41 difficulty in collecting receivables during the COVID-19 pandemic. Meanwhile, Schools 1 and 3 have negative days of cash on hand in 2020 due to negative cash and cash equivalents, and no depreciation was deducted from operating expenses. These schools should no longer be able to continue operations due to lack of funds. The schools should investigate to ensure that no journal entries were recorded wrongly, and the bank accounts are updated and reconciled monthly. Formula: ℎ = ℎ ℎ ( − ℎ ) ÷ 365 = Table 13 2018–2020* Days of Cash on Hand and Current Ratios Source: School Statements of Financial Activity and Financial Position *For School 5, 2015–2016 2018 2019 2020 2018 2019 2020 2018 2019 2020 Cash and Cash Equivalents 332,438 283,154 (87,128) 51,709 64,793 91,648 16,090 38,754 (16,592) Operating Expenses 1,354,610 1,029,139 1,133,726 838,854 747,437 637,938 896,601 891,377 778,081 Depreciation 42,915 0 0 25,552 22,394 21,803 0 0 0 Current Assets 483,764 517,611 376,855 131,020 138,439 197,658 302,842 387,505 457,642 Current Liabilities 405,554 337,246 387,629 193,273 193,144 124,153 298,891 373,782 324,212 Days Cash on Hand 9 3 100 (28) 2 3 3 3 5 4 7 1 6 (8) Current Ratio 1.19 1.53 0.97 0.68 0.72 1.59 1.01 1.04 1.41 School 3 Aspects School 1 School 2 2018 2019 2020 2015 2016 Cash and Cash Equivalents 51,142 55,771 74,026 6,588 5,409 Operating Expenses 501,381 505,935 465,037 114,312 94,633 Depreciation 0 0 0 0 0 Days Cash on Hand 3 7 4 0 5 8 2 1 2 1 Aspects School 4 School 5
42 Table 14 2015-2020 Working Capital Before Audit Table 15 2015-2020 Liquidity Before Audit 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Working Capital Current Assets 435,449 459,416 508,894 483,764 517,611 376,855 121,403 102,215 148,709 131,020 138,439 197,658 112,896 162,878 251,251 303,009 387,505 457,642 (-) Current Liabilities 310,209 312,128 372,513 359,393 291,086 251,304 141,442 144,428 124,265 152,080 151,951 82,960 189,744 224,457 255,860 297,141 373,782 324,212 Total Actual Working Capital 125,241 147,289 136,380 124,371 226,525 125,551 (20,039) (42,213) 24,444 (21,060) (13,512) 114,698 (76,849) (61,579) (4,609) 5,868 13,723 133,431 Recommended Working Capital Total Operating Expenses 1,423,390 887,090 1,276,388 1,354,610 1,043,139 1,347,297 680,210 615,211 652,436 838,854 747,437 637,938 706,263 857,260 704,494 896,601 891,377 778,081 Recommended Working Capital (15% of Operating Expenses) 284,678 177,418 255,278 270,922 208,628 269,459 102,032 92,282 97,865 125,828 112,116 95,691 141,253 171,452 140,899 179,320 178,275 155,616 Allocated Funds 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 Recommended Working Capital 590,227 478,252 558,626 574,271 497,976 345,237 234,047 190,008 167,497 210,474 220,139 180,770 141,253 171,452 140,899 179,320 178,275 155,616 Working Capital Excess (Deficit) (464,987) (330,964) (422,246) (449,900) (271,451) (219,686) (254,086) (232,221) (143,053) (231,534) (233,650) (66,073) (218,101) (233,031) (145,508) (173,452) (164,552) (22,186) Percentage of actual to recommended Working Capital 21.22% 30.80% 24.41% 21.66% 45.49% 36.37% -8.56% -22.22% 14.59% -10.01% -6.14% 63.45% -54.41% -35.92% -3.27% 3.27% 7.70% 85.74% Source: School Financial Statements Aspects School 1 School 2 School 3 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Liquidity 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) 16,257 38,754 (16,592) Total Liquid Assets 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) 16,257 38,754 (16,592) Less Commitments: Current Liabilities 310,209 312,128 372,513 359,393 291,086 251,304 141,442 144,428 124,265 152,080 151,951 82,960 189,744 224,457 255,860 297,141 373,782 324,212 Allocated Funds 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 Commitments 615,758 612,962 675,862 662,742 580,435 327,082 273,457 242,155 193,896 236,726 259,974 168,040 189,744 224,457 255,860 297,141 373,782 324,212 Net Liquid Assets (247,039) (236,343) (306,573) (330,304) (297,281) (414,210) (216,019) (217,722) (134,575) (185,017) (195,181) (76,392) (177,330) (249,189) (258,179) (280,884) (335,028) (340,803) Percent of Liquid Assets to Commitments 59.88% 61.44% 54.64% 50.16% 48.78% -26.64% 21.00% 10.09% 30.59% 21.84% 24.92% 54.54% 6.54% -11.02% -0.91% 5.47% 10.37% -5.12% Source: School Financial Statements Notes: Recommended Working Capital for School 1 and School 3 calculated at 20% whereas School 2 at 15% of total operating expenses. Aspects School 1 School 2 School 3
43 Table 16 2015-2017 Working Capital After Audit Source: 2015-2017 GCAS Audit Report Table 17 2015-2017 Liquidity After Audit Source: 2015-2017 GCAS Audit Report 2015 2016 2017 2015 2016 2017 Working Capital Current Assets 437,991 434,416 476,615 122,963 92,894 140,701 Current Liabilities 275,659 302,128 400,619 143,003 151,674 133,957 Total Actual Working Capital 162,332 132,288 75,996 (20,040) (58,780) 6,744 Recommended Working Capital Total Operating Expenses 1,496,812 1,215,356 1,335,390 785,626 706,015 796,779 Recommended Working Capital (15% of Operating Expenses) 224,522 182,303 200,309 117,844 105,902 119,517 Allocated Funds 301,329 305,399 132,015 97,727 Total Recommended Working Capital 525,851 487,702 200,309 249,859 203,629 119,517 Working Capital Excess (Deficit) (363,519) (355,414) (124,313) (269,899) (262,409) (112,773) Percentage of actual to recommended Working Capital 30.87% 27.12% 37.94% -8.02% -28.87% 5.64% School 1 School 2 Aspects 2015 2016 2017 2015 2016 2017 Liquidity Cash and Cash Equivalents 368,719 376,619 350,173 57,438 24,433 59,332 Total Liquid Assets 368,719 376,619 350,173 57,438 24,433 59,332 Less Commitments: Current Liabilities 275,659 302,128 400,619 143,003 151,674 133,957 Allocated Funds 132,015 97,727 71,020 Total Commitments 275,659 302,128 400,619 275,018 249,401 204,977 Net Liquid Assets 93,060 74,491 (50,446) (217,580) (224,968) (145,645) Percent of Liquid Assets to Commitments 33.76% 24.66% -12.59% 20.89% 9.80% 28.95% Aspects School 1 School 2
