FINANCIAL STATEMENT QUALITY AND INTERNAL CONTROL: ISSUES, REASONS, AND SOLUTIONS AMONG ADVENTIST SCHOOLS IN SABAH, MALAYSIA

FINANCIAL STATEMENT QUALITY AND INTERNAL CONTROL: ISSUES, REASONS, AND SOLUTIONS AMONG ADVENTIST SCHOOLS IN SABAH, MALAYSIA By BINGGOL BIN MARAJANG An Independent Study Project Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration (Accounting Emphasis) Faculty of Business Administration Asia-Pacific International University May 2022

i Title of Study Financial Statement Quality and Internal Control: Issues, Reasons, and Solutions Among Adventist Schools in Sabah, Malaysia By Binggol Bin Marajang APPROVAL BY ADVISOR: ………………………………………… Dr. Wayne Hamra 6 May 2022 ………………. Date Approved

ii DEDICATION To my beloved wife (Sheron Dulan) and children (Carrisa, Darnell, and Jordan), thank you for your continuous support and encouragement throughout my MBA study and especially to complete this final project. To my mother, Rupiun Jakub, you are the backbone of our family who always inspires and strengthens us when we face real-life obstacles. Thank you for your guidance from childhood to the present. To my brothers and sisters, thank you for your words of encouragement.

iii Research Title: Financial Statement Quality and Internal Control: Issues, Reasons, and Solutions Among Adventist Schools in Sabah, Malaysia Author: Binggol Bin Marajang Research Advisor: Dr. Wayne Hamra Program: MBA Academic Year: 2018-2022 ABSTRACT This project analyzed the issues, reasons and solutions for financial statement quality and internal control among Seventh-day Adventist Schools in Sabah, Malaysia. The research problem in this study focused on how numerous factors, such as internal control problems, affect the quality of financial statements. Therefore, the objectives of this research were to investigate the issues and reasons that influenced the quality of financial statements. The issue of internal control was examined in depth to reveal the extent to which it has worsened the quality of financial statements. This study investigated corrective efforts taken by the local schools and Mission to improve the quality of the financial reports. The research method used in this study was a qualitative approach. The sample consisted of 5 schools (2 secondary and 3 primary). The data were collected by examining the financial statements (2015-2020) and audit reports (2015-2017). Interviews were also conducted for 15 respondents consisting of the principals, headmasters/headmistress, treasurers, financial staff and auditors.

iv The findings revealed that the schools experienced financial statement quality issues such as severance allowance understated or not reviewed, inadequate allowance for doubtful debts, inaccurate records of plant, property and equipment (PPE), as well as problems with working capital and liquidity calculations. The study also indicated that there were internal control deficiencies in the aspects of accounting control and administrative control that affected the accuracy of financial statements, such as incomplete reconciliation with banks and higher organizations, minimal segregation of duties, and incomplete inventory records. There were schools that used a single entry accounting system without using accounting software which did not comply generally accepted accounting principles. The findings also showed that there was minimal effort by the Sabah Mission and local schools to improve the quality of financial statements. Results of the research showed that the Adventist schools in Sabah were facing quality issues in terms of qualitative and quantitative reporting in their financial statements that need to be addressed by the school boards and administrators. Keywords: Financial statements, internal control, qualitative approach, Adventist schools, General Conference Auditing Services, Sabah Mission Auditing Service, generally accepted accounting principles.

v ACKNOWLEDGEMENTS First and foremost, I would like to express my sincere gratitude to the Almighty God for his special blessings, guidance, and wisdom that made it possible for me to finish this study. I wish to acknowledge my project advisor, Dr. Wayne Hamra, for his invaluable advice and thoughts, continuous support, and patience during my MBA study. Without my advisor, it would be impossible for me to complete my research. I would also like to thank all the MBA Committee members for giving me insights and valuable comments to complete my independent study. I am especially indebted to the Southeast Asia Union Mission (SAUM), Seventh-day Adventist Mission of Sabah, and Sabah Adventist Secondary School for their financial support during my study at Asia-Pacific International University. My grateful thanks are also extended to the Sabah Adventist Mission, the five SDA schools in Sabah that participated in this study, and especially to the school boards for granting permission and approval for me to collect data and conduct interviews. I would like to offer my special thanks to the General Conference Auditing Service (GCAS) and Sabah Mission Auditing Service (SMAS) auditors, Education Department of Sabah Mission, principals, headmasters, headmistress, treasurers and finance office staff for giving valuable time for the interviews and wonderful thoughts. Finally, I would like to express appreciation to my mother, wife, children, family members and friends. It would have been difficult for me to finish my studies without their wonderful understanding and encouragement throughout the last few years. Binggol Marajang

vi TABLE OF CONTENTS ABSTRACT.............................................................................................................................iii ACKNOWLEDGEMENTS ....................................................................................................v TABLE OF CONTENTS .......................................................................................................vi List of Tables.........................................................................................................................viii List of Figures........................................................................................................................viii CHAPTER 1: INTRODUCTION...........................................................................................1 Background Information.................................................................................................1 Statement of the Research Problem ...............................................................................5 Rationale and Purpose of Research................................................................................6 Objectives of the Research ..............................................................................................6 Scope and Delimitations of the Research.......................................................................7 Research Question(s) .......................................................................................................8 Benefits to be Derived from the Research .....................................................................8 Conceptual and Operational Definitions of Terms.......................................................9 Overview of Following Chapters..................................................................................10 CHAPTER 2: LITERATURE REVIEW.............................................................................11 Introduction....................................................................................................................11 Concepts and Related Theories ....................................................................................11 Financial Statements and Financial Reporting ...........................................................11 Financial Reporting Quality and Qualitative Characteristics...................................13 Small and Medium Enterprises (SMEs) ......................................................................14 Internal Control .............................................................................................................16 Related Research Works or Publications ....................................................................22 Restatement of Research Objectives and Questions...................................................22 Research Model or Conceptual Framework ...............................................................23 Conclusion ......................................................................................................................24 CHAPTER 3: RESEARCH METHODOLOGY ................................................................26 Introduction....................................................................................................................26 Research Design .............................................................................................................26 Population and Sampling Frame (Quantitative Studies) or Participants (Qualitative Studies)............................................................................................................................27

vii Data Collection Method(s) and Procedures.................................................................28 Financial Statements Data .............................................................................................29 Interviews ........................................................................................................................29 Research Instrument or Measures, Including Validity and Reliability ....................30 Data Analysis Techniques .............................................................................................31 Ethical Considerations...................................................................................................33 Conclusion ......................................................................................................................33 CHAPTER 4: RESULTS OF STUDY .................................................................................34 Data Analysis, Including Tables and Explanations ....................................................34 Financial Statements Issues...........................................................................................34 Internal Control Issues...................................................................................................46 CHAPTER 5: DISCUSSION ................................................................................................49 Brief Presentation as Per Objectives of the Study ......................................................49 Discussion of Results Based on Proposed Research Model and Hypotheses............49 Auditor Recommendation Over Internal Control..........................................................52 Retirement Plan (Severance Allowance) Calculations..................................................54 CHAPTER 6: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS..............55 Summary of the Study...................................................................................................55 Conclusions of Research Findings................................................................................55 Limitations of the Study ................................................................................................56 Recommendations..........................................................................................................56 Theoretical Contribution and/or Implications of Study.............................................58 Directions for Future Research ....................................................................................59 References...............................................................................................................................60 Appendices..............................................................................................................................64 Appendix A: Financial Statement Issues.....................................................................64 Appendix B: Internal Control Deficiencies .................................................................65 Appendix C: General Information and Interview Guide...........................................67 Appendix D: Student Enrollment and Number of Employees, Adventist Schools in Sabah...............................................................................................................................70 Appendix E: Letter to School Board............................................................................71

viii List of Tables Table 1. 2015-2021 Student Enrollment in SDA Schools, Sabah, Malaysia.............................2 Table 2. Malaysian Categories and Criteria for Small and Medium Enterprises.....................14 Table 3. Summary of Preventive Financial Control (Control Activities) Used in Private Secondary Schools’ Revenue Mobilization, Uganda ................................................17 Table 4. Internal Controls Checklist ........................................................................................21 Table 5. 2015-2021 Student Enrollment..................................................................................27 Table 6. 2015-2021 Number of Employees.............................................................................28 Table 7. Interview Participants................................................................................................28 Table 8. Financial Statements Characteristics Among the School ..........................................34 Table 9. 2015-2020 Statements of Financial Position Before Audit .......................................35 Table 10. 2015-2017 Statements of Financial Position After Audit by GCAS .......................36 Table 11. 2015-2020 Statements of Financial Activity Before Audit (School 1 and 2)..........39 Table 12. 2015-2020 Statements of Financial Activity Before Audit (School 3 and 4); 2015- 2016 (School 5) .......................................................................................................40 Table 13. 2018–2020* Days of Cash on Hand and Current Ratios.........................................41 Table 14. 2015-2020 Working Capital Before Audit...............................................................42 Table 15. 2015-2020 Liquidity Before Audit ..........................................................................42 Table 16. 2015-2017 Working Capital After Audit.................................................................43 Table 17. 2015-2017 Liquidity After Audit.............................................................................43 Table 18. Comparison of Working Capital and Liquidity Calculations between the Schools and Auditors ............................................................................................................45 Table 19. GCAS Audit Report of Internal Control Deficiencies from 2015 to 2017, SDA Schools in Sabah......................................................................................................47 Table 20. SMAS Audit Report of Internal Control Deficiencies from 2015 to 2017, SDA Schools in Sabah......................................................................................................48 Table 21. Internal Control Issues and Reasons........................................................................50 Table 22. Severance Allowance Calculation ...........................................................................54 List of Figures Figure 1: Internal Control Framework for SDA Schools...........................................................24

