, like
its trading losses, to statutory bodies such as the Monetary Authority of
Singapore, its shareholders, its parent company, and other relevant parties
concerned with its finances. This would improve its transparency and allow its
stakeholders a better and more accurate view of its finances. Should its
financial situation show a constant downward trend, the alarm can be sounded
earlier and the relevant authorities, such as its parent company, could step in
to provide them with funding. To ensure the Board is aware of its fiscal
situation, CAO should submit monthly accounts to Board Members to keep them
updated on the company’s performance. The Non-Executive Directors can then meet
periodically to discuss the company’s finances and sound out any concerns they
might have to the Board (Lay Hong, 2009).

Implement a ‘Close Period’

A close period is a pre-defined duration prior to the
announcement of the company’s financial results to the public, usually starting
from the time of completion of the results. This period will act as a blackout
period whereby CAO’s Management, Directors, and other designated employees are
barred from purchasing its securities. This ensures that insiders who would
have access to information unavailable to the public are unable to act on the
information. For example, should CAO engage in activities which led to losses,
employees with no prior knowledge, but early access to the financial results
would not be able to act on the information and sell their shareholdings. Therefore,
the public will have an equal opportunity to act on the information and not be
adversely affected by the share price’s movement, especially if the company had
incurred losses prior to the release of the results (Investopedia, 2018).

Strengthen the Internal Audit Procedures

One factor which allowed the fraud to continue over a year was CAO’s
incorrect application of accounting principles, which allowed it to hide its
trading losses. The internal audit function also played a vital role in the fraud with its inability in
detecting the errors and preventing the fraud from moving forward. Therefore,
to decrease the probability a similar fraud could occur, CAO should strengthen
its internal audit procedures.

For example, the internal auditors can place a stronger
emphasis on analytical procedures and look out for irregularities,
inconsistencies, and other anomalies, such as unusual relationships involving
accounts. These anomalies may be signs of fraudulent financial reporting, which
could occur through manipulation, falsification, or alteration of accounting
records, intentional omission of key information, or the intentional
misapplication of accounting principles (International Federation of
Accountants, 2009).
For example, a trend analysis of the monthly revenue and sales return data for
the period leading up to and slightly after the reporting period may indicate
the presence of undisclosed side agreements with customers which have been
excluded from the revenue calculations (Tsounis & Vlachvei,

To identify the anomalies, the internal audit team may
compare the recorded data and ratios with the expected values developed by the
team. The derivation of the expected values can stem from analysing and
extrapolating CAO’s historical financial data, or identifying and utilising the
relationships which are reasonably expected to exist in the data due to the
nature of the industry CAO operates in. Therefore, the internal audit team
should have a good understanding of CAO’s operations and the industry it
operates in (American Institute of
Certified Public Accountants, Inc., 2002).

Furthermore, the internal auditors should conduct stress
tests by incorporating elements of unpredictability in their audits. These
stress tests will provide an opportunity for the team to spot emerging risks,
uncover weak spots, and alert Management to take the relevant preventive
actions. Some ways of conducting the stress tests include: (i) performing
substantive tests of selected accounts, especially those which lie outside the
customary selection parameters, (ii) varying the timing of the audit
procedures, (iii) performing the procedures on an unannounced basis, and (iv)
using different sampling methods to ensure that frauds do not have time to
cover for one another (Public Company Accounting
Oversight Board, 2010).