44 Tables 14 and 15 illustrates the working capital and liquidity of Schools 1, 2, and 3 from 2015 to 2020 before audit and Tables 16 and 17 from 2015 to 2017 after audit, which is essential for examining the organization’s financial condition. Several concerns were discovered while analysing working capital and liquidity, which will be discussed more below. a. School 2 experienced a negative percentage of working capital for 2015, 2016, 2018 and 2019, as did School 3 from 2015-2017 (Table 14) because the total actual working capital was negative (current liabilities exceeded current assets). Several accounts payable items that the school needs to pay attention to were a Loan Payable to the Sabah SDA Mission, Tithe Payable, Social Security Organization (SOCSO) Payable, Employees Provident Fund (EPF), Prepaid Expenses, and Pre-registration. The school account and Sabah Mission must be regularly reconciled to present the actual figures in the general ledger. b. The financial situations at School 1 in 2020 and School 3 during the years of 2016, 2017, and 2020 were quite alarming since the liquidity percentage was negative compared to School 2 (Table 15). This condition may have happened because the cash and cash equivalents figure was negative. The cash at hand and bank should not be zero. The possible reasons may have been (1) a bank reconciliation was not done; (2) a journal entry was wrongly posted which caused the credit balance in the bank account to exceed the debit balance. The school treasurer needs to investigate the transactions involved further to identify the actual problems. c. The GCAS auditor and the schools used different methods of calculating recommended working capital and liquidity that may be confusing when determining
45 whether the school can meet its short-term obligations such as to pay tithe, SOCSO and EPF contributions, and debts to suppliers as illustrated in Table 18. Table 18 Comparison of Working Capital and Liquidity Calculations between the Schools and Auditors School 1 School 2 School 3 GCAS Auditor for School 1 GCAS Auditor for School 2 Working Capital Total Current Assets – Total Current Liabilities *Total Current Assets – Total Current Liabilities Total Current Assets – Total Current Liabilities Total Current Assets – Total Current Liabilities Current Assets – Current Liabilities Recommended Working Capital (20% x Total Operating Expenses) + Allocated Fund (15% x Total Operating Expenses) + Allocated Fund 20% x Total Operating Expenses (15% x Total Operating Expenses) + Allocated Fund (15% x Total Operating Expenses) + Allocated Fund Net Liquid Assets Cash – (Current Liabilities + Allocated Fund) *Total Current Assets – (Current Liabilities + Allocated Fund) Cash – Total Current Liabilities Cash – Total Current Liabilities Cash + (Current Liabilities + Allocated Fund) Percentage Liquid Assets to Commitments Total Liquid Assets / Total Commitments x 100 Total Liquid Assets / Total Commitments x 100 Total Liquid Assets / Total Commitments x 100 Net Liquid Assets / Total Commitments x 100 Total Liquid Assets / Total Commitments x 100 Total Current Assets include cash on hand, bank, and accounts receivable (students and employees). Current liabilities are the account payables, which consist of the higher organization (Sabah SDA Mission), tithe, Social Security Organization (SOCSO), Employees Provident Fund (EPF), and suppliers. School 1 and School 3 used 20% of total operating expenses plus allocated funds, whereas School 2 used 15% of total operating expenses plus allocated funds in its preparation for recommended working capital from 2015-2020. Schools 4 and 5 did
46 not prepare their working capital and liquidity calculations. Recommended working capital for schools is 15% of the operating expenses of the latest complete fiscal year, not including allocated funds (GC Working Policy, 2017-2018). School 2 used previous year operating expenses to calculate the current year recommended working capital, which is contrary to the GC working policy, and did not include overall operating expenses such as administrative and general expenses as well as expenses for allocated fund (only workers compensation was used), for years 2015, 2016, and 2017. The GCAS auditor still included allocated fund to calculate recommended working capital and liquidity in 2017 for School 2. This should be excluded. An error in calculation of the net liquid assets of School 2 (audited financial statements for 2015-2016 and 2017) was made by the GCAS auditor. The liquidity calculation for School 2 included total assets. It is supposed to include cash and bank only. Internal Control Issues The data presented in Table 19 and Table 20 were internal control deficiencies detected after analyzing the GCAS and SMAS audit communication letters from 2015 to 2017 for five schools. Among the accounting control major issues for School 1 and School 2 were lack of bank and higher organization reconciliations, severance allowance not reviewed, improper recording of other revenue sources, receivable and payable misstatements, ineffective collecting of student receivables and government grants not properly recorded. Major administrative control issues involved incompatible or insufficient segregation of duties, delay of cash deposits, inadequate