1 CHAPTER 1: INTRODUCTION Background Information In every organization, financial statements play an important role to communicate the company’s financial position and performances particularly to guide the main users such as the owner and management, investors, creditors, banks, and government in making significant decisions. The financial statement should be disclosed with high integrity and quality so that users are not misled with the financial information revealed and the reporting entity is protected from fraud. Therefore, the auditor must also act professionally by giving a fair judgment and opinion, and expose any financial irregularities during the audit process. The financial statement should include information for both the current fiscal year and the prior fiscal year so that the entity’s performance can be compared at the same period (Szydelko & Biadacz, 2016). High-quality information of financial statements can be achieved with enough evidence and have qualitative characteristics, namely relevance, faithful representation, comparability, understandability, timeliness, and verifiability (Herath & Albarqi, 2017). Some not-for-profit organizations do not have strong internal controls and have few employees. However, the administrators and other relevant staff can still establish a good code of conduct, implement policies and procedures to safeguard assets, produce a reliable and proper financial statement, and improve administrative effectiveness. Good internal controls are geared toward prevention of fraud and error, thus protecting the company’s reputation and assisting to achieve its objectives (Dzomira, 2014).

2 Preparing financial statements that are consistent with generally accepted accounting principles and establishing a high standard of internal control have become important issues for SDA schools in Sabah. The primary and secondary schools operated by the Seventh-day Adventist (SDA) denomination in Sabah play an important role in providing basic education to the community, especially for the church members’ children. There are two secondary schools operated by the Seventh-day Adventist Mission of Sabah and twelve primary church schools, mostly located in the rural area. These schools are registered under the Sabah Education Department and overseen by the Ministry of Education Malaysia as private schools and non-profit organizations. The SDA schools in Sabah are supervised by the Education Superintendent of the Sabah Adventist Mission. All schools use the same syllabi and textbooks as are used by government schools in which Malay is the medium of instruction. Each primary school also operates a kindergarten class. The education program is offered for kindergarten children aged five to six, primary (grade 1 to grade 6), and secondary (grade 7 to grade 12). Table 1 shows Adventist and nonAdventist student enrolments in 12 primary schools and 2 secondary schools from 2015 to 2021. Table 1 2015-2021 Student Enrolment in SDA Schools, Sabah, Malaysia Year Primary Schools Secondary Schools Grand Adventist Non-Adventist Total Adventist Non-Adventist Total Total 2015 1014 473 1487 311 134 445 1932 2016 1070 571 1641 345 126 471 2112 2017 1159 560 1719 354 96 450 2169 2018 1162 563 1725 351 122 473 2198 2019 1161 553 1714 361 114 475 2189 2020 1108 578 1686 382 119 501 2187 2021 1120 581 1701 382 119 501 2202 Source: Schools’ Closing Reports, Education Department, Sabah Mission (12 Primary, 2 Secondary)

3 The elementary school provides knowledge and a basic core of skills that are beneficial to students’ lives. The school program was designed purposely to enhance spiritual, physical, mental, and emotional health. One of the main purposes of Adventist primary schools is to prepare students for whole-person development based on biblical values, including stimulating a loving relationship with God. “The secondary school implementing the church philosophy seeks for objectives of spiritual dedication, selfrealization, social adjustment, civic responsibility, and economic efficiency” (SSD Working Policy Book II - Education, 2015, p. 11). The principal (for secondary school) or headmaster (for primary school) is the chief administrator of the school. They also act as the financial manager who oversees accounting and financial statement preparation monthly. Apart from that, the principal ensures that the school’s working capital and liquidity is maintained at or above 100% as specified by denominational policies, and that students and faculty outstanding accounts receivable are no more than 8% of total revenue. It is important to operate the school within the approved budget (SSD Working Policy Book II - Education, 2015). The school board, chaired by the Mission President, is the highest governing committee in the local Mission. The school board committee for a secondary school consists of seven to thirteen Adventist church members who include: school principal as secretary of the board, Mission Secretary and Treasurer, Mission Education Superintendent, Mission Youth Director, and parental representatives. The school treasurer or other faculty members could be invited to attend the meetings, but they have no privilege to vote, for they are not members. The primary school board officers are composed of a chairman, vice-chairman, secretary, and treasurer. The committee members include two representatives from each

4 of the constituent churches, pastors of the constituent churches, the school principal (secretary of the board), Mission president, Mission Executive Secretary, Mission Treasurer, and Mission Education Superintendent. The policy requires the school board to hold a minimum of nine regularly scheduled meetings each year (SSD Working Policy Book II - Education, 2015). The school board's responsibilities related to school finances are to review and respond to audit reports and management letters issued by the General Conference Auditing Service (GCAS) and to correct weaknesses identified in the reports. The school board is also responsible to decide the amount of appropriations given to the school, monitoring the results of financial activity, and run the business within the budget. The board ensures that financial procedures and systems are established and function effectively to address such matters as operating and capital budgets, inventories, student finance, payroll, school maintenance and landscaping, academic support for teaching resources, library, and facilities. GCAS is responsible to perform independent financial auditing services, financial reviews and inspections, reviews of trust operations, and compliance tests of core policies yearly for the secondary schools to address accounting problems and provide information to the administrators and governing boards (General Conference Working Policy [GCWP] 2019-2020, n.d.). Financial auditing for primary schools is normally conducted by the Sabah Mission auditor. “GCAS can particularly assist in analyzing such areas as internal control processes, changes in accounting principles or estimates, methods of processing accounting data, financial statement note disclosures, and possible solutions to specific accounting problems” (Seventh-day Adventist [SDA] Accounting Manual, 2011, p. 7).

5 Financial statements should be prepared by the school treasurer. The treasurer is accountable to the governing committee for sharing information on the financial statements and financial advice. Monthly operating statements must be prepared by the 20th of the following month to be discussed by the Board members (SSD Working Policy Book II - Education, 2015). According to GCWP (S 19 05), financial reports must be prepared and discussed in at least nine of the twelve-monthly meetings by the organization’s administrative committee, and at least four meetings by the controlling board, executive committee, and officers of the higher-level organization. Statement of the Research Problem Auditors and governing committee are concerned about the quality of financial statements produced by schools, as these need to meet GCAS and local mission standards. SDA schools in Sabah have experienced difficulty preparing financial statements that had fundamental and enhancing qualities such as relevance, faithful representation, comparability, verifiability, timeliness, and understandability. According to the GCAS report, the most common financial report infraction is insufficient monthly financial statements submitted to governing committees and administration (GCAS Annual Report, 2019). In other words, schools are failing to prepare timely and complete financial statements that are required to be submitted every month. Furthermore, some schools only employ a single-entry system to generate their financial statements and do not use accounting software. The primary issues that SDA schools in Sabah encounter are: (1) the auditor’s unfavorable audit opinion (qualified, adverse, disclaimer) on the quality of financial

6 information disclosed in the financial statement, and (2) documenting internal control weaknesses that jeopardies the quality of financial statement. GCAS also reported that the educational institutions are the worst performers in terms of current ratio (ability to meet short-term obligations), self-support percentage (ability to operate without support from external sources), and days cash on hand (number of days the entity can continue to pay its operating expenses) (GCAS Annual Report, 2019). The SDA schools in Sabah also facing financial problems that may related to poor financial management due to improper production of financial statements. Rationale and Purpose of Research The value of financial statement reporting among the Adventist schools in Sabah has not been widely discussed and reported. The results of this study are crucial to the school board members and school management to know the real issues and factors so that solutions can be presented. It is also important that school communities, church members, and parents of the students are well informed about the current financial position of the school through regular financial reporting. The purpose of this research is to study the quality of financial statement reporting among selected primary and secondary SDA schools in Sabah. Objectives of the Research Specifically, the objectives of this study are stated as follows: 1. To identify the financial reporting quality issues and its reasons by examining the school’s financial statements and their audit reports.

