The Case of Cooking the Accounting Books in Malaysia (Essay Sample)

The case of cooking the accounting books in Malaysia
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The case of cooking the accounting books in Malaysia
Introduction
In accounting, ‘cooking the books’ refers to the undertaking of fraudulent activities to falsify the financial statements and position of an organization. Financial fraud has become rampant in the economic and financial landscapes of companies, raising worldwide concern. Fraudulence is perpetrated through different channels. Research into this area indicates that companies pay their taxes on exaggerated rates to cover for their tax frauds. Other studies have suggested that, creative accounting which allows accountants to create financial situations which do not exist. In the end, an organization sinks in debt. One would ask why companies feel the need to cook the financial reports. Normally, 50 percentage of fraud is conducted from within the organization (Mohd Nor, Ahmad, & Mohd Saleh, 2010). Managers and the board of the directors are the greatest culprits as they possess significant control over the business and its financial operations. In these cases, the opportunistic interests of a manager forces him or her to forge the necessary incentives like creating fake suppliers overstating the financial position, and falsifying invoices. Together with auditing tools, these acts come in handy in minimizing the appearance of the damage of self-serving leaders.
The cases of Megan Media Bhd, the 1 Malaysia Development, Malaysia and the Transmile Group Berhad are central in the discussion of fraud as “they published enforcement actions by the Securities Commission Malaysia (SC) from 1998 to 2012 for reasons of alleged financial misreporting” (Lau & Ooi, 2016, p. 5). Besides, eports about corporate regulations argued that Malaysia had the best accounting and auditing standards. Nevertheless, its performance about financial accuracy is still poor seeing as the mechanisms set for enforcing compliance are insufficient. Recent reports conducted by the Association of Certified Fraud Examiners (ACFE) conclude that fraudulent cases in Malaysia have spiraled in the past years and are likely to rise in the future if nothing is done to reverse the trends. In the year 2014, fraudulence contributed to the greatest loss compared to asset misappropriation and corruption. The specific cases of Megan Media, 1DMB, and Transmile Berhad were the most pronounced hence exposed the height of fraudulence in Malaysia. All the companies indicate an accounting fraud that involved creating fictitious suppliers, and financial overstatement. The named companies declared bankruptcy due to the huge losses incurred. Furthermore, financial reporting accuracy is pivotal in the efficiency of the financial markets and acts as the medium through which investors gauge their investment decisions. That said, the quality and accuracy of the information that is provided is a matter of concern for many companies. The impacts of such fraudulent activities to the internal and external parties are not to underestimate. Recent studies report that in Malaysia, companies who fell victim of fraudulent activities incurred losses of up to $ 5,000, 000 in 2011. On top of that, significant collateral damage such as reduced employee morale, damaged reputation, and brand destruction has occurred. Aggressive financial reporting has been rampant in Malaysian companies. Overall, the cases of Malaysia illustrate that, overall, managers engage in the cases of cooking books activities to overstate the financial situation of an organization.
Background of the issue
The issue of cooking of the accounting books in Malaysia first attracted the attention of regulators around 2006 and 2007. During that time, the regulatory bodies had conducted prosecutions of major financial officials involved in the cases of Megan Media,Welli Multi, and Wimems, top fraudulent companies that year. Surveys conducted in the subsequent years indicated that indeed fraud was a major challenge when it came to Malaysian businesses. Different studies projected that Malaysian fraud cases would worsen in the next three years. This problem was associated to poor accounting mechanisms of compliance with the accounting issues.