47 internal control of cash, incomplete list of purchased or donated equipment and property, physical inventory list problems, and depreciation. Table 19 GCAS Audit Report of Internal Control Deficiencies from 2015 to 2017, SDA Schools in Sabah The major internal control problems faced by School 3 in 2015-2017 as found in Table 19 and also through interviews were bank reconciliations not done, bank accounts dormant, incomplete signature of Wage Audit Committee members on the Wage Audit Sheet, lack of Wage Audit Committee members, especially lay persons, and unclear asset capitalization policy. The most notable problem for Schools 4 and 5 2015 2016 2017 No. of A/E 2015- 2016 2017 No. of A/E Accounting Control Issues 1 Bank reconciliations not prepared on a timely basis, not initialed, dated and approved ▲ ▲ ▲ 2 2 Reconciliation with Higher Organization / Inter-organization Accounts not prepared on a timely, no approval ▽ ▲ ▲ 1 1 2 3 Accrued severance allowance understated / not reviewed ▲ ▲ ▲ 1 ▲ 1 2 2 4 Improper recording of other revenue sources (canteen / bakery / commercial crops or farm products / etc.) ▲ ▲ ▲ 1 ▲ 1 2 2 5 Accounts receivable and payable misstated ▲ 1 1 1 6 Ineffective collection of student receivables ▲ 1 7 Inadequate allowance for doubtful accounts ▽ ▲ 1 ▲ 1 2 ▽ 1 ▲ 1 2 2 8 Detailed summary of old student Accounts Receivable unavailable ▽ ▲ 2 9 Opening balances of all assets, liability and net asset accounts did not agree with the audited ending balances ▲ 1 10 Expenses/Income year-end cutoff not evaluated properly ▽ 1 1 1 11 Government grant not properly recorded ▲ ▲ ▽ 1 12 Writing off (student receivables / PPE) - no action taken, no approval ▽ 1 ▲ 1 1 Administrative Control Issues 13 Minimal Segregation of Duties / Incompatible Duties ▲ ▲ ▲ ▲ ▲ 2 14 More frequent (daily) cash deposits to bank / Delay in cash deposits ▲ 1 15 Inadequate internal control of cash – summary of cash deposits not attached / Unauthorized cash disbursements ▲ ▲ 1 16 Deficit in receipted cash ▲ ▲ 1 1 1 17 Voiding of cash disbursements: supporting documentation not stamped “paid” and signed ▲ 1 18 Tithe payable not regularly (monthly) submitted to Sabah Mission ▲ ▲ ▲ 2 19 No fraud risk assessment performed ▽ ▽ ▽ ▽ ▽ 2 20 Incomplete list / unrecorded purchased or donated PPE ▲ 1 ▲ ▲ 1 2 ▲ ▲ 1 1 2 21 Physical inventory not performed for all equipment or other assets ▲ ▲ ▲ ▲ ▲ 2 22 Incorrect evaluation or calculation of PPE to be depreciated ▲ ▲ 1 23 Policies: PPE purchased or donated, capitalization and disposal isssues ▲ ▲ ▲ 2 24 Allocated funds for specific purposes not monitored properly ▽ 1 1 ▲ ▲ 1 1 2 25 Written Policies of Internal Control unavailable ▽ 1 26 Lack of back-up accounting data ▲ 1 27 Administrative Committee meeting minutes not documented properly ▲ 1 Total No. of Issues in Table 13 11 19 13 14 Total No. of Comments in GCAS Letters 24 24 30 24 26 No. of Specific Adjusting Entries/Significant 4 1 4 9/9 3 6 9/9 Source: Audit Communication Letters, GCAS Audit Report 2015-2017 Major Issue = ▲ Minor Issue = ▽ A/E = No. of Adjusting Entries GCAS = General Conference Auditing Service No. of Schools No Internal Control Deficiency School 1 School 2
48 was that there were no PPE records in the financial statements and incomplete inventory records. School 5 is facing a cash flow problem which caused delay in payment of teacher salaries, and its receipt books were not pre-numbered. Table 20 SMAS Audit Report of Internal Control Deficiencies from 2015 to 2017, SDA Schools in Sabah 2015 2016 2017 No. of A/E 2015 2016 2017 No. of A/E 2015- 2016 2017 No. of A/E 1 Cash flow problem ▲ 1 2 Receipt books not prenumbered ▲ 1 3 Printing of general ledger ▽ 1 4 Bank reconciliation ▲ ▲ ▲ 1 5 Bank account dormant ▲ 1 6 Signature on the wage audit committee ▲ 1 7 Wage Audit Committee-Lacking Lay Person ▲ ▲ 1 8 Capitalization of Assets Policy ▲ ▲ 1 9 Plant, Property, and Equipment Record ▽ ▽ ▽ ▲ ▲ ▲ ▲ ▲ 3 Total No. of Issues in Table 4 5 4 1 1 1 3 1 Total No. of Comments in SMAS Letters 4 5 4 1 1 1 3 1 No. of Specific Adjusting Entries/Significant Source: Audit Communication Letters, SMAS Audit Report 2015-2017 Major Issue = ▲ Minor Issue = ▽ A/E = No. of Adjusting Entries SMAS = Sabah Mission Auditing Service No. of Schools No Internal Control Deficiency School 3 School 4 School 5
49 CHAPTER 5: DISCUSSION Brief Presentation as Per Objectives of the Study The discussion in this chapter focuses on the causes of financial statement quality issues as well as weaknesses in internal control. Discussion of Results Based on Proposed Research Model and Hypotheses The evidence presented in Chapter 4 shows that the Adventist schools in Sabah are experiencing financial statement issues and internal control deficiencies due to several issues. The information that elaborated in this section was partly from the interview responses. In the aspects of financial reporting, two schools were unable to set up a double entry accounting system due to lack of accounting knowledge by the accounting personnel and the absence of accounting software. The interview findings show that not all finance department employees possess accounting qualifications and experience using accounting software. According to the Sabah Mission auditor, only one out of twelve primary schools is using accounting software. Both secondary schools are using accounting software and a double entry system; however, two schools are using an old (2000) version of SunPlus Accounting Software that still uses DOS commands and is not user friendly. The latest news was that a secondary school had just bought a new accounting software package called SQL-Accounting at a cost of MYR2,000, plus a desktop computer that cost MYR2,500. It began to use this package in January 2022 to replace the Sun Accounting software. Other primary schools could not afford to buy software due to their budget constraints. The reason for not employing qualified accounting personnel or to add finance staff was also caused by fund shortages.