7 2. To study internal control weaknesses and reasons that affected the quality of financial statements through examining the audit communication letters. 3. To investigate the efforts made by the local schools and Sabah Adventist Mission to address issues relating to financial statement quality. 4. To formulate recommendations to the school management and Sabah Adventist Mission in terms of producing appropriate financial statement reporting that is in harmony with generally accepted accounting principles. Scope and Delimitations of the Research The coverage of this study was to review and analyse the financial statements of the schools from 2015 until 2020. The audit reports for the years 2015 to 2017 was also reviewed to analyse the audit opinions and internal control issues mentioned in the audit communication letters. An audit communication letter is a report about the organization’s internal control deficiencies and other financial matters. The financial statements that were reviewed were the statements of financial position, statements of financial activity, statements of changes in net assets, statements of cash flows, and notes to the financial statements from 2015 until 2020 for two secondary schools and three primary schools operated under the Sabah Adventist Mission. The limitations of this study were that the researcher was unable to examine monthly financial reports and every single transaction that may help to explain the actual issues due to time constraints.

8 Research Question(s) Based on the objectives of this study, the following research questions were composed. 1. What challenges do SDA schools in Sabah face in issuing appropriate financial statements on a regular and timely basis? a. What issues and reasons affected the quality of financial statements? b. How do weaknesses in internal control lead to imprecise reporting in financial statements? c. What other factors and reasons prevent or delay regular production of acceptable financial statements on a timely basis? 2. How might these problems be resolved? a. What actions to improve the quality and speed of financial reporting might be taken by local schools? b. What actions to improve the quality and speed of financial reporting might be taken by the Sabah Adventist Mission? Benefits to be Derived from the Research This study encourages the school management to regularly prepare accurate and timely financial statements to prevent fraud, show transparency, and build trust among stakeholders. A financial statement that is reported completely and accurately will help the organization to monitor, maintain, and improve cash flow, especially to collect receivables productively and to control expenses so that the school will operate within the approved budget or based on the school's current achievements. A systematic financial statement prepared every month is a key to successful financial management,

9 and a tool for the institution to perform financial analysis, to oversee the financial position, and to have a clear picture of strengths and weaknesses. Proper financial statements that are updated and reported timely would assist the school to manage students’ accounts receivable effectively and transparently. This situation will create trust and confidence in students and parents, which will encourage them to stay loyal and may attract more students in the future (Annamdevula & Bellamkonda, 2016). If the school finances are managed properly and adequately, the management may allocate funds to improve physical and academic facilities that enhance the students learning experience (Peng & Samah, 2006). The teacher will also be motivated to work harder if their salary is paid on time that eventually will benefit the students for academic excellence. If the teachers are working happily with their institutions, then they will likely perform better in their respective jobs. Financial rewards are important motivators of the organization’s management and workers (Rynes et al., 2004). Conceptual and Operational Definitions of Terms The term Accurate Financial Statement Reports in this research study refers to a financial report disclosed complete, neutral, free from material error (accurate), and timely. Accurate financial reporting depicts the organization’s real financial position concerning assets, earnings, provisions for bad debts, and other indicators (Abdulrazak, 2013). This accuracy is influenced by computerized accounting software, employees competency, and internal training (Tarus et al., 2015). However, not all Adventist schools in Sabah use accounting software packages.

10 According to GCWP (S 29), the financial statements will be produced following the Seventh-day Adventist Accounting Manual and audited annually (GCWP 2019- 2020, n.d.). The financial statement format suggested for use by the Seventh-day Adventist denomination is to adopt the International Financial Reporting Standards (IFRS), which requires accrual basis accounting and a complete set of financial statements consisting of a statement of financial position (SFP), an income statement, a statement showing changes in equity, a cash flow statement, and certain explanatory notes. However, the International Accounting Standards Board (IASB) allows the notfor-profit entity to adapt and modify the titles, line items, and applicable content of the financial statements to suit the organization's particular needs (Seventh-day Adventist Accounting Manual, 2011). Overview of Following Chapters This research report consists of six chapters. Chapter 2 discusses the relevant literature review including concept, theory and related research, research model and hypotheses. Research methodology, including data collection, the research instrument used for measurement, and analysis of findings are elaborated in Chapter 3. The results of this study are presented in Chapter 4, followed by a discussion of their significance in Chapter 5. This study ends with a summary, conclusions, and recommendations (including theoretical contributions and/or implications of the study), limitations of the study, and directions for future research which are covered in Chapter 6.

11 CHAPTER 2: LITERATURE REVIEW Introduction This chapter aims to review several research studies conducted by other researchers, authors, scholars, or organizations concerning the practices and challenges faced by organizations in preparing financial reports. A special focus is placed on small and medium enterprises (SMEs) in Malaysia that have adopted International Financial Reporting Standards (IFRS). The literature on weaknesses in internal control documentation and other factors will be discussed as factors leading to imprecise financial reporting. Other topics that need to be elaborated include concepts and related theories, related research works or publications, a restatement of research objectives and questions, research hypotheses, research model, and conceptual framework. Concepts and Related Theories Financial Statements and Financial Reporting A financial statement is a sort of financial report that discloses key information about the organization's financial position, which is obtained from its assets, liabilities, and equity. They also show financial performance derived from income and expenses, which is useful in analyzing management's responsibilities for managing the entity's economic resources and evaluating the organization’s past and future performance to induce cash inflows (IFRS, 2018). The International Financial Reporting Standards (IFRS) Foundation revised the definition of financial statement elements in 2018 to reflect contemporary business and economic conditions; this will be briefly discussed.

12 Assets are the current economic resources that an organization manages because of previous events. This economic resource is used in the production of goods and services to meet the client’s demand. Liability is the organization's present duty to transmit an economic resource as a result of previous events. Equity is the balance of the company's assets after all liabilities are deducted. Income is defined as growth in assets or declines in liabilities that cause an increase in equity, excluding payments from equity holders' claims. Expenses are declines in assets or increases in liabilities that cause reducing in equity, excluding distributions to equity holders’ claims (IFRS, 2018). The primary goal of financial reporting is to reveal the organization's financial information about its financial position, which includes economic resources (assets) and claims (liability and equity), as well as information about how income is earned and spent, which affects the value of economic resources and claims. This information is crucial to stakeholders (i.e., investors, banks, creditors) to discover the organization’s financial strengths and weaknesses before making any decision to provide funds to the reporting entity, even if the report is merely an estimate, judgment, or model. This report is also essential to evaluate how efficient and efficacious the organization’s governing board and management accomplish their duties of managing and overseeing the organization's use of economic resources to generate revenue, as shown in the past and estimated future cash inflows (IFRS, 2018).

13 Financial Reporting Quality and Qualitative Characteristics Accounting quality is defined as the capability of accounting measures to determine the firm’s economic position and performance (Barth et al., 2008). Highquality financial reports will be achieved when the source contains high information usefulness and vice versa (Osasere & Ilaboya, 2018). To have a high-level quality of financial reporting, it must be precise and predictable, transparent, not misleading, and correspond to the objectives and qualitative characteristics of financial reporting (Herath & Albarqi, 2017). The quality of financial reporting depends on the quality of accounting standards, and the underlying regulations used to enforce these standards set by the standard-setter bodies, the accounting methods employed by management, and management judgments and estimations when applying the selected alternatives. The qualitative characteristics of accounting information may become an effective tool for evaluating the quality and accuracy of financial reports (Osasere & Ilaboya, 2018). The information excerpted from financial reports is useful when it fulfills the fundamental and enhancing qualitative characteristics of financial information. The fundamental qualitative characteristics are relevance and faithful representation, whereas enhancing qualitative characteristics consist of comparability, verifiability, timeliness, and understandability (IFRS, 2018). Relevant financial information can influence users’ decisions if it has predictive value (forecasting future outcomes), confirmatory value [suggesting response or explanation of (confirms or modifies) past judgments], or both. To be a perfectly faithful representation, a financial statement report must be complete, neutral, and free from errors (accurate) (IFRS, 2018). Accuracy (free from errors) is defined as the amount of inaccuracy (bias, (lack of)