Transmile Group Berhad (Transmile)
Transmile is an investment holding company that is involved with the supply of airfreight, aircraft engineering, and maintaining services. It was established in the year 1993 by Gan Boon, and later listed on the Bursa Malaysia Security Herbad in 1997. It was one of the companies whose fraud case hit the fans in the year 2006 that it was labeled as mini Enron. Prior to 2006, Transmile prided itself in being a leading investment holding company with stellar operational and financial management. In 2007, the company was hit by an accounting scandal that alleged that it had overstated its revenues and profits since 2004. As at 28 April, 2006, the company was already making unparalleled profits owing to its local and foreign shareholding. Its greatest shareholder was Trinity Coral Sdn Bhd, a Kuok Group company. Of important to note is that, earlier in 2004, Kuok Group had purchased a 28.5 percent stake in Transmile via Trinity Coral Sdn. Over the years, the company built a board of directors that was strong and capable. Additionally, it created a pool of loyal clientele including and not limited to DHL, Nationwide Express, and Nippon Express. Owing to this expansive operation network, the company indicated a phase of increasing sales and revenues. In 2007, things went south as it was hit by a grand financial scandal. It was reported that the company had persistently failed to adhere to the deadline of submitting auditing reports for the year ending 31st December, 2006. Things escalated faster as the external auditor, Deloitte & Touche wrote a letter to the Board of Directors declining to approve the annual accounts for lack of supporting evidence regarding the same. Instead, the board appointed Moores Rowland, an internal Risk Management officer, to create a special audit regarding the issues that had been raised by Deloitte. Rowland established that the company had materially overstated revenues and profits for the periods starting 2014 to 2016.
The IMalaysia Development Bhd
This was a Malaysia’s government battle that had been ongoing since 2015. In the year 2015, the then prime-minister Najib channeled RM 2.67 billion from the 1Malaysia Development Berhad (IMDB), a government-based strategic development firm to his personal accounts. This situation sank the bank in a public debt worth RM 42 billion. After the 2018 elections, the new prime minister, Mahathir Mohamed reopened the investigations which proved that Najib was guilty of colluding with SRC international to siphon money out of 1MDB. Reports through the British newspaper argued that, a financier, Jho Low, who had ties with Najib’s step-son, pumped $ 700 million from a joint venture activity between Petro Saudi International and 1MDB through a third party, Good Star Limited. Low, despite not being officially appointed as the bank’s financial consultant, was consulted often to work for the company. The Bank’s CEO approved a loan meant for Najib, without getting approval from bank Negara (LENNOX, LISOWSKY, & PITTMAN, 2013). Later, he forged bank statements that pertained to its subsidiary branch based at Singapore. Later, it came to light that 1MDB bought Malaysian based power assets at an overprice. It was also established that, the three banks that 1MDB claimed to fund the petroleum company were linked to Najib. In the end, 1MDB had accumulated a debt of RM 42 million. On the auditor’s part, it was established that the company had not had external audit of accounts since 2013.
Megan Media Bhd
Megan Median Bhd is a Malaysian company that deals in the manufacturing of data storage products. It was incorporated and listed under the second board company in the year 1994 and 2000 respectively. In 2006, the company had announced that it would create a sterling fourth quarter for the financial year ended 2006. In 2007, it announced that 2 of its subsidiaries had defaulted on the maturation of trade facilities amounting to RM 893 million. Reports form investigative accountants confirmed that the financial statements had substantial irregularities which indicated fictitious creditors and debtors. After investigations, the financial controller was charged with falsifying of financial statements. It was established that he financed fake creditors by borrowing and recycling money from plenty of businesses. He was also charged with making bogus payments which amounted to RM211 million. It came to light that a huge chuck of its previous statements was falsified. On top of that, it failed to provide the regulation plan for the particular period.
Discussion of the problem
The cases of the companies discussed in the above situations indicated that, cooking financial books is a deep seated challenge in the accounting department of organizations. Seeing as all the institutions named dealt with transformation and processing of financial data across entities, it was easy to manipulate the details to suit one’s demands, and forge the statements to fix the situation in the eyes of competitors and the public (Md Nor, & Ku Ismail, 2017). The cases indicate that managers were the greatest culprits of forgery and book cooking as they are in charge of oversight in the organization thus control the finances of the organization. For instance, in the case of Transmile, and the 1DMB bank, the managers aided fal...