50 The next discussion is about reasons for deficiencies in internal control as elaborated in the table below. The response was based on the interview responses from the respondents, as well as the researcher's observations. Table 21 Internal Control Issues and Reasons No Internal Control Issues Reasons Given Accounting Control Issues 1 Bank reconciliations not prepared on a timely basis, not initialed, dated and approved Delay in obtaining information such as debit notes, credit notes and other data required for reconciliation with the higher organization. Time constraints because the treasurer is also teaching, doing multiple tasks. Not understanding how to prepare a bank reconciliation. 2 Reconciliation with higher Organization / Inter-organization Accounts not reconciled 3 Accrued severance allowance understated / not reviewed Incomplete record for years of service because employees' service records were not updated. Inadequate understanding of the method for calculating severance pay. 4 Improper recording of other revenue sources (canteen / bakery / commercial crops or farm /etc.) Delay in reporting daily, weekly or monthly income to the finance department. Sales calculated manually rather than using a cash machine. 5 Accounts receivable and payable misstated Unorganized records, particularly those that do not use accounting software or lack of skills to use that software when recording student charges or other transactions. Shortage of finance staff to handle fee collection. 6 Ineffective collection of student receivables 7 Inadequate allowance for doubtful accounts Inexperience in calculating doubtful accounts. 8 Writing off (student receivables / PPE) - no action taken or no approval Failure to emphasize the importance of writing off accounts.
51 Administrative Control Issues 9 Minimal Segregation of Duties / Incompatible Duties Shortage of employees. The school cannot afford to hire new worker due to financial constraint. 10 Tithe payable not regularly (monthly) submitted to Sabah Mission Payment delay because not enough cash is available some months. 11 Incomplete list / unrecorded purchases or donated PPE Lack of manpower to perform physical inventory. 12 Physical inventory not performed for all equipment or other assets 13 Incorrect evaluation or calculation of PPE to be depreciated Incomplete list and lack of capitalization policy. Incomplete record such as costs, date of purchased/used make it difficult to be valued for depreciation. 14 Policies: PPE purchased or donated, capitalization and disposal issues There is no comprehensive written policy in place at the school. According to interviewee responses, policies were endorsed during the school board meeting, however they were not compiled into a single book. The absence of a written capitalization policy complicates whether to capitalize or to expense it. 15 Written Internal Control policies unavailable The respondent does not have formal written internal control policies. Source: Interviewee responses and the researcher’s personal observations
52 Auditor Recommendation Over Internal Control Several recommendations found in the Audit Communication Letter need to be enforced by the school administrator and monitored by the Audit Review Committee/ Education Superintendent as discussed below. 1. Minimal Segregation of Duties To achieve some segregation of incompatible duties, the principal/ headmaster should work actively in the review and approval of any financial transactions or journal entries. The school may ask help from an employee of another institution to prepare speedy monthly reconciliations and other items. 2. Bank Reconciliations - Review and Approval Bank reconciliations should be prepared on a regular basis/monthly by someone who is not involved in recording cash transactions, signed and dated by the preparer, followed by initials and dated by an independent individual (i.e. principal, internal auditor) who reviews and approves the report. 3. Cash Deposits to Bank Cash deposited to the bank frequently (i.e. three times a week) by an assigned employee, not the cashier alone who receives payments from the customers. The treasurer can help with this process, but the reconciliation should be done by another employee, or if the treasurer does the reconciliation, then it must be checked by the cashier and approved by the principal.
53 4. Evaluation of Allowance for Uncollectable Accounts The institution should conduct a periodic analysis of the collectability of accounts receivable to determine a reasonable balance for the allowance for uncollectible accounts, and adjusted accordingly to ensure that net accounts receivable is properly valued. 5. Students Receivable – Collections Internal controls are evaluated and modified by the administration and officers to ensure that any amounts due the school are collected on time. 6. Canteen / Bakery / Farm / Commercial Crops Revenue To ensure that all legitimate transactions are properly accounted for and reported, the school must create and implement an effective system of internal controls for any source of income. 7. Property and Equipment A physical inventory must be taken of all equipment (purchased or received as a donation), put appropriate acquisition values and dates, and depreciate over the estimated useful life. Record this item into the subsidiary ledger and reconcile it withs the general ledger control account. Update at least once every three years as recommended in the SDA Accounting Manual. 8. Accrued Severance Allowance Management evaluates accrued severance allowance every year-end. 9. Tithe Payable Tithe is paid every month to Sabah Mission to avoid accumulated value.
54 Since many schools are facing uncertainty how to calculate the severance allowance, the researcher would like to share the method as follows. Retirement Plan (Severance Allowance) Calculations According to the SSD education policy (Y 36 30), the basis of the severance allowance shall be one week’s salary for each year of service rendered, up to a maximum of thirteen weeks of salary, excluding all other allowances, including but not limited to travel, housing, and cost of living allowances. In the case of a surviving dependent parent, as provided for under Y 36 10 (3), no more than 5 years of full-time service shall be counted (SSDWP, 2015, p. 177). The severance allowance should be computed and its accrual recorded in financial statements when employees reach 25 years of denominational service and maximum at 39 years. The following table illustrates the method to calculate this allowance. Table 22 Severance Allowance Calculation (Current Date: 31 December 2021) To record the above allowance, the following journal entry should be prepared, assuming the Accrued Severance Allowance balance in the general ledger is zero. Journal Entry JE # 1 Debit Credit To record unrecorded accrued severance allowance for 2021 10142744 Severance Allowance Expense 101,808 10011905 Accrued Severance Allowance 101,808 Total 101,808 101,808 No. Name Date of Hire Applied Years of Service Rate Wage Factor Salary 13/52 Amount (MYR) a b c d = b x c f = d x 13/52 e = f x a 1 John 1-Jan-81 41 113% 2500 2825 706 27,544 2 Mary 1-Feb-89 33 104% 2500 2600 650 21,407 3 Paula 1-Jan-93 29 104% 2500 2600 650 18,861 4 Patricia 1-Mar-90 32 104% 2500 2600 650 20,707 5 Smith 1-Jan-97 25 85% 2500 2125 531 13,289 Total 101,808
