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Ahmad Saiful Azlin Puteh Salin1+, Norlela Kamaluddin 2 and Siti Khadijah Abdul Manan2
1
Accounting Research Institute (ARI) and Universiti Teknologi MARA (UiTM) Perak
2
ARI and Centre of Islamic Thought and Understanding (CITU) , UiTM Shah Alam
Abstract. The purpose of this paper is three-fold. First, it is to highlight corporate scandals that have
happened in Malaysia. Second, it is to discuss some major causes of these corporate scandals; and third, it is
to recommend the possible actions and preventive measures to curb these scandals from the Islamic point of
view. On the whole, the paper has given motivation to the researcher to embark and initiate a research in
Islamic Ethics and Governance.
Keywords: fraud, code of ethics, Islamic
1. Introduction
In the recent years, the public and business community have been surprised with the exposure of many
corporate scandals and accounting fraud by the managers of the company. It disappoints many stakeholders
as after the financial crisis in 1997, many efforts have been initiated and implemented to strengthen the
business control and foundation of the company. One of the important lessons learned from the financial
crisis in 1997 is the weaknesses in the governance of the company such as too much power is given to a
single person in managing the company, weak internal control and poor work of the directors that leads to
the failure of the company. Due to this, a total regulatory and governance were embarked all over the world.
Just to name a few, in the US, the Sarbanese Oxley Act was established, while in the UK the Code of
Corporate Governance was extensively revised to stop all these corporate diseases from spreading and
becoming a cancer for the global business community.
However, all this effort has seemed fruitless as after the heavy debate and discussion and huge struggle
by the regulator and market administrator, these corporate scandals are still returning but with more scaring
facts. This paper, therefore, is designed to address some major causes of the problems and suggest possible
action to solve these problems.
+
Corresponding author. Tel.: + 6053742544; fax: +6053742635
E-mail address: ahmad577@perak.uitm.edu.my
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The total amount of losses during the survey period was RM63.95 million in which 87% was accounted from
internally perpetrated fraud, means committed by the management and non-management employees.
Apparently, there were a series of accounting scandals incurred in the prior years. One of the most
famous was the Transmile Group Berhad that overstated its groups revenue figures by 30% and 35% of the
consolidated revenues in the financial statement ending December 2006 and 2005 respectively. Other than
that, in Megan Media Holdings Berhad the optical disk maker was suspected to be involved in fictitious
trading of more than RM500 million. The other selected corporate fraud and misconduct are as per Figure 1.
It was however annoying to see this mismanagement relentlessly continuing. In one recent case, one
director of a company called Linear Corporation paid RM36 million to start the RM1.67 billion King Dome
project in Manjung, Perak. This contract was awarded by the Global Investment Group Inc, a Seychelles-
based company, but until now no significant progress of the project has been made and there has been no
evidence that a feasibility study has been conducted before the company started the construction.
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In Malaysia itself, the first introduction of the Malaysian Code of Corporate Governance in 2000, had
gone through its first revision in 2007 and is still currently under serious consideration by the relevant
regulatory bodies to come out with the third version of the code. In the next few years, this code will be
constantly reviewed and new guidelines will be introduced while at the same time, corporate scandals will
keep on recurring over time.
Misappropriation of the rights issue of Kiara Emas Asia Industries Bhd. The estimated proceeds
amounting to RM17 million in December 1996 was used for personal purposes. Under the penal
code, the perpetrator was fined only RM600,000
Datuk Ishak Ismail, the director of Idris Hydraulic misused RM50 million of the proceeds from the
disposal of Kewangan Bersatu Berhad in 2003. He was fined only RM400,000
Former director of Aokam Perdana Berhad was alleged with misappropriation of funds of RM55
million. In 1998, the company was declared insolvent and could not pay some RM33.3 million in
debts. The director escaped without paying a single cent back to the company.
The co-founder of Omega Securities was fined RM3 million for defrauding RM424.9 million in
1999. In June 14, 2007, he again was fined RM3 million for each of the two charges of abetting the
submission of false statements to Bursa Malaysia relating to 44.592 million Omega shares.
A director of Ekran Berhad took some RM712.9 million from the company as an advance to inject
his private assets in 1996/1997. He was fined only RM500,000.
