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. 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. 1.1 What do we mean by Fraud and Misconduct Fraud is a broad concept that generally refers to any intentional act committed to secure an unfair or unlawful gain Misconduct is also a broad concept and generally refers to violations of laws, regulations, policies or market expectations of ethical business conduct Together, they fall into the following categories of fraud schemes that can undermine corporate integrity and public trust: Fraudulent financial reporting - Falsification of an organizations financial statements Misappropriation of assets - Involves the theft or misuse of an organizations assets

Corruption - Wrongfully using influence in a business transaction to procure some benefit to themselves or another person, contrary to duties to the employer

1.2 The Recipe for Fraud The Fraud Triangle

Motive / Incentive I want to or have a need to commit fraud Rationalisation / Integrity I am convinced that it is worth the risks Opportunity There is a weakness in the system that I could exploit

Capability

2. Corporate Scandals Malaysian Scenarios Malaysia, like other developing countries, is unable to run away from a number of corporate scandals that have been highlighted by the media. After all the recommendations and efforts by the various parties to eradicate these various scandals, it is still occurring and there is no sign that it will stop or even reduce in the near future. The KPMG Malaysia Fraud Survey Report 2009 [1] for example revealed that a total of 61% of the respondents believed that fraud would rise in the next two years by which more than three quarters of the respondents believed that financial statement fraud will continue. A similar survey also revealed that management did not

take appropriate action of the fraud red flag. The major factors that contributed to the fraud included poor internal control, collusion with external parties and unethical practices. 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 nonmanagement 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. Company MEMS Technology Bhd Pancaran Ikrab Bhd Welli Multi Corp Bhd Polymate Holdings Bhd INIX Technologies Holding Bhd LFE Corporation Bhd GP Ocean Food Bhd Megan Media Holdings Bhd Offence Alleged Offence

Year 2007 Submission of misleading statement 1997 Securities fraud 2006 Submission of misleading information 2003 Submission of false statement 2006 Submission of misleading information 2008 Misuse of company funds for personal benefit 2006 Submission of misleading information 2007 Submission of false statement Fig. 1: Corporate Fraud

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. 3. Root of the cause 3.1. Ineffective governance

Basically, the current problem faced by problematic companies all over the world is the missing directors. The meaning of missing here is not missing in action but the inability of the directors to perform their jobs efficiently. These famous corporate scandals show that directors nowadays are involved in many unethical practices such as assets misappropriations, misused companys assets for personal benefits, financial statement fraud, recording fictitious revenue, concealing liability, inflating reporting assets, corruption and bribery. Not only that, it costs the biggest audit firm in the world, Arthur Andersen, to close their businesses and pay for the price of honesty. In addition to that, the corporate governance and law for a long time have been criticised to be insufficient in regulating companies generally and directors particularly. Many evaluation and assessment on the current law reveal many weaknesses in preventing the unethical behaviour of directors. One of the obvious weaknesses is the business judgment rule. These loopholes are always used by the directors in making decisions without adequate investigation of aggressive risk opportunities in project taking and poor investment in overseas projects. In the name of judgment rules, gut feeling, intuition, or whatever it is called, just means that these means have been manipulated by directors to discharge their responsibilities improperly and in the worst case, committing a fraud. Due to this, now is the right time to emphasise the directors ethical obligations. The business community now should stop from depending too much on the laws and regulations. Revision, revamp and introduction of new rules and guidelines seem a fruitless effort to curb all the scandals and corporate criminals. Dating back from the classic Cadbury Report (1992) in the UK that contributed to the evolution of corporate governance, until the introduction of Sarbanese Oxley Act 2002 in the US as well as the latest King Report III (2010) from South Africa, there has been a never ending problem of mismanagement and manipulation by greedy directors. 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. 4