14 proximity) that occurs between projected (forecast) values when compared to the actual values or reported results (where higher errors signify lower accuracy). Accuracy can be measured using absolute errors or directional errors (Downen, 2014). However, being error-free does not imply being absolutely accurate in all aspects (IFRS, 2018). Small and Medium Enterprises (SMEs) Since the SDA schools in Sabah are small not-for-profit organizations, some characteristics of Small and Medium Enterprises are explored. Small and Medium Enterprise Corporation Malaysia (SME Corp. Malaysia) issued a revised definition of SMEs approved at the 14th National SME Development Council (NSDC) meeting in July 2013, which classified a firm as an SME if it meets all three (3) requirements in terms of qualifying criteria, type of establishment, and shareholding structure. The definition of SMEs under the qualifying criteria looks at size of operations and is categorized into micro, small, and medium sizes based on sales turnover or the number of full-time employees, whichever is lower. Table 2 shows details explaining the SME definitions for services and other sectors, including private education. Table 2 Malaysian Categories and Criteria for Small and Medium Enterprises Category Sales Turnover Number of Full-Time Employees Micro less than RM300,000 less than 5 Small from RM300,000 to less than RM3 million from 5 to less than 30 Medium from RM3 million to not exceeding RM20 million from 30 to not exceeding 75 Source: (SME Corp. Malaysia, 2013) SMEs business must also register with the authorities or district offices in Sabah and Sarawak. Based on this SME definition, the SDA schools in Sabah, which are kindergarten, primary or secondary schools, fall into the micro or small enterprise

15 categories. The SDA schools in Sabah are registered under the Ministry of Education, Malaysia. Malaysia adopted the IFRS standards for financial statements and reporting beginning January 1, 2012, as stated by the chairman of the Malaysian Accounting Standards Board (MASB), Dato Mohammad Faiz Azmi (MASB, 2013). The Borneo Post Online, reported that MASB chairman Mohamed Raslan Abdul Rahman said that “Malaysia has succeeded in convergent 80 percent of the IFRS standard since 2012, and will be 100 percent convergent by January 1, 2018” (Borneo Post Online, 2015). A statement from the MASB Chairman Mohamed Raslan Abdul Rahman has confirmed that for fiscal years beginning on or after January 1, 2018, all non-private entities in Malaysia must now use a single set of high-quality, internationally accepted accounting standards known as the Malaysian Financial Reporting Standards (MFRS) Framework (MASB, 2019). The IFRS version for SMEs was also introduced and is called the Malaysian Private Entities Reporting Standards (MPERS). The implementation of this standard set was to be effective by January 1, 2016, with some amendments to suit local organization needs (Salin, 2017). The fundamental goal of establishing the IFRS for SMEs, according to the IASB, was to improve the effectiveness of decisions and to minimize information gaps for SMEs around the globe (Jamil et. al., 2021). However, the implementation of IFRS in Malaysia has prompted concerns, particularly about the costs as well as the knowledge and skills required. The expense of harmonizing with the MFRS outweighs the benefits to financial statement users, and complete adoption compels governments to give up their rights. Full IFRS adoption can

16 be troublesome, and human resources must be educated to meet this demand (Mustafa et al., 2012). The biggest problems of IFRS implementation, however, are a scarcity of competent people and a lack of readiness (Gelaye, 2019). The firm's success or failure is determined by maintaining accurate and timely financial records or information to present a clear financial business picture (Ankrah et al., 2015). Internal Control The Treadway Commission's Committee of Sponsoring Organizations (COSO) was established in 1985 and released the "Internal Control-Integrated Framework" in 1992. This framework has been revised multiple times, most recently in 2013 and 2017, to introduce new guidelines that have been accepted by various organizations around the world to detect fraud. Internal control means a strategy designed by the governing boards, administrators, and other staff to accomplish the organization’s goals in respect to (a) operational effectiveness and efficiency, as well as financial performance and asset protection against loss; (b) reliability, transparency, and timeliness of financial and non-financial reporting; and (c) laws and regulations, including the organization’s policy compliance (COSO, 2013). A study conducted explained that COSO internal control policies must be properly formulated to ensure efficiency and effectiveness, reliability, and compliance to attain intended revenue and to avoid financial problems (Nantunda et al., 2020). The COSO guidelines control activities and procedures to enhance preventive financial control to generate desired income are implemented effectively and efficiently in schools. However, these standards face several hurdles to achieving the primary goals of institutions. The rules are outlined in the table below.

17 Table 3 Summary of Preventive Financial Control (Control Activities) Used in Private Secondary Schools’ Revenue Mobilization, Uganda Efficiency & Effectiveness Reliability Compliance Financial committee planning meeting Advice from accounting experts and professionals Decision policies approved Preparing to budget Auditing process Monitoring students’ account balances Analysis of expenditures Analysis of revenues Constantly examining post-dated cheques and bank drafts Prevent inaccurate reconciliation Prevent overbudgeting Prevent underbudgeting Prevent fake money Prevent fraudulence Prevent accumulates debts Encourages defaulting Discourages investments No cash accepted in the school office All payments through banks Mobile money electronic payments Different bank slip issuing offices Electronic and manual financial databank Genuine bank slip stamps Generate computer reporting using tally software Bank slip receipting Recording vouchers Recording invoices Receipting admissions Receipting purchases Bank reconciliation Writing requisitions Source: Nantunda et al., (2020) The COSO internal control strategy consists of five components, namely, control environment, risk assessment, control activities, information and communication, and monitoring activities (Lynford, 2015). These components are important for achieving the reliability of financial reporting, preventing or detecting fraud, and correcting material misstatements (Rubino & Vitolla, 2014). To resolve material misstatements, the organization must deal with three levels of internal control deficiencies: control deficiencies, significant deficiencies, and material weaknesses (Hammersley et al., 2007). Internal control over the financial reporting of an entity

18 cannot be regarded as effective if one or more material weaknesses exist (Public Company Accounting Oversight Board [PCAOB], 2007). A strong internal control system has the capability of producing high-quality financial reporting that reduces procedural/principle errors (e.g., transactions posted with the correct amount but entry into the wrong account) and estimation errors, as well as earnings management (e.g., manipulating financial records to make revenue and profit appear consistent and reliable). Financial information becomes more reliable because of excellent internal control (Doyle et al., 2007). However, weak internal control may lead to low quality of accounting information, which may lead to inaccurate financial reporting (for example, accrualbased accounting). Lower accrual quality may happen if the entity has a poor control environment that leads to intentionally biased accruals through earnings management caused by a lack of separation of roles, and unintentional errors in accrual estimations because of inexperience in calculating the bad-debt expense provision (Doyle et al., 2007). Nevertheless, due to a lack of data on internal control, it is nearly impossible to establish a link between the quality of internal control and the quality of accounting information (Doyle et al., 2007). On the other hand, Skaife et al. (2008) explained further details on how internal control deficiencies affect the severity of abnormal accruals in financial statements by giving two arguments: (1) via random, unintended mistakes. This scenario arises because of a lack of proper training, inappropriate policies, or the worker's vigilance. The consequences that may happen in this case, for example: (i) differences when recording revenue for no specific

19 rules set for income recognition, (ii) confusion in recording the amount as an expense or capitalizing it, (iii) omission of items such as credit purchases not recorded in an account payable, and (iv) insufficient knowledge of accounting estimates, such as the allowance for obsolete inventory; and (2) Due to non-random, deliberate misstatements or omissions by staff or management personnel; for example, important accounting estimates such as the allowance for uncollectible receivables are not recorded, or there is inadequate segregation of duties. Improper separation of duties may result in undiscovered asset embezzlement and modification of recorded amounts because there are not enough people to monitor, and senior management does not react to tackle the weak control environment. Employees may also overstate or understate the organization’s income (Skaife et al., 2008). Challenges in duty segregation have been identified as a prevalent underlying cause of material misstatement and fraud (Burns, J., & Herrygers, 2014). Separating financial responsibilities reduces inaccuracy risk, such as fraud and mistakes (Gathii et al., 2014). Internal controls that emphasize safeguarding the entity's resources from misuse and increasing the quality of internal reporting for decision making will improve the organization's operational efficiency. Hence, when serious material weaknesses are corrected, the organization's operational performance will also be improved. This impact is mainly due to the improvement of operational efficiency that gives more benefits to small businesses (Cheng et al., 2018). In addition, in terms of fund management, a robust internal control system such as ensuring that the transactions are legally authorized, that records are complete and accurate, and that errors and frauds are detected and prevented in time, will help the