55 CHAPTER 6: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS Summary of the Study During the study, it was discovered that School 1, School 2, and School 3 had appropriate financial statements using a double entry system. However, School 4 and School 5 did not comply with generally accepted accounting principles because their financial statements were generated in form of a single entry system. Some financial statement reporting quality issues that were identified included inaccuracies in the calculation of working capital, severance allowance, and allowance for doubtful debt not being adjusted and recorded consistently, as well as inaccurate depreciation journal entries due to building and equipment values not being updated on a regular basis. There were also schools where the values of the building and equipment were not included in the financial accounts, raising the possibility of embezzlement. Transparency was one of the internal control concerns due to a shortage of staff in the finance office. The absence of a clear capitalization policy makes it difficult for the finance department to recognize whether an equipment item or a repair/renovation of a building should be recorded as an expense or a fixed asset to be capitalized. The issue of recording income and expenditures on an accrual basis was also discovered in this study's research, which resulted in larger adjustments to fund balances. Furthermore, efforts made by the higher organizations to improve the current situation were lacking. Conclusions of Research Findings Results of the research shows that the Adventist schools in Sabah are facing quality issues for the Statement of Financial Position because large adjustments were made to these accounts after the audit, and the working capital and liquidity calculations
56 were inaccurate, which complicated the analysis of the school’s financial condition. Internal control reports from the GCAS Audit Communication Letter stated several deficiencies that need to be addressed by the school boards and administrators. A lack of support and effort from the higher organization and administration to improve the financial statement quality may reduce the overall effectiveness of financial management. Limitations of the Study The researcher was not able to collect data from all the SDA schools in Sabah. Internal control deficiencies cannot be compared between the secondary schools and primary schools due to different audit formats. There was no internal control opinion specifically in the audit report of the primary school. Recommendations There are several recommended solutions for the problems faced by the Adventist schools in Sabah: a) Setup Accounting Software that suits the needs of the schools The Sabah Mission may allocate funds to help the schools buy standardized accounting software for all the schools, or find a non-profit organization (NGO) to donate accounting software. There are many options for accounting model setup including cloud-based accounting software (public or private cloud) or installation on a local desktop for a single school user. Another option is the Malaysia Union Mission (MAUM), or Southern Asia-Pacific Division (SSD) may become a host for cloud accounting software accessible to all schools virtually. Centralized and standardized
57 accounting software allows for easier monitoring and facilitates the preparation of training modules. The software provider such as Sage UBS or SQL Accounting also provides personalized training and phone support for users. b) Set up an Accounting Technical Support Team for SDA Schools in Sabah This team would purposely established to setup accounting software, and to provide training and technical support to the users in each school. The members may include school treasurers and IT department staff who are familiar with the use of accounting software. This team can provide assistance to the finance department of each school to install and run the software, drafting the chart of accounts, and demos for journal entry posting. c) In House Training In collaboration with the GCAS and SMAS auditors as the guest speakers, Sabah Mission needs to organize several in-house training sessions or workshops for all treasurers and other finance staff. The purpose is to study the financial statement format that follows generally accepted accounting principles and is in accordance with GCAS policy. Among the topic contents includes calculation of cash flow, working capital and liquidity, depreciation, capitalization policy, inventory, allowance for doubtful debts, severance allowance, retirement plan, bank reconciliation, documentation and other related topics including accounting software training. d) Request assistance from secondary school accounting students or Adventist graduate students from the Adventist University to stick inventory tags on the equipment. It is possible to complete this during semester breaks. e) School treasurers, under the supervision of the Education Superintendent and SMAS auditor, should re-evaluate the value of buildings, equipment, land, and other
58 property to be recorded in the accounting records and depreciated every month. This can be implemented, especially for the primary schools. f) The schools need to formulate an effective way to collect school fees every month to avoid uncollectable student debts. g) Accrual-based accounting needs to be practiced as recommended in the SDA Accounting Manual. Accrual accounting creates relevant and accurate financial reports that improve accountability and transparency (Dewi & Hoesada, 2020). h) Segregation of duties needs to be implemented effectively even though there is a lack of finance staff. Hiring qualified accountants is highly recommended. i) All journal vouchers, bank reconciliations, transactions slips, and other documents need to be signed, dated, and approved by the higher personnel in the organization. j) Request that the GCAS and SMAS auditors audit the school's financial statements on an annual basis to avoid overburdening the auditors and to detect any problems with the organization's financial statements earlier. It is strongly advised to hire additional auditors to expedite the auditing process. It is also recommended that audit reports for secondary and primary schools be in the same standard format so that comparisons can be made. This will only be possible if all schools implement a double entry system and use accounting software in their financial reporting. Theoretical Contribution and/or Implications of Study Accounting credentials and knowledge are required to produce high-quality financial statements. In addition, skills in using accounting software are required for
59 preparing financial statements in accordance with generally accepted accounting principles. Directions for Future Research Further study should be conducted on the efforts made by schools, particularly primary schools, to produce excellent financial statements by implementing a double entry accounting system, and employing accounting software. A study should also be done to determine the efforts being made to improve the internal control of financial statement reporting in all schools.
