Cradle moves to clean up processes after Auditor General's report

By Gabey Goh April 25, 2014

Report found weaknesses in agency’s financial and grant management processes
Audit committee established, internal process clean-up to begin in May

Cradle moves to clean up processes after Auditor General's report

THE 2013 Auditor General’s Report highlighted weaknesses in the management of activities at Cradle Fund Sdn Bhd, a funding agency under the Ministry of Finance.

The issues highlighted in the report centred on the agency’s incomplete Standard Operating Procedures (SOPs) and guidelines on the management of Cradle Investment Programme (CIP) grants.

The report said that these weaknesses “resulted in ambiguous terms and conditions on grant expenditure.”

Weaknesses in in the appointment and payment to programme mentors, such as “no mechanism in determining the work performed by mentors before payment was made,” were also highlighted.

Other issues reported included:

Arrears due from the recipients (reimbursement grants) amounting to RM1.29 million were not recorded in the financial statements of Cradle and were not monitored; and

Due diligence costs amounting to RM468,650 were not collected from grant recipients as stipulated and were treated as an expense in Cradle's financial statements.

In addition, guidelines and SOPs for financial management were not prepared, which resulted in several accounting discrepancies such as:

Bills/ invoices were not stamped with the date of receipt, no cancellation on the documents which were already paid;

82 payment vouchers worth RM749,915 were not supported with bills/ invoices;

102 payment vouchers worth RM1.37 million were not approved with complete signatures required; and

204 payment vouchers worth RM226,352 were prepared using cash cheques.

The report also noted that cash advances granted to employees were not recorded as due from employees and had been recorded as expenses;; while bonuses for Cradle staff were overpaid by a total of RM154,929.

[RM1 = US$0.31]

As a funding agency, Cradle solely depends on government grants to cover all its expenses. It has no other income, with its main function centred on the management of government grants.

At the end of 2012, Cradle's retained earnings were RM5.61 million, derived from the interest and dividend income received from investments in unit trusts. These investments were made using the balance of unutilised grant funds.

In 2013, the agency increased its authorised capital to RM5 million and currently has a paid-up share capital of RM5 million, out of which a total of RM4.99 million is owned by the Ministry of Finance, with one share owned by the Federal Lands Commissioner.

[To read the 2013 Auditor General’s Report Series 1 in full, click here]

The bigger picture

In an interview with Digital News Asia (DNA), Cradle chief executive officer Nazrin Hassan (pic) pointed out that the audit process essentially only checks for compliance.

“Something is either there or not there, it’s a very black-and-white process with no grey areas.

“It’s a statement of what can and cannot be found at that moment. If a document can be found, then the report will say it’s there, if it can’t be found or produced in time, it will state as such.

“So on a factual basis, the findings of the report are correct but from a contextual perspective, it can be not entirely accurate,” he claimed.

Nazrin urged those interested to read not just the Auditor General’s report but also the Feedback Report on Key Issues in the Auditor General's Report for a more comprehensive view of the situation.

“The feedback report typically comes out at the later date and includes the follow-ups after having found all the documents requested of us. So it is important to read it together to get the full context of what the situation covers,” Nazrin said.

[To read the Feedback Report – in Bahasa Malaysia – click here]

Asked about the issue of overpaid bonuses to staff, Nazrin described it as a “conclusion made prematurely”, and pointed out that as an agency under the Ministry of Finance, the basis of bonus calculations was given to the ministry before any payout is done.

“There is no way that the calculation could be wrong, before the bonus is given the basis of it is submitted to the ministry for approval.

"Once the bonus is paid out, we also submit our accounts to the ministry so if there was improper payment at any point, they would have red-flagged it immediately," he said.

Nazrin said that there wasn’t any over-payment but in the approval process between the ministry and the agency, there were no explicitly written approval documents.

“So the fact that is wasn’t worded one-to-one, doesn’t mean that there was overpayment. It boils down to a shortfall in documentation.

“There was proper communications between the ministry and our chief financial officer and in addition, there is a board member from the ministry present all the times,” he said.

The benefits of an audit

That being said, Nazrin still welcomes the findings of the report, calling it a “positive” thing.

“The good thing about the audit is that is fleshed out the areas that we need to improve on, such as process weaknesses and the need for SOPs for certain areas to be documented.

“There are areas where we have to get our mandate or authority in black-and-white but frequently, the decisions made between government and agency is not actually documented apart from the minutes of the meeting.

“But decisions move ahead, things get executed but the paperwork is missing,” he added.

This is the second time Cradle has been audited in its six-year history, with the first audit focused only on its investment processes. This is the first organisation-wide audit which included areas not related to the investment process, such as internal governance.

In comparing the first audit with the second, Nazrin noted that the first round involved auditors who had a very good grasp of what Cradle does, and highlighted aspects they did not understand for the agency to brief them fully on, which resulted in fewer red flags.

If there was one especially bright spark in the findings of the report for Nazrin, it was the conclusion of the Auditor General’s office that the CIP should be continued in the future as the programme “has helped in realising the ideas of entrepreneurs.”

“And also there were no allegations of criminal or impropriety actions. As a public fund manager, we’re happy about that,” he added.

Nazrin admitted that it is “always a challenge” to try and balance the needs of legal bureaucracy with the need to facilitate entrepreneurs.

“Having said that, the audit has highlighted alternative ways we can do things that we can incorporate into the process for compliance and still keep it fast for entrepreneurs.

“We want to do right by the entrepreneurs but as a public funding agency, we must be mindful and careful about legalities,” he added.

In response to the findings of the Auditor General's report, Nazrin said that moves have already been made to improve. An audit committee has been set up on the board level of Cradle and the agency is planning to outsource its internal audit functions to a reputable accounting firm.

“This is so that some gaps can be addressed properly and benchmarked to industry standards. We expect to have the cleaning-up process completed within three months from the beginning of May,” he added.