In November 1997, UEM purchased shares of its parent company at a market price of RM3.24 per
share, in total of RM2.34 billion. The former executive chairman entered into a put-and-call option,
giving an undertaking to buy back shares at RM3.24 inclusive of cost to please minority
shareholders and regulators. When the option was due on Feb 14, 2001, the entire amount was
RM3.3 billion, but there was no settlement. The executive chairman resigned. Khazanah took UEM
private and later cancelled the option. No charge was imposed to the person responsible.
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Proton Holdings Berhad, who received RM5 million from his previous employment. This is considered by
public as a payment for failure. This substantial amount of money should not be paid when Proton is
known as a laggard performer in the automobile industry (as compared to Kia for example) although it has
already been in business for almost 30 years. However, the payment was made due to the instruction of
prominent political figures that once sat on the top position of the company.
The biggest negative implication of the intervention by political decisions is that it paralyses the rules
and regulations and fails to achieve its primary objective a mechanism to safeguard the public interest. This
will provide perception that the rules and regulations are only a formality, while the political agenda to serve
the needs of some bureaucrats is above and beyond the essential need of the stakeholders.
1
Agency theory suggests that there is a conflict between the owner of the firm, called principal with the managers/directors that he hires to manage
the firm on his behalf, called agent
2
Stakeholder theory argued that managers/directors, when running the company must consider the benefits to all parties that have the interest in the
company.
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Islamic ethics also put education at a major part of developing a good person that upholds moral values
at the utmost importance in their lives. For example, in the education institution, from the lowest level such
as kindergarten to the highest level such as university, the educator should always, when time permits and
when the situation is appropriate, advise the students on the importance of ethics, honesty and integrity in
their daily lives. The educator must encourage his students to always observe the right thing because it is
right, not because the laws require them to do and suggest students to always look at every matter spiritually
rather than the letter of law.
For example, there should be no toleration for unethical practices such as copying during the exam and
plagiarism. The educator must emphasise and educate the students that many kinds of immoral behaviour
normally start at a very young age. It is better for the student to graduate with a lower class degree which is
solely based on his effort rather than a higher class without honesty and integrity. The educator should fail
his student rather than let him graduate and become a manager or director who will damage the country in
the future. Let the university lose a few thousand ringgit now rather than the country and nation lose millions
or billons of money due to unethical behaviours. This is also true as what has been stated in the holy Al-
Quran: Oh believers! Fear Allah, and say the right thing. (Al-Ahzab:70)
Prophet Muhammad s.a.w also has said that:If you guarantee me six things on your part, I shall
guarantee you paradise: Speak the truth when you talk, keep a promise when you make, when you are
trusted with something fulfill your trust, avoid sexual immorality, lower your eyes and restrain your hand
from injustice (Hadith).
Islam also posits that the best way to regulate and educate a person is by regulating and educating their
heart or from the inside first. Prophet Muhammad s.a.w said:There is a piece of flesh in the human body. If
this is good, all the organs will be good. If this is evil, all the organs will be evil. This piece of flesh is the
heart (Hadith).
5. Conclusion
It is believed that how a human draws a picture in his life such as a school, house, or office and puts
values like honesty, integrity and transparency begins from his heart and soul. The best education ever is
education for our inner strength. Empirical findings show that the laws and regulations just work as a
complementary education. As people become smarter and the environment, politics, economy and social
continuously change, these laws and regulations become out-dated fast and cannot work appropriately. Thus,
self-regulation is a more powerful tool than any other type of monitoring mechanism that gives humans a
better life, higher kindness and first class integrity.
6. Acknowledgements
The authors wish to express their thanks to the Accounting Research Institute (ARI) for the financial
assistance in the administration and preparation of this paper.
7. References
[1] Beekun, R. (1997) Islamic Business Ethics. International Institute of Islamic Thaught. Virginia, US.
[2] KPMG (2009) KPMG Malaysia Fraud Survey Report 2009. Retrieved from
http://www.kpmg.com.my/KPMG/publications/home/fraud%20survey%20report%2009_Final.pdf
on 22 November 2009
[3] Schwartz, M.S., Dunfee, T.W., Kline, M.J. (2005), Tone at the Top: An Ethics Code for Directors? Journal of
Business Ethics, vol. 58, pp. 79-100
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