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61 Fitri, D. N., Ferdous, A. S. M., & Khalidah, S. Y. M. (2019). Factors influencing the information quality of local government financial statement and financial accountability. Management Science Letters, 1373–1384. https://doi.org/10.5267/j.msl.2019.5.013 Gathii, K. J., Nassiuma, D., B., O. M., & Karanja, D. (2014). Relationship between financial resources accountability and value delivery in secondary schools in Kenya: a survey of Nakuru County. International Journal of Management Sciences, 3(12), 886–908. https://ideas.repec.org/a/rss/jnljms/v3i12p4.html General Conference Auditing Service (GCAS). (2019). Annual Report. https://www.gcasconnect.org/2019-annual-report.pdf General Conference Working Policy 2019-2020. (n.d.). General Conference of Seventh-day Adventists. Golafshani, N. (2003). Understanding reliability and validity in qualitative research. The Qualitative Report, 8(4), 597–606. https://doi.org/10.46743/2160- 3715/2003.1870 Hamra, W., & Namkote, S. (2020). Financial policy compliance and internal control among Adventist Schools in Thailand : issues and reasons. International Forum Journal, 23(2), 5–21. https://journals.aiias.edu/info/article/view/309 Herath, S. K., & Albarqi, N. (2017). Financial reporting quality: A literature review. International Journal of Business Management and Commerce, 2(2). https://www.researchgate.net/profile/Siriyama-Herath/publication/ 314236476_Financial_Reporting_Quality_A_Literature_Review/links/58bc692d 92851c471d563950/Financial-Reporting-Quality-A-Literature-Review.pdf International Financial Reporting Standards (IFRS) Foundation. (2018). The Conceptual Framework for Financial Reporting. https://www.masb.org.my/ pdf.php?pdf=BV2018_revised_CONCEPTUALFRAMEWORK.pdf&file_path =pdf_file Jamil, N. N., Ramli, N. M., Marzuki, A., & Ahmad, N. N. (2021). Compliance factors of Malaysian Private Entity Reporting Standard (MPERS) by small medium enterprises (SMEs). International Journal of Financial Research, 12(3), 149– 156. https://doi.org/10.5430/ijfr.v12n3p149 Kapp, L. A., & Heslop, G. (2011). Protecting small businesses from fraud: simple controls can reduce opportunities. The CPA Journal, 81(10), 62–67. https://www.proquest.com/scholarly-journals/protecting-small-businessesfraud/docview/900317892/se-2?accountid=39909 Kirk, J., Miller, M. L. (1986). Reliability and validity in qualitative research. SAGE Publications. https://books.google.com.my/books?hl=en&lr=&id=YDFZlq_ KM88C&oi=fnd&pg=PA5&dq=(Kirk+%26+Miller,+1986&ots=ujXbUZmAdA &sig=p6T78IrIhTHzPUzAneg-aKu3SXk#v=onepage&q=(Kirk %26 Miller%2C 1986&f=false Krippendorff, K. (2004). Content analysis: An introduction to its methodology (2nd ed.). SAGE Publications.. https://www.oeaw.ac.at/resources/Record/990001124240504498 Lelly, K. C., & Afiah, N. N. (2017). Does quality of financial statement affected by internal control system and internal audit? International Journal of Economics and Financial Issues, 7(2), 568–573. https://dergipark.org.tr/en/download/articlefile/365935
62 Malaysian Accounting Standards Board (MASB). (2013). MASB Chairman’s Statement 2012-MASB. https://www.masb.org.my/pages.php?id=86 Malaysian Accounting Standards Board (MASB). (2019, March 14). MASB Chairman’s Statement 2018-MASB. https://www.masb.org.my/pages. php?id=298 Nantunda, L., Ddungu, L., Munby, J. R., & McCauley-Smith, C. (2020). The influence of COSO preventative control operations on revenue mobilization in Ugandan schools. Open Journal of Business and Management, 08(04), 1587– 1608. https://doi.org/10.4236/ojbm.2020.84101 Nassaji, H. (2015). Qualitative and descriptive research: data type versus data analysis. SAGE Journal, 19(2), 129–132. https://doi.org/10.1177/136216881 5572747 Oche, B., & Oche, D. P. (2009). Financial management practices of secondary school principals in Benue State. University of Nigeria, 1–87. https://www.unn.edu.ng/ publications/files/images/PROJECT WORK OCHE DEAN (FINALPRINTED).pdf Osasere, A. O., & Ilaboya, J. O. (2018). IFRS adoption and financial reporting quality: IASB qualitative characteristics approach. Accounting and Taxation Review, 2(3), 30–47. https://www.researchgate.net/profile/AigienohuwaOsasere/publication/329012123_IFRS_Adoption_and_Financial_Reporting_Qua lity_IASB_Qualitative_Characteristics_Approach/links/5bef98b4a6fdcc3a8ddbef 0a/IFRS-Adoption-and-Financial-Reporting-Quality-IASB-Qualit Oun, M. A., & Bach, C. (2014). Qualitative research method summary. Journal of Multidisciplinary Engineering Science and Technology (JMEST), 1(5), 252–258. http://www.jmest.org/wp-content/uploads/JMESTN42350250.pdf Patton, M. Q. (2002). Qualitative research & evaluation methods (3rd ed.). SAGE Publications, Inc. https://books.google.com.my/books?hl=en&lr=&id=ovAk BQAAQBAJ&oi=fnd&pg=PP1&dq=qualitative+research+%26+evaluation+met hods+(3rd+ed.)&ots=ZRZ-7quAB_&sig=jZ0pxMOhr-wuKp4KeR4-dnx1fiw#v= onepage&q=qualitative research %26 evaluation methods (3rd ed.)&f=false Peng, P. J., & Samah, A. J. A. (2006). Measuring students’ satisfaction for quality education in a e-learning university. UNITAR E-Journal, 2(1), 11–21. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.512.7710&rep=rep1&t ype=pdf Public Company Accounting Oversight Board (PCAOB). (2007). AS 2201: An audit of internal control over financial reporting that is integrated with an audit of financial statements, PCAOB. https://pcaobus.org/oversight/standards/auditingstandards/details/AS2201 Rashid, C. A. (2018). Efficiency of financial ratios analysis for evaluating companies’ liquidity. International Journal of Social Sciences & Educational Studies, 4(4), 110–123. https://doi.org/10.23918/ijsses.v4i4p110 Rynes, S. L., Gerhart, B., & Minette, K. A. (2004). The importance of pay in employee motivation: Discrepancies between what people say and what they do. Human Resource Management, 43(4), 381–394. https://doi.org/10.1002/hrm.20031 Saldaña, J. (2013). The coding manual for qualitative researchers (2nd ed.). SAGE Publications. http://emotrab.ufba.br/wp-content/uploads/2020/09/Saldana-2013- TheCodingManualforQualitativeResearchers.pdf
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64 Appendices Appendix A: Financial Statement Issues Major Issue = ▲ Minor Issue = ▽ A/E = No. of Adjustment Entries No Aspects School No. of Schools 2015 2016 2017 2018 2019 2020 No. of A/E Financial Statements Reported Regularly and Timely 1 Statements of Financial Position 2 Statements of Financial Activity 3 Statements of Changes in Net Assets 4 Statements of Cash Flows 5 Notes to the Financial Statements Audited Financial Statement 6 Auditor’s Opinion (standard/unqualified, qualified, adverse, disclaimer) Reasons for Modified Opinion on Audited Financial Statement 7 Lack of evidence resulting in a disclaimer of opinion 8 Misstatement of property, plant, and equipment 9 Lack of evidence for property, plant, and equipment 10 Lack of evidence for inventory 11 Misstatement of accounts receivable 12 Lack of evidence for accounts receivable 13 Lack of evidence for accounts payable 14 Lack of evidence for revenue 15 Misstatement of cash 16 Lack of evidence due to un-reconciled interorganizational balances 17 Lack of audit evidence due to the overall state of the accounting records 18 Misstatement due to inadequate provision for doubtful accounts receivable Financial Condition 19 Working Capital 20 Liquidity 21 Net Income (Loss) 22 Self-Support Ability Total No. of Issues in Table Total No. of Comments in GCAS Letters No. Specific Adjusting Entries/Significant