3.2. Poor implementation of laws and rules Corporate crimes and these unethical behaviours have become worse due to the poor regulations enforced by the relevant authorities. In the latest case of Pancaran Ikrab Berhad, the director had misused RM52.5 million for personal benefits and it was disappointing to see that the judge only fined him RM2 million without recovering the prior lost money. The public interpreted this action as an evidence of the countrys poor regulation and enforcer which has affected the judiciary system. Arguably, this becomes bad as the judge has to meet certain key performance indicators (KPI) set by the government. As a result, not only the judge but also the prosecutor is under pressure to meet the goal of the government, not the interest of the public as a whole! What purpose is the regulation when these white-collar criminals can get away with so much money with just a little fine? There is no proper enforcement of the existing laws and rules that will act as a means to deter wrongful behaviours. A summary of some of the examples of many unethical practices by corporate communities in Malaysia and possibly, the poor outcome from the sentence given by the judge have been compiled from the various sources as follows: In Axis, RM100 million valued of debts were written off due to the unknown contract manufactures as a result of missing documents. This can be a childish reason given by the company to run away from the regulator punishment, or as a smart fraud planning. Instead of being charged for fraud for the manipulation of RM100 million, it is better for the directors to be convicted for improper documents kept in which the charges are substantially low. 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.

3.3. Political governance The Malaysian economic system is also highly dominated by political figures and actions. It is yet to observe this country moving forward towards the pure market forces in determining and making a corrective system in our economics. One good example is in the case of the former CEO of the national carmaker, 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. 4. Forensic Accounting 4.1 What do we mean by forensic accounting Forensic accounting, sometimes called investigative accounting, involves the application of accounting concepts and techniques to legal problems. Forensic accountants investigate and document financial farud and white-collar crime such as embezzlement. They also provide litigation support to attorneys and law enforcement agencies investigating financial wrongdoing. Many different organizations consult forensic accountants. Corporations hire forensic accountants to investigate allegations of fraud on the part of their employees, suppliers, or customers. Attorneys consult forensic accountants to obtain estimates of losses, damages, and assets related to specific legal cases in many areas of the law, including product liability, shareholder disputes, and breaches of contract. In criminal investigations, forensic accountants analyze complex financial transactions such as those in Stock Market manipulations and price fixing schemes. They also help governments achieve compliance with various forms of regulation. Forensic accountants typically become involved in financial investigations after fraud auditors have discovered evidence of deceptive financial transactions. After conducting an investigation, they write and submit a report of their findings. When a case goes to trial, they are likely to testify as expert witnesses

4.2 Fraud on the Rise

Varoius survey in Malaysia and worldwidw has shown that fraud is on an increasing. Fraud schemes are much more complex and more organised than ever before especially with the sophisticated links among individual and organizations carrying out the fraudulent activities. The roles of the Board and Forensic Accountant are becoming critically important as most of the recent major accounting frauds are perpretrated by senior management in collusion with the third parties or others employees. Fraud risk is ecpected to increase further due to : Rising trend of fraud activities involving senior management Companies tendency of not reporting to authorities fearing negative impact on reputation Weakness in prosecution cases involving accounting fraud i.e. missing key evidence result in perpratrated escaping punishment Lean custodial sentencing in Malaysia when compared to fraud cases in Singapore and the West Job losses leading to lack of segregation of duties and staff finding other means to supplement their income when job loss/cuts to maintain lifestyle In additional, based on the Transperacy International Corruption Perception Index, The CPI score for Malaysia shown in diagram 1 below, has dip from 5.28 in the year 1995 to 4.4 in the year 2010 where a score of 0 indicates a highly corrupted enviroment. In addition, malaysia is now ranked 56 out of 178 countries in the world from being ranked 23 out of 41 countries in 1995. Year 1995 2008 2009 2010 Ranking 23 47 56 56 *Score 5.28 5.1 4.5 4.4 * Score 10 (highly clean) to 0 (highly corrupt). Diagram 1 : Corruption Perceptions Index for Malaysia 4.3 Role of Forensic Accounting The need to discover complex accounting fraud schemes supported by proper evidence ,which can withstand court scrutiny has nade accounting a critical discipline. Forensic accounting is a 8