20 organization to grow and expand (Sambo & Benneth, 2018). However, leaders such as principals in secondary schools may neglect their responsibility to set up effective financial policies, segregate financial duties, and monitor expenses and income, including transactions authorization and verification that eventually weakens fund management (Aase, 2009) & (Oche & Oche, 2009). A successful internal control system should result in more trustworthy recorded amounts for everyday operations, such as payments from customers, sales, and inventory management, as well as reducing intentional and unintentional mistakes in financial statements. On the other hand, adverse internal control may lead to inaccurate financial statements due to bias into accruals, lowering the quality of both internally and externally reported accounting numbers. (Skaife et al., 2008). The following internal control checklist shown in Table 4 is worth practicing in small organizations:

21 Table 4 Internal Control Checklist Type of Account Internal Control Regulation Cash Cheque issued must be approved/signed by the authorized signers. Timely and intact deposits of all receipts Prepare and evaluate bank reconciliations Examine your bank statement for electronic payments Cheques are kept in a safe place Payroll Ensure the employee exists. Make sure the gross and net salary are both appropriate. Keep track of vacations and sick days. Pay attention to the amount of your payroll tax deposit. Inventory Inventory should be kept as safe as possible, and only approved vendors should be used. Purchased inventory is necessary for business. Inventory is tallied and confirmed against records at least once a quarter. Compare invoice use of inventory to jobs Vehicles Monitor vehicle miles record Observe daily expenses Vehicles are locked and entry is restricted Accounts Receivable Only authorized clients are given credit Oversee Accounts Receivable balances regularly Bills are delivered consistently for outstanding balances Check invoices regularly to keep track of any missing bills Compare amounts between manual invoices and computerized systems Canceled invoices are documented and kept All accounts receivable write-offs are approved and recorded by the owner or authorized person Accounts Payable Deal with approved suppliers only Confirm goods received before paying Pay invoice on time to avoid penalties for late payment Expenses Expense is a proper business expense Spend accordingly at a reasonable amount and within budget Expense is truly incurred General Make sure policies and procedures do not allow fraud through consistent, careful implementation Prepare budgets: quarterly/half-yearly/annual Expenses and income are compared to budget Inspect report of voids, adjustments, and journal entries Access to computer and accounting software is restricted (give password only to authorized account personnel) Hiring Investigate references, backgrounds, and profiles of potential workers before employing them Source: Kapp & Heslop, (2011).

22 Related Research Works or Publications A research study conducted by Lelly and Afiah, (2017) on 66 local government units of 15 districts and cities in North Sulawesi Province of Indonesia found that internal control and internal audit had a favorable influence on financial statement quality. Another study conducted in South Sumatra, Indonesia for 26 offices discovered that the quality of financial statements was influenced by the effectiveness of internal control systems and human resource competency (Fitri et al., 2019). Restatement of Research Objectives and Questions This study mainly to discover issues and reasons that affected the quality of the school’s financial statements. In addition, this research will seek data to show how inadequacies in internal control documentation and other variables contribute to improper reporting in financial statements. Finally, the study seeks explanations for the strategies utilized by local Adventist schools and the Sabah Mission to address these issues. Based on the concerns described in the objectives, this research addressed two major questions, each of which contains a few sub-questions. 1. What challenges do SDA schools in Sabah face in issuing appropriate financial statements on a regular and timely basis? a. What major issues in financial statement reporting faced by the schools? b. How might weaknesses in internal control documentation lead to imprecise reporting in financial statements? c. What other factors prevent or delay regular production of acceptable financial statements on a timely basis?

23 2. How might these problems be resolved? a. What actions to improve the quality and speed of financial reporting might be taken by local schools? b. What actions to improve the quality and speed of financial reporting might be taken by the Sabah Adventist Mission? Research Model or Conceptual Framework The focus of the conceptual framework for this study is to evaluate two main issues namely financial statements and internal control systems as an independent variable to produce good quality of financial statement as the dependent variable. The school administrator and school board committee may play an important role to solve any problems related to financial statement reporting and internal control (accounting control and administrative control) to uplift the quality of the financial statements. Accounting control emphasizes the methods and procedures that are imposed by the entity to ensure the quality and reliability of financial reports. Administrative control involves putting policies and rules to support the effective implementation of accounting control. The private schools which are in the category of SMEs may implement this strategy by listing down the financial statement’s quality issues as well as accounting and administrative control components that need to be given attention for financial reporting accuracy, and quickly resolve any deficiencies detected. The model is presented as follows:

24 Figure 1 Internal Control Framework for SDA Schools Source: Adapted From Hamra & Namkote, (2020) Conclusion This chapter has reviewed the relevant concepts and theoretical literature concerning the conceptual framework of financial statements and reports, as well as the difficulties faced by SMEs in implementing the IFRS, and the deficiencies of internal control policies that might lead to misleading financial reporting. However, the results Financial Statement Quality Financial Statements Issues - Reasons for incomplete financial statements produced by the school Internal Control Issues Issued to be addressed by the school Administrative Control Segregation of Duties Authorization or Approval of transactions or journal voucher Budgets Protect resources (both tangible and intangible assets) Training Programs Financial Information Accuracy and Safety Accounting Control Financial Statements Reconciliation Completeness and Accuracy General/Subsidiary Ledger Agreement Internal Audits Recording Entry Limited Access to Accounting Software Guidance From Governing Committee (Sabah Mission) School Boards

25 of this review show that there is very little research on the subject and sometimes conflicting ideas. Anyhow, the researcher is interested in developing a conceptual framework adapted from Hamra and Namkote (2020) to broaden more ideas. The following chapter discusses the research methodology, including data collection, research instruments or measures, and statistical analysis.

26 CHAPTER 3: RESEARCH METHODOLOGY Introduction This chapter describes subtopics related to the study’s design, target participants, data collection methods and procedures, research instruments including validity and reliability, data analysis methodologies, and ethical considerations. Research Design A qualitative descriptive research design was used to examine and analyze the financial statements and content of GCAS audit reports. Qualitative research activity “collects and interprets data, making the researcher as much a part of the research process as the participants and the data they provided” (Corbin & Strauss, 2015, p. 4). Qualitative research varies from quantitative research in that it does not depend on statistical testing and uses smaller sample sizes but seeks an answer in real-world contexts where the phenomenon occurred naturally (not manipulated) (Patton, 2002). The qualitative approach uses inductive thinking to uncover research questions and hypotheses that may become substantive or even formal theories (Atmowardoyo, 2018). Descriptive research means to describe phenomena and their characteristics as precisely as feasible (Nassaji, 2015). Content analysis is defined as “a research technique for making replicable and valid inferences from texts (or other meaningful matter) to the contexts of their use” (Krippendorff, 2004, p. 18). The word “texts” or data can be sounds, symbols, art, images, maps, signs, interview scripts, and numerical data (Krippendorff, 2004). The procedures in the content analysis are design, unitizing, sampling, coding, drawing inferences/analysis, and validation (Krippendorff, 2004).

27 Population and Sampling Frame (Quantitative Studies) or Participants (Qualitative Studies) In this study, the sample group included the respondents from the five schools who participated in the interview sessions. Financial statements from 2015-2020 were also an important part of the data collected. Five of the fourteen SDA schools (two secondary and three primaries) in Sabah have been chosen for this research study. These schools were picked because they have a relatively larger number of students and employees in comparison to other Adventist schools and are also located in different districts. The dilemmas faced by these sampled schools regarding their financial statements and internal control may represent similar situations experienced by other schools that were excluded from this study. The following table shows the school’s enrolment and number of employees in recent years. Table 5 2015-2021 Student Enrolment Source: School's Closing Report, Education Department, Sabah Mission School Year / Student Enrollment Year / Total Students Adventist Non-Adventist 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 School 1 189 215 194 189 187 198 198 108 94 65 79 88 88 88 297 309 259 268 275 286 286 School 2 122 130 160 162 174 184 184 26 32 31 43 26 31 31 148 162 191 205 200 215 215 School 3 403 381 396 382 370 298 298 144 174 152 155 140 154 154 547 555 548 537 510 452 452 School 4 174 194 192 187 191 200 200 102 116 113 100 93 99 99 276 310 305 287 284 299 299 School 5 50 61 72 82 76 83 83 9 7 9 9 11 11 13 59 68 81 91 87 94 96