65 Appendix B: Internal Control Deficiencies 2015-2017 GCAS Audit Report of Internal Control Deficiencies, SDA Schools in Sabah No School No. of Schools 2015 2016 2017 No. of A/E Accounting Control Issues 1 Bank reconciliations not prepared on a timely basis, not initialed, dated and approved 2 Reconciliation with Higher Organization / Inter-organization Accounts not prepared on a timely basis, no approval 3 Accrued severance allowance understated / not reviewed 4 Improper recording of other revenue sources (canteen / bakery / commercial crops or farm products /etc.) 5 Accounts receivable and payable misstated 6 Ineffective collection of student receivables 7 Inadequate allowance for doubtful accounts 8 Detailed summary of old student Accounts Receivable unavailable 9 Opening balances of all assets, liability and net asset accounts did not agree with the audited ending balances 10 Expenses/Income year-end cutoff not evaluated properly 11 Government grant not properly recorded 12 Writing off (student receivables / PPE) - no action taken, no approval Administrative Control Issues 13 Minimal Segregation of Duties / Incompatible Duties 14 More frequent (daily) cash deposits to bank / Delay in cash deposits 15 Inadequate internal control of cash – summary of cash deposits not attached / Unauthorized cash disbursements 16 Deficit in receipted cash 17 Voiding of cash disbursements: supporting documentation not stamped “paid” and signed 18 Tithe payable not regularly (monthly) submitted to Sabah Mission 19 No fraud risk assessment performed 20 Incomplete list / unrecorded purchased or donated PPE 21 Physical inventory not performed for all equipment or other assets 22 Incorrect evaluation or calculation of PPE to be depreciated 23 Policies: PPE purchased or donated, capitalization/disposal issues. 24 Allocated funds for specific purposes not monitored properly 25 Written Policies of Internal Control unavailable 26 Lack of back-up accounting data 27 Administrative Committee meeting minutes not documented properly Total No. of Issues in Table Total No. of Comments in GCAS Letters No. of Specific Adjusting Entries/Significant Source: 2015-2017 GCAS Audit Communication Letter Major Issue = ▲ Minor Issue = ▽ A/E = No. of Adjustment Entries GCAS = General Conference Auditing Service
66 2015-2017 SMAS Audit Report of Internal Control Deficiencies, SDA Schools in Sabah No School No. of Schools 2015 2016 2017 No. of A/E 1 Cash flow problem 2 Receipt books not prenumbered 3 Printing of general ledger 4 Bank reconciliation 5 Bank account dormant 6 Signature on the wage audit committee 7 Wage Audit Committee-Lacking Lay Person 8 Capitalization of Assets Policy 9 Plant, Property, and Equipment Record Total No. of Issues in Table Total No. of Comments in SMAS Letters No. of Specific Adjusting Entries/ Significant Source: 2015-2017 SMAS Audit Communication Letter Major Issue = ▲ Minor Issue = ▽ A/E = No. of Adjustment Entries SMAS = Sabah Mission Auditing Service
67 Appendix C: General Information and Interview Guide General Information: 1. When was your school established? 2. What is your accounting method? Single entry or Double entry? 3. Please give information about your accounting software used to prepare financial statements. Brand and model: …………………………………… Used since year ……………………………………… 4. If your school is not using accounting software, what is the reason for not using it? 5. Please give information about your student enrollment and the number of employees from 2015 to 2021. Table: Student Enrollment and Number of Employees From 2015 to 2021 Year Student Enrollment Number of Finance Office Employees Number of employees (Not including Finance Office Employees) Adventist Non-Adventist 2015 2016 2017 2018 2019 2020 2021 Source: Schools Closing Report, Education Department, Sabah Mission Notes: Finance Office Employees = example: Treasurer, cashier, …. Employees = all employees on school payroll 6. Do the school’s finance office employees’ have accounting knowledge/qualifications? 7. Did your school conduct any in-house training (e.g., training to use accounting software, etc.) or send them outside for external accounting courses (for treasurer and finance office employees)? Please state the name of the training and its objectives. If no training, please state the reasons.
68 Suggested Interview Questions for the Principal / Treasurer This interview is based on the financial statement reporting for the periods / fiscal years of 2015 to 2020 of SDA schools in Sabah. The interviewee can also provide an update on the actions taken to improve the financial statements in 2021. 8. Reporting financial statements accurately, regularly, timely (e.g., monthly), and with adequate evidence is very important. Could you explain some reasons or challenges faced by the school to prepare a financial statement in accordance with generally accepted accounting principles and report every month? 9. Please describe the situation in your school regarding the following important issues in accounting: (Misstatement of property, plant, and equipment / lack of evidence for property, plant, and equipment / lack of evidence for inventory / lack of evidence for accounts receivable and payable / lack of evidence for revenue/expenses). 10. Do your school have a written policy for accounting / financial matters / internal control? When was it implemented, and how effective have these tools been? 11. Internal control is one of the tools to make sure that the financial statement is presented fairly. Please describe the strength/effectiveness of your school's internal control system (e.g., appropriate authorization of transactions / adequacy documentation to support transactions / appropriate review or approvals and documentation for journal vouchers / review or approval of financial statements / uncollectable accounts receivable or evaluation of allowance / appropriate accounts or bank reconciliation / appropriate segregation of duties, etc.). 12. Please share your knowledge about the policies implemented by the school to increase the effectiveness of internal control to produce an accurate and timely financial statement. 13. Based on your school’s experience, to what extent might weaknesses in internal control documentation lead to imprecise reporting in financial statements? 14. Please describe the financial condition of the school from 2015 to 2021. Did the school undergo any financial crisis? How did the school management solve this issue? 15. Financial crises may be caused by the poor quality of reporting in financial statements. To what extent might improper reporting in financial statements lead to financial crises in your school? 16. What actions have been taken by the school management to improve the quality of financial statements or solve any problems related to financial statement issues?