dicipline that deal with the relationship and application of financial facts to business problems, conducted in a alegal setting. Hence having the right person conducting the forensic accounting works is an important starting point. The professional skill and attributes of a forensic accountant include having sufficient knowledge on accounting (including complex double entry transactions), audit, fraud, information technology and law of evidence. In addition, forensic accountant are expected to have good communication skills, an investigation mentality and critical scepticism and an understanding of psycology and motivation. On the other hand, auditors are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud but auditors can assist in deterring fraud by examining the effectiveness of external controls. The common saring of You need to think like a crook to catch a crook makes it difficult for a typical auditor to play the dual role of an auditor and forensic accountant. Important lesson in conducting forensic accounting work include: Planning is critical as it will save millions of dollars of cost of investigation Need to ensure that documentation is complete as it may be called upon during a trial Internal Auditors can get involved in the investigation as they are involved at the process level work Collecting evidence: Getting it right is important as going back to collect evidence is very expensive and time consuming and in certain instances the evidence may be destroyed by the perpetrator. In addition , the Audit Committe (AC) plays an important role in initiating and investigation as they are normally provided with the summary of the whistle blower report, allegations or complaints. Upon receiving this reports, the AC needs to: Look at the initial reports and decide on the next step Determine the scope of investigation Determine the independence and competency of internal audit department to carry out investigation involving senior management Engage an experince forensic accountant to complex fraud Expect to complete and through report from the investigator

4.4 Prevention of Farud While external audits are clearly important and can have a strong preventative effect on fraudulent behaviour, they should not be relied upon exclusively for fraud detection. Organisation have the tendency to over-rely on external and internal audits. Organizations need to regconize complex fraud and develop a structured process addressing fraud risk on a longer-term basis. This includes and implementing the fraud risk assurance map (FRA Map). The critical elements of a FRA Map are shown in Diagram 2 below:

Fraud Risk Management (FRM) Fraud Policy and Staff Education Key Internal Controls

Fraud Reporting System

FRA MAP

Computer Security

Sound Business Principles Personnel Policies

Sounding Board: Audit Committe Internal Audit External Audit

Diagram 2: critical element of a FRA Map Each of the above elements plays critical role in the fight against fraud activities and all elements must be in place effectively reduce fraud activities to an acceptable level within an organisation.

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Implementing above elements of FRA Map requires proper planning and commitment fron the senior management and the Board. For example, there are 5 different activities in the FRM element including determining faraud risk universe, identifying farud risks through fraud risk assessment, preparing action plans to deal with the fraud risk, monitoring of fraud indicators.. Having a proper fraud policy and staff education is the faoundation of detecting and preventing fraud. Management needs to organise fraud awareness sessions involving all staff within an organization on aspects relating to the fraud policy, fraud risk, fraud reporting mechanism including fraud hotline and importance of internal control. These awareness sessions should also be extended to other stakeholders of the organization. Another critical element of FRA Map, which is gaining popularity, is fraud-reporting systems, which consist of developing and implementing a whistle blowing policy and procedures including a fraud hotline. The fraud reporting programmes mustcoverall staff, customers, vendors and other external stakeholders of an organisation. 5. Conclusion While fraud activities will continue to rise in the current enviroment, auditors can play an important role in helping the Board of Directors reduce fraud activity through proper planning and execution of the audit. In addition, the need for forensic accounting is critical to investigate a complex fraud situation and collate evidence, which can withstand court scrutiny. Staff education is the foundation of detecting and preventing fraud. Proper fraud awareness sessions need to be conducted to train staff on what constitutes fraud, how it affects the organization and how to report the a questionable activity. The Board need to set the right Tone at the Top and obtain senior management commitment to properly develop and implement FRA Map to reduce fraud activities in the longer term. And for me, Ive 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 11

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. 7. References [1] Owojori, A.A, T.O. Asaolu (2009), The Role of Forensic Accounting in Solving Vexed Problem of Corporate World, European Journal of Scientific Research. Retrieved from http://www.eurojurnal .com [2] KPMG (2009), An Introduction to Fraud and Forensic Auditing, Persidangan Juruaudit Sektor Awam on 22 July 2009. Retrieved from http://www.audit.gov.my/intranet/images/pdf/persidangan_juruaudit/Fraud%20Forensic %20Auditing%20-%20En. Sukdev%20Sigh%20KPMG.pdf [3] 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 [4] Dr. Nawal Kasim, June 2010, Auditing from Islamic Perspective, Accountant Today. Retrieved from http://www.mia.org.my/at/at/2010/06/08.pdf [5] Securities Commisions Malaysia, December 2010, Vol 1, No. 2, The Reporter, The Enforcement and Supervision Bulletin of the Securities Commission Malaysia. Retrieved from http://www.sc.com.my/eng/html/resources/reporter/reporter_2010_12.pdf

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