28 Table 6 2015-2021 Number of Employees Source: School's Closing Report, Education Department, Sabah Mission For the interview session, Table 7 shows the interviewee participants from the selected schools. Table 7 Interview Participants School Designation Number Total School 1 Principal 1 Treasurer 1 3 Finance Staff 1 School 2 Principal 1 Treasurer 1 3 Finance Staff 1 School 3 Headmaster 1 Treasurer 1 3 Finance Staff 1 School 4 Treasurer 1 2 Finance Staff 1 School 5 Headmistress 1 2 Treasurer 1 Sabah Mission Auditor 1 1 GCAS Auditor 1 1 Total 15 15 Data Collection Method(s) and Procedures The data was collected through examining the financial statement records and audit reports, as well as in-depth interviews with financial personnel. The researcher wrote a letter to the Sabah Adventist Mission and each school’s board to ask for School Year / Number of Finance Office Employees Year / Number of Employees (Not including Finance Office Employees) Year / Total Employees 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 School 1 2 2 2 2 2 2 2 24 28 29 28 26 26 22 26 30 31 30 28 28 24 School 2 2 2 2 2 2 2 2 18 17 17 21 19 16 16 19 19 23 21 18 18 School 3 3 3 3 3 4 5 5 21 24 26 27 25 24 24 24 27 29 30 29 29 29 School 4 2 2 2 2 2 2 2 18 15 18 17 16 16 16 20 17 20 19 18 18 18 School 5 1 1 1 1 1 1 1 7 6 6 6 5 5 5 8 7 7 7 6 6 6 20

29 permission to review the year-end financial statements and audit reports for six fiscal years from 2015 to 2020, and to interview the financial staff. It took about four months to get approval from all of the schools. Financial Statements Data The researcher managed to collect the financial statements and the audited financial statements from all five schools. Each school provided good cooperation. Here is a brief description of how the financial statement data was collected: 1. The researcher traveled to the respective school to obtain a hard copy of the financial statements, which were handed over by the treasurer. 2. The financial statements were also distributed in soft copy via WhatsApp apps and email. 3. Three schools provided a full financial statement, except for cash flow, for the fiscal years 2015 to 2020, as well as audit reports for 2015 to 2017, in soft copy, sent via WhatsApp apps and email. One school provided a paper copy of a single-entry system of financial statements from 2015 to 2020, as well as audit reports from 2015 to 2017, which were collected by hand, and other information sent via WhatsApp. One school handed over a hard copy of two fiscal years of a single-entry system of financial statements, including audit reports for 2015 and 2016. This school did not share financial statements from 2017 to 2020 because the school administration was not ready to reveal the unaudited financial statements. Interviews For the interview sessions, an appointment was set with each participant. The researcher prepared several focused open-ended questions related to critical issues about financial statements, internal control, and how to solve these issues. The focused

30 interview is a semi-structured interview in which the researcher led the interview session based on the interviewee's responses, but within the scope of the issue to get more detailed information (Oun & Bach, 2014). A face-to-face interview was conducted in the principal’s office along with the treasurer for one of the schools. Interviews were also performed using Google Meet, which brought together the school’s principal and treasurer. Google Meet and Microsoft Teams were used to conduct interviews with the GCAS auditor and Mission auditor, respectively. The other schools’ headmasters and treasurers preferred to write their answers for the questions in Microsoft Word, and the file were sent through WhatsApp. Other finance employees who participated in this study also wrote their answers using offline WhatsApp. The interview did not end there, but the researcher requested followup explanations to ensure that the answers given were clear. The researcher communicated with the GCAS auditor several times to request clarification on the audit reports of two schools via WhatsApp and email. Online meetings were maximized to avoid transmission of COVID-19. Research Instrument or Measures, Including Validity and Reliability The research instrument utilized in this research was a comprehensive analysis of the audited and non-audited financial statements of the school. Two tables consisting of financial statements issues and internal control issues were used to record information discovered from the financial statements of the respective schools from 2015 to 2020. The second instrument was interview questions for the principal, treasurer, finance staff, and the auditor. The instruments are included as Appendices A to C.

31 No validity or reliability tests were conducted for these research instruments. However, the researcher would like to explain these terms briefly. The concepts of reliability and validity are normally for quantitative research methods which rely on statistical testing for measurement. In qualitative research, reliability and validity are hardly discussed, nevertheless, credibility still needs to be tested (Golafshani, 2003). The credibility in qualitative research relies on “the researcher is the instrument” and in quantitative depends on the quality of the designed instrument (e.g. questionnaire) (Patton, 2002). Reliability is the extent to which a data collection procedure and analysis yield the same answer for multiple participants in the research process (Kirk & Miller, 1986). Validity in general defined as how precisely a method is used to measure the narrative from the participant's experience that has credibility (Schwandt, 1997). To enhance the validity in qualitative research, it is suggested to “employ member checking, triangulation, thick description, peer reviews, and external audits” (Creswell & Miller, 2000, p. 124) for the analysis result. For this study, the interview guide and other instruments were reviewed by the researcher’s advisor and the MBA Program Committee, and modified per the suggestions received. Data Analysis Techniques Data analysis includes some steps such as coding, comparison, integration, triangulation, and interpretation. This approach comprises some methods such as phenomenology, ethnography, case study, narrative inquiry, participant observation, biographical study, and grounded theory (Atmowardoyo, 2018, p. 197). In this study, the researcher used coding. A code is described as follows:

32 A code in qualitative inquiry is most often a word or short phrase that symbolically assigns a summative, salient, essence-capturing, and/or evocative attribute for a portion of language-based or visual data. The data can consist of interview transcripts, participant observation field notes, journals, documents, drawings, artifacts, photographs, video, Internet sites, e-mail correspondence, literature, and so on. (Saldaña, 2013, p. 3) The coding process in inductive studies involves highlighting important terms for data analysis: At first read, the text data of a document → detect significant text segments relevant to objectives → to establish categories, label the text segments → minimize overlap and redundancy between the categories → generate a model combining most essential categories (Thomas, 2006). The data analysis is presented in the form of a table followed by some explanations. The school’s financial statements and auditor report were examined to identify any problems, reasons and solutions pertaining to financial report quality and internal control. The researcher used coding to analyze the secondary qualitative data available from the financial statements and audit reports. The researcher closely scrutinized the materials/documents so that a clear code could be assigned in response to the interview questions which were listed in a table. Following that, a symbol was created to represent whether the issue was of major or minor importance. Analysis was also performed by comparing the actual financial data figures to the audit reports, which are displayed in tables. The research findings were also derived from the interviewees' response.

33 Ethical Considerations Ethics in research has gotten more attention since it involves the participants, research, and researcher (Corbin & Strauss, 2015). The researcher must obtain consent, maintain confidentiality, create mutual respect, and handle with respect for those participants (person and organization) involved. The research must be published with methodological integrity, not be sloppy nor take shortcuts when gathering data and analyzing it so that new ideas and knowledge are added to their profession. When a researcher becomes overly emotional or unable to think rationally, he or she is not encouraged to judge the participant's response (Corbin & Strauss, 2015). Therefore, the researcher must act professionally and ethically. In this study, the names of the schools and respondents are not revealed to protect their privacy and identity. The researcher completed the Institutional Review Board (IRB) for Research Proposals Involving Human Subjects request form, which was approved by the MBA Program Committee. And the Sabah Mission Executive Committees and the School Boards also permitted the researcher to proceed with this study with the condition that respondent confidentiality was protected. Conclusion Developing a research instrument and measurement requires deep thought to make sure that it is answering the question and hypothesis as well as considering reliability and validity to achieve the research’s objectives. Collecting data in qualitative research is time-consuming especially during the interview session. Furthermore, ethics must be upheld before, during, and after the research is completed and published to protect the confidentiality and sensitivity of the participants including the schools.

34 CHAPTER 4: RESULTS OF STUDY Data Analysis, Including Tables and Explanations Financial Statements Issues The researcher noted that the financial statements of Schools 1, 2, and 3 met the criteria of generally accepted accounting principles, whereas those of Schools 4 and 5 did not. The comparison between them is shown in Table 8 below. Table 8 Financial Statement Characteristics among the Schools Schools Financial Statements Characteristics School 1 School 2 School 3 Prepared in double entry system using accounting software. Financial statements include statements of financial position, statements of financial activity, statements of changes in net assets, notes to the financial statements and trial balance. Cash flow statements were not provided by these three schools. The financial statements generally met the fundamental qualitative characteristics, which are relevance and faithful representation, as well as enhancing qualitative characteristics in which its contents can be compared, verified and are understandable. School 4 School 5 Microsoft Excel was used to create a single-entry system. This means that the financial statements did not adhere to generally accepted accounting principles. The statements show only cash in and out (income and expense). The contents can be easily understood, but because only one year’s data was presented, the figures could be compared with previous years. The following table shows the Statements of Financial Position (SFP) for Schools 1, 2, and 3 from 2015 to 2020 before audit, (Table 9) and after audit (Table 10) for Schools 1 and 2 from 2015 to 2017.