69 17. Please explain the strategies taken by the Sabah Mission to solve the problems of imprecise financial statement reporting. How effective are these methods to improve the situation? 18. What actions were taken in response to previous auditor recommendations in the management letters on internal control and financial statements? Were the recommendations presented to the Audit Reviewe Committee and the school board for consideration? What follow-up work (if any) was done in regard to these recommendations? Which items have not been acted upon yet, and why? Suggested Questions for the Finance Office Employees 19. What problems did you face when using accounting software to post any transaction? What factors and how do you solve these problems? 20. What is your opinion about the organization's practice in terms of segregation of duties? 21. Do you think your school has effective internal control in terms of financial statement reporting? Please share your opinion. 22. Please describe/list your responsibilities to assist the treasurer or the school finance department. 23. Describe your strengths, difficulties, and limitations, hile carrying out the prescribed tasks in the finance department. Suggested Questions for the Auditor 24. In your opinion, what are the major issues that caused the auditor not to give an unqualified/standard opinion for the school's financial reports? 25. Please describe the school's progress to implement the auditor suggestions to improve financial reporting. 26. Please share your ideas about what strategies that the school needs to implement to improve the situation of inaccurate financial reporting. 27. Please describe the problems faced by the auditor in not conducting an audit every year. Give reasons for not releasing the audit report according to the time frame.
70 Appendix D: Student Enrollment and Number of Employees, Adventist Schools in Sabah Table: Student Enrollments and Number of Employees 2015-2021, Adventist Schools in Sabah 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 Sabah Adventist Secondary School (SASS) 189 215 194 189 187 198 198 108 94 65 79 88 88 88 26 30 31 30 28 28 24 Goshen Adventist Secondary School (GASS) 122 130 160 162 174 184 184 26 32 31 43 26 31 31 20 19 19 23 21 18 18 Sekolah Rendah Advent Tamparuli 168 163 155 155 159 158 158 108 132 128 119 119 132 132 22 19 20 20 16 19 20 Sekolah Rendah Advent Goshen 403 381 396 382 370 298 298 144 174 152 155 140 154 154 24 27 29 30 29 29 29 Sekolah Rendah Advent Damai 174 194 192 187 191 200 200 102 116 113 100 93 99 99 20 17 20 19 18 18 18 Sekolah Rendah Advent Sungoi 41 33 48 44 46 51 50 23 34 29 40 44 50 50 8 8 7 9 9 12 12 Sekolah Rendah Advent Tagaroh 36 48 53 60 59 62 62 5 16 15 21 28 31 31 7 6 6 6 6 6 6 Sekolah Rendah Advent Bambangan 36 33 29 42 42 12 8 11 7 7 3 4 4 5 5 5 Sekolah Rendah Advent Marabau 20 23 20 22 30 17 30 12 11 18 25 30 24 30 4 4 5 5 5 5 5 Sekolah Rendah Advent Tambuluran 30 34 45 38 44 48 48 22 30 26 22 23 28 28 6 7 6 6 6 6 6 Sekolah Rendah Advent Gaur 50 61 72 82 76 83 83 9 7 9 9 11 11 13 8 7 7 7 6 6 6 Sekolah Rendah Advent Rangalau 26 50 57 67 69 69 69 6 5 16 17 15 14 14 3 6 6 6 6 5 5 Sekolah Rendah Advent Kelawat 30 47 53 60 55 47 47 19 17 14 18 12 11 6 4 5 5 5 5 5 5 Sekolah Rendah Advent Tenghilan 36 36 32 32 33 33 33 23 29 28 29 27 17 17 5 5 5 5 7 9 9 Source: School's Closing Report, Education Department, Sabah Mission Year / Student Enrollment Adventist Non-Adventist School Number of Employees
71 Appendix E: Letter to School Board Binggol Bin Marajang, Sekolah Menengah Advent Tamparuli, P.O. Box 79, 89257 Tamparuli, Sabah, Malaysia. SEPTEMBER 17, 2021 To, Chairman of School Board, Dear Sir/Madam/Pastor, RE: REQUEST FOR PERMISSION TO REVIEW THE FINANCIAL STATEMENT REPORTS OF SELECTED SDA SCHOOLS IN SABAH FOR THE PURPOSE OF ACADEMIC RESEARCH Regarding the above matter, I would like to ask for permission to read and review the school’s financial statements report, audit report, and relevant documents for the period of 2015-2020 (Year-end financial statements only) for academic research purposes. This review will be conducted from September to December 2021. The school may provide me the documents in the form of soft copy or hard copy. All documents will be returned to your school or destroyed after the study has been done. I pledge to not let anyone else see these documents. For your information, I am currently taking an MBA degree at Asia Pacific International University (AIU). The topic that I would like to study for my independent study research project is entitled Financial Statement Quality and Internal Control: Issues, Reasons, and Solutions Among Adventist Schools in Sabah, Malaysia has been approved by the MBA Committee of AIU. Sabah Mission has also permitted me to continue this study. To proceed with this topic, however, I would need to examine some documents as mentioned above and interview school financial departmental staff and the auditor also. I believe that your school is doing its best to produce financial statements with generally accepted accounting principles. During the examination of records, if any inaccuracies are found in the financial reports, they will be stated in the report, but the name of the school will not be revealed. The aim of this research is not to find fault or to blame any parties, but to try to find acceptable solutions for the betterment of our schools in Sabah in terms of better financial reporting and internal control practices. I am sure that the findings from this research will benefit the stakeholders, the Sabah Mission, the school management, the church members, students, and parents. This study will also become a reference for those who are going to study the same topic in thefuture. I understand that these financial documents are restricted access. However, I promise not to undermine those respondents involve and will keep their privacy. Therefore, I hope that my application will be granted. Thank you in advance for your anticipated co- operation. For any queries, please feel free to contact me directly.
72 Yours faithfully, ………………………………… (BINGGOL BIN MARAJANG) c.c School Administrative Committee Sabah SDA Mission