35 Unit: Malaysian Ringgit (MYR) Table 9 2015-2020 Statements of Financial Position Before Audit 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 1 Cash and Cash Equivalents 368,719 376,619 369,289 332,438 283,154 (87,128) 57,438 24,433 59,322 51,709 64,793 91,648 12,415 (24,732) (2,319) 16,090 38,754 (16,592) 2 Account Receivable Teacher's Receivable 9,186 14,909 16,679 24,204 31,912 33,267 1,544 1,934 1,884 1,574 (70) (70) 13,913 25,541 34,743 31,312 17,849 13,027 Government Grant & Government Aid for Student 17,260 47,616 85,610 Other Receivable (Subsidiary Organizations) 31,139 55,154 83,100 120,300 160,952 Student Debt (Previous Year) 73,291 29,969 49,292 48,970 47,170 45,370 Student Receivable (Present Balance) 64,672 63,251 98,966 86,225 133,092 325,069 83,313 96,740 131,423 155,361 151,341 183,705 100,878 145,240 184,638 203,189 238,845 328,498 (-) Allowance for Doubtful Debts (80,718) (25,632) (25,632) (25,632) (25,632) (25,632) (20,892) (20,892) (43,920) (77,624) (77,624) (77,624) (16,000) (16,000) (22,655) (32,539) (32,539) (32,539) 3 Supplies & Prepaid Expenses 300 300 300 300 300 300 1,690 1,690 1,690 1,690 4,296 4,296 4 Property and Equipment Land 59,350 59,350 59,350 59,350 59,350 59,350 Buildings 1,141,887 1,471,887 1,404,169 1,404,169 1,404,169 1,404,169 694,487 694,487 694,487 704,487 704,487 704,487 266,655 266,655 266,655 440,976 440,976 440,976 (-) Accumulated Depreciation (852,412) (898,103) (891,128) (932,248) (932,248) (932,248) (507,874) (526,262) (544,649) (563,037) (580,652) (597,955) (85,619) (85,619) 87,450 (85,619) (82,619) (82,619) Net Buildings 289,474 573,783 513,042 471,922 471,922 471,922 186,613 168,225 149,838 141,450 123,835 106,532 181,036 181,036 354,105 355,357 358,357 358,357 Furnishings & Equipment 163,345 10,724 10,724 10,724 13,568 13,568 160,016 160,016 160,016 179,723 180,900 185,100 63,511 64,112 65,812 83,252 90,831 92,211 (-) Accumulated Depreciation (167,295) (4,734) (6,529) (8,324) (8,324) (8,324) (156,289) (157,342) (158,151) (165,315) (170,094) (174,594) (14,900) (14,900) (14,900) (14,900) (14,900) (14,900) Net Furnishings and Equipments (3,950) 5,990 4,195 2,400 5,243 5,243 3,727 2,674 1,865 14,408 10,806 10,506 48,611 49,212 50,912 68,352 75,931 77,311 Total Assets 720,973 1,039,189 1,026,130 958,086 994,777 854,021 311,743 273,114 300,412 286,878 273,080 314,696 401,892 452,476 715,618 785,901 881,143 952,660 1 Accounts Payable 310,209 312,128 372,513 359,393 291,086 251,304 141,442 144,428 124,265 152,080 151,951 82,960 189,744 224,457 255,860 298,891 373,782 324,212 2 Miscellaneous: Accrued Severance Allowance 29,712 45,646 45,646 45,646 45,646 45,646 111,338 111,338 27,574 41,193 41,193 41,193 3 Miscellaneous: Accrued Salary, Salary / EPF / SOCSO / EIS Payable, Salary deducation 514 514 514 514 514 90,678 4 Fund Balances (Unallocated & Allocated) Allocated 305,549 300,834 303,349 303,349 289,349 75,778 132,015 97,727 69,632 84,646 108,023 85,080 Unallocated 74,990 380,067 304,108 249,184 368,181 390,614 (73,052) (80,378) 78,942 8,959 (28,087) 105,463 212,148 228,019 459,757 487,010 507,361 628,448 Total Liabilities and Fund Balances 720,973 1,039,189 1,026,130 958,086 994,777 854,021 311,743 273,114 300,412 286,878 273,080 314,696 401,892 452,476 715,618 785,901 881,143 952,660 Source: School Financial Statements School 1 School 2 School 3 N o Aspects

36 Table 10 2015-2017 Statements of Financial Position After Audit by GCAS Source: GCAS Audit Report There were several issues found from the SFP before audit in Table 9 as follows: 1. The Allowance for doubtful debts was not regularly adjusted for all three schools each year. For example, School 1 did not adjust its debt allowance from 2016 to 2020 during which the amount was still MYR25,632 even though the student debt kept increasing every year. When the student debt increases every year, it invites some doubt as to how effective the school has been in collecting monthly fees. What does the school do with the accumulated debt every year? 2015 2016 2017 2015 2016 2017 1 Cash and Cash Equivalents 368,719 376,619 350,173 57,438 24,433 59,322 2 Account Receivable 86,417 Teacher's Receivable 12,921 14,909 35,796 Government Grant & Government Aid For Student Other Receivable (Subsidiary Organizations) 6,462 6,278 Student Debt (Previous Year) Student Receivable (Present Balance) 75,933 93,220 148,259 105,920 152,726 (-) Allowance for Doubtful Debts (19,882) (50,632) (57,912) (20,892) (43,920) (77,624) 3 Supplies & Prepaid Expenses 300 300 300 4 Property and Equipment Land Buildings 1,471,887 1,471,887 1,424,169 694,487 694,487 694,487 (-) Accumulated Depreciation (853,743) (898,103) (893,128) (507,875) (526,262) (544,649) Net Buildings 618,144 573,784 531,041 186,612 168,225 149,838 Furnishings & Equipment 163,345 10,724 10,724 160,016 160,016 173,543 (-) Accumulated Depreciation (167,296) (4,735) (9,792) (156,289) (157,342) (160,771) Net Furnishings and Equipments (3,951) 5,989 932 3,727 2,674 12,772 Total Assets 1,052,184 1,014,189 1,008,589 313,302 263,794 303,312 1 Accounts Payable 275,659 302,128 400,619 143,001 151,674 133,957 2 Miscellaneous: Accrued Severance Allowance 45,646 45,646 50,195 111,338 27,574 41,193 3 Miscellaneous: Accrued Salary, Salary / EPF / SOCSO / EIS Payable, Salary deducation 514 514 514 4 Fund Balances (Unallocated & Allocated) Allocated 301,329 305,399 303,349 132,015 97,727 71,020 Unallocated 429,036 360,502 253,912 (73,052) (13,181) 57,142 Total Liabilities and Fund Balances 1,052,184 1,014,189 1,008,589 313,302 263,794 303,312 N o Aspects School 1 School 2

37 2. Depreciation was not regularly recorded and adjusted especially for the building and equipment. For example, School 3 recorded the same accumulated depreciation from 2015 until 2020, that is MYR14,900, even though the furnishing and equipment recorded an increasing amount every year. This annual depreciation is not accurate anymore. 3. Accrued severance allowance also facing the same issue. School 1 maintained its severance allowance at MYR45,646 from 2016 to 2020, whereas School 2 at MYR41,193 from 2018 to 2020. This means that the school did not make or record any adjustments. 4. School 3 did not record allocated funds in the Statements of Financial Position. The school should record the items that are used for specific purposes in the allocated funds. For example, these include fees for the library, school development, building maintenance fund, and so on. A brief analysis was performed by the researcher upon the SFP after it was audited (Table 10) and compared before the audited amounts (Table 9) for the period of 2015 to 2017 for Schools 1 and 2 only. Schools 3, 4 and 5 were not included in this analysis because the audit report format was different. Schools 1 and 2 were audited by GCAS, whereas Schools 3, 4 and 5 were audited by Sabah Mission Auditing Service (SMAS). Several issues were encountered as discussed below: 1. Cash and cash equivalents were adjusted for School 1 in 2017. The cash amount before audit was MYR 369,288.78, but it went down to MYR 350,173.00 after audit. No changes of cash amount before or after audit were made for School 2 from 2015 to 2017.

38 2. There was a huge adjustment of total assets and total liabilities after audit as reported by GCAS auditor for Schools 1 and 2. Significant adjustments occurred for the student receivables, Property, Plant, and Equipment accounts (assets), as well as the accounts payable (liabilities), allocated, and unallocated fund balances. The auditor's adjustment to the SFP revealed inaccuracies in the school's financial statement reporting. The statements of financial activity (SFA) before audit for Schools 1 and 2 are shown in Table 11, and for School 3, 4, and 5 in Table 12. Several findings drawn from the SFA are discussed below: 1. The main source of income for all schools is registration and tuition fees. Dorm rental and food sales are also important sources of income for Schools 1 and 2. Donations, education offerings from church members, and fundraising also contributed to earnings. Donation income for Schools 1, 2 and 4 showed a significant increase in 2020. These donations came from the government, alumni, church members, individuals, politicians, and corporate businesses during the Movement Control Order due to the COVID-19 outbreak. 2. The major expense for all schools was employee salaries, along with administrative and general expenses. Administrative expense for School 1 increased in 2020 by MYR 154,557 due to a discount given to students (186,734) who studied online during the COVID-19 pandemic. 3. The allocated funds of Schools 1 and 2 cannot simply be used for operating expenses like to pay salaries. Allocated funds must be used to finance planned projects for which they were raised.

39 Table 11 2015-2020 Statements of Financial Activity Before Audit (School 1 and 2) Source: School Financial Statements Tables 11 and 12 reveal that all schools experienced deficit budgets (expenses exceeded income) before receiving appropriations (subsidy) from the Sabah Adventist Mission. The Sabah Mission allocated some funds every year to reduce the financial burden of each school. Even though the schools received appropriations, some of them still experienced cash shortages and struggled to pay salaries on time. Interviews with school administrators revealed that earned operating income was in the form of student receivables. Analysis from the statement of financial position of Schools 1, 2 and 3 showed that student receivables increased every year. 2019 GCAS audit reports indicated that educational institutions were the worst performers in terms of selfsupport percentage (ability to operate without reliance on external resources) (GCAS, 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 A. UNALLOCATED FUND Earned Operating Income 1 Tuition & Registration 468,848 444,499 414,540 436,464 433,652 496,950 215,466 216,543 273,788 280,160 275,334 307,954 2 Dormitory & Cafeteria 333,793 341,359 342,062 365,832 362,066 339,005 35,937 58,780 66,023 78,189 66,470 43,751 3 Donations 14,659 14,695 10,136 902 29,312 92,822 84,332 25,191 149,622 4 Education Offerings 23,217 41,809 31,641 16,182 16,952 1,955 25,576 36,237 16,662 27,221 34,547 658 5 Fund Raising 2,221 37,578 200 0 6 Income (Others) 409,397 196,349 246,598 217,729 155,955 84,859 201,965 202,825 243,086 138,426 161,849 122,504 7 Total Earned Operating Income 1,252,135 1,038,710 1,044,976 1,074,686 998,137 1,015,591 478,944 514,386 599,558 608,328 563,392 624,488 Operating Expenses 1 Workers Salary / Allowance 781,289 813,057 831,806 940,362 835,497 817,700 461,929 461,156 481,487 519,612 505,308 451,565 2 Administrative Expense 260,533 244,576 167,416 192,621 102,721 257,278 218,281 154,055 170,950 319,241 242,129 186,373 3 General Expense 370,878 (170,543) 277,167 221,628 90,920 58,748 4 Total Operating Expense 1,412,700 887,090 1,276,388 1,354,610 1,029,139 1,133,726 680,210 615,211 652,436 838,854 747,437 637,938 5 Increase (Decrease) Before Appropriations (160,565) 151,620 (231,412) (279,924) (31,002) (118,135) (201,266) (100,826) (52,878) (230,526) (184,046) (13,450) Operating Appropriations 1 Mission Appropriation Received 155,314 153,458 155,453 225,000 150,000 140,567 111,880 93,500 145,000 175,743 147,000 147,000 2 Increase (Decrease) after Appropriation (5,250) 305,077 (75,959) (54,924) 118,998 22,432 (89,386) (7,326) 92,122 (54,783) (37,046) 133,550 3 Net Increase (Decrease) For Year (5,250) 305,077 (75,959) (54,924) 118,998 22,432 (89,386) (7,326) 92,122 (54,783) (37,046) 133,550 4 Fund Balances, January 1 80,240 74,990 380,067 304,108 249,184 368,181 16,334 (73,052) (13,180) 63,742 8,959 (28,087) 5 Fund Balances, December 31 74,990 380,067 304,108 249,184 368,181 390,614 (73,052) (80,378) 78,942 8,959 (28,087) 105,463 B. ALLOCATED FUND 1 Income 2,000 4,070 2,514 149,534 127,855 51,169 92,829 182,309 77,047 2 Expenses 10,691 14,000 213,571 110,720 162,143 79,264 90,758 158,932 99,990 3 Fund Balances, January 1 314,240 296,764 300,834 303,349 303,349 289,349 93,201 132,015 97,727 82,575 84,646 108,023 4 Fund Balances, December 31 305,549 300,834 303,349 303,349 289,349 75,778 132,015 97,727 69,632 84,646 108,023 85,080 TOTAL OPERATING FUNDS 380,539 680,901 607,456 552,532 657,530 466,391 58,963 17,348 148,573 93,605 79,936 190,543 No Aspects School 1 School 2

40 2019). An effective method to collect student receivables and to find other sources of income needs to be implemented by the school management to tackle cash shortages. Schools may need to consider requesting permission from the Malaysian Ministry of Education to raise tuition fees. Table 12 2015-2020 Statements of Financial Activity Before Audit (School 3 and 4); 2015-2016 (School 5) Source: School Financial Statements Table 13 displays a financial analysis about the days of cash on hand and current ratios of Schools 1, 2, 3, 4, and 5. Days of cash on hand is the number of days during which a business can continue to pay its operating expenses, based on its cash on hand. The current ratio is a liquidity ratio that measures an organization’s ability to pay its short-term obligations, i.e. those due in one year or less. A higher current ratio (more than 1) is better because the current assets are sufficient to cover its current liabilities (Rashid, 2018). For example, School 1 has a current ratio of less than one in 2020 due to lower enrollment, decreased dormitory, cafeteria, and canteen income, and 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 2015 2016 A. UNALLOCATED FUND Earned Operating Income 1 Tuition & Registration 377,582 441,861 471,961 523,330 512,570 431,016 191,385 257,569 233,525 243,862 247,249 188,143 21,636 15,577 2 Dormitory & Cafeteria 3 Donations 79,916 82,113 31,758 91,945 71,262 196 109,021 49,134 75,911 57,978 50,381 125,099 4,210 5,333 4 Education Offerings 15,811 27,905 47,467 32,212 35,663 4,508 5,469 9,635 4,908 12,584 4,274 5,692 7,557 8,135 5 Fund Raising 24,830 7,972 25,799 5,800 982 2,866 1,378 828 4,570 203 6 Income (Others) 92,111 202,252 246,327 151,210 149,209 340,424 63,878 73,298 81,700 91,678 129,850 89,912 44,489 36,784 7 Total Earned Operating Income 565,420 754,131 822,343 806,669 794,503 781,944 370,735 392,503 397,421 406,929 436,323 409,049 77,892 65,829 Operating Expenses 1 Workers Salary / Allowance 430,543 535,910 524,013 610,969 649,521 674,687 213,415 260,050 294,915 295,407 304,561 333,219 96,128 79,496 2 Administrative Expense 148,634 207,870 35,056 138,311 124,422 21,187 173,307 121,146 139,657 175,084 160,635 95,234 9,280 7,753 3 General Expense 127,085 113,480 145,424 147,321 117,433 82,207 29,935 53,392 21,044 30,890 40,739 36,584 8,904 7,384 4 Total Operating Expense 706,263 857,260 704,494 896,601 891,377 778,081 416,657 434,588 455,616 501,381 505,935 465,037 114,312 94,633 5 Increase (Decrease) Before Appropriations (140,843) (103,129) 117,850 (89,932) (96,874) 3,863 (45,922) (42,085) (58,195) (94,452) (69,612) (55,988) (36,421) (28,804) Operating Appropriations 1 Mission Appropriation Received 71,400 119,000 113,889 117,185 117,185 117,185 62,208 52,000 70,000 74,242 74,242 74,242 31,000 32,358 2 Increase (Decrease) after Appropriation (69,443) 15,871 231,739 27,253 20,311 121,048 16,285 9,915 11,805 (20,210) 4,630 18,254 (5,421) 3,554 3 Net Increase (Decrease) For Year (69,443) 15,871 231,739 27,253 20,311 121,048 16,285 9,915 11,805 (20,210) 4,630 18,254 (5,421) 3,554 4 Fund Balances, January 1 281,591 212,148 228,019 459,757 487,050 507,400 33,348 49,632 59,547 71,352 51,142 55,772 8,463 3,043 5 Fund Balances, December 31 212,148 228,019 459,757 487,010 507,361 628,448 49,633 59,547 71,352 51,142 55,772 74,026 3,043 6,597 School 5 No Aspects School 3 School 4