Fraudulent Financial Reporting Cases in Malaysia: A Descriptive Analysis

The objective of this study is to explore the background of the companies involved in fraudulent financial reporting and the impacts to the offenders as well as the companies after the fraud was revealed by the regulator. In Malaysia, the main regulator empowered to investigate fraudulent financial reporting case is Securities Commission of Malaysia. The offenders involved in furnishing false information to the Securities Commission or Bursa Malaysia were charged under Capital Market and Services Act 2007. Prior to 2007, the offenders were charged under Securities Industry Act 1983. In this study, the fact of the case of 22 fraudulent companies listed in the criminal prosecution under enforcement action of Securities Commission of Malaysia’s website were extracted and analyzed. The results reveal that most fraudulent financial reporting cases occurred a few years before the introduction Malaysian Code of Corporate Governance (MCCG) 2000 and a few years before the MCCG was revised in 2007. Industrial product sector was the sector most frequently involved in fraudulent financial reporting. The financial reports were manipulated in three aspects namely audited accounts, quarterly reports and corporate proposals. In most cases, the offenders involved in such fraud scheme were the top management mostly directors.


Introduction
Fraudulent financial reporting has been an issue of great concern worldwide following the collapsed of once venerable companies such as Enron and WorldCom. Fraudulent financial reporting is a category occupational fraud a long side with asset misappropriation and corruption. It is a fraud schemes, in which the perpetrator intentionally causes a material misstatement or omission in the organization's financial statements. According to the 2020 Global study on occupational fraud and abuse which analyzed 2,504 cases between January 2018 and September 2019, fraudulent financial reporting is the least used scheme (10% of cases) yet the costliest category of occupational fraud. It results in median loss of USD 954,000 per case (ACFE, 2020). In other words, it is reported as the first rank of enormous losses. Asset misappropriation which involves an employee stealing or misusing the employing organization's resources, occurs in the vast majority of fraud schemes (86% of cases) however, these schemes produce the lowest median loss at USD 100,000 per case. The third category, corruption which includes offenses such as bribery, conflicts of interest, and extortion falls in the middle in terms of both frequency and financial damage. This scheme occurs in 43% of cases and cause a median loss of USD 200,000. Since these three types of fraud are frequently undetected and often never reported, so it is difficult to determine the full scope of global losses.
In Malaysia, fraudulent financial reporting cases have started to surface even before the collapse of Enron. Based on the securities commission enforcement record, the first case of submitting false information was committed by the director of Ganad Corporation Bhd in 1995. Towards the end of 1990's, a few more similar cases arose in companies such as Kiara Emas Asia Industries Bhd and Chase Perdana Bhd. The highest frequency of such fraud occurred between 2004 and 2007 involving companies such as Transmile Group Bhd, Welli Multi Corporation Bhd and MEMS Technology Bhd (Wan Abdullah et al., 2012). Prior to 2007, the offences related to fraudulent financial reporting were charged under Securities Industry Act 1983. Later, the cases were charged under Capital Market and Services Act 2007 (CMSA) when this new Act came into force on 28 September 2007 (Sulaiman, 2008).
However, to this date, no study in Malaysia has been specifically conducted to explore the background of the companies involved in fraudulent financial reporting and the impacts to the offenders as well as the companies after the fraud was revealed by the regulator. If this study is not carried out, the overall understanding about the background of the companies involved in fraudulent financial reporting and the impacts to the offenders as well as the companies after the fraud was revealed will be unclear. Therefore, this study attempts to explore the background of the companies involved in fraudulent financial reporting and the impacts to the offenders as well as the companies after the fraud was revealed by the regulator.

Enforcement Action in Malaysia
The main statute regulating the securities market in Malaysia is Capital Market and Services Act 2007 (CMSA). Under the CMSA, the Securities Commission is authorized to initiate criminal proceedings as well as civil actions for contravention of the securities law, in addition to administrative sanctions that may be imposed without having recourse to the courts. The CMSA is a consolidating Act which now encompasses the former Securities Industry Act 1983, the Futures Industry Act 1993 and Part IV of the Securities Commission Act 1993 which deals with fund raising activities. The CMSA is supported by the Capital Markets and Services Regulations 2007, the Licensing Handbook and the Guidelines on Regulation of Markets. The CMSA which was passed by Parliament in May 2007, came into force on 28 September 2007 (Sulaiman, 2008). Hence, any public listed companies involves in fraudulent financial reporting will now be charged under CMSA.

Methodology
The sample data of this study consist of 22 public listed companies that were involved in fraudulent financial reporting. They were manually identified from the criminal prosecution list under enforcement action of Securities Commission of Malaysia's website. There are various types of offences being listed under criminal prosecution such as furnishing false information, money laundering, insider trading, criminal breach of trust, short selling, market manipulation, illegal fund management activities and defrauding a stockbroking company. The offence relates to fraudulent financial reporting is furnishing false information either to Securities Commission of Malaysia or Bursa Malaysia Berhad (previously known as Kuala Lumpur Stock Exchange (KLSE)). The offence was previously charged under section 122B and 122C of Securities Industry Act 1983. Now, the offence is charged under section 369 and 370 of Capital Market and Services Act 2007 (Sulaiman, 2008). The information about the offender, the fact of the case and the penalty imposed were extracted from the criminal prosecution record of Securities Commission of Malaysia. Additional information related to the type of market, the business sector, year of delisting, the availability of annual report and the auditor that audited the companies in the year of fraud is obtained from the Bursa Malaysia website.

Findings and Discussions
This section will discuss the findings of the study. The discussion will first describe the background of the fraudulent companies then followed by discussing the impacts to the offenders as well as the companies after the fraud was revealed.  Nasir & Hashim, 2020). During that period, weak corporate governance structures were believed to be the reason behind the financial statement fraud (Yang et al., 2017). Later, the frequency of fraudulent financial reporting cases were on the rise again between 2004 and 2007 could be attributed to the fact that at that time the MCCG was still at its infancy stage and required improvements. As a consequence, the MCCG was revised in 2007 to strengthen the effectiveness of the corporate governance as a control mechanism to prevent fraud. As for frequency of fraud among business sector, it be summarised as Table 1.3 below. The Table 1.3, above reveals that 50% (11 companies) of the fraudulent companies came from industrial product sector. The justification could be due to weakness in the internal control system and the complexity of industrial product business. Such weaknesses provided opportunity for the offenders to commit fraud.
Next, by referring back to Table 1.1, the annual report of four fraudulent companies have been removed from the Bursa Malaysia website namely Ganad Corporation Bhd, Westmont Industries Bhd, Kiara Emas Asia Industries Bhd and Idris Hydraulic (M) Bhd. The possible reason could be that they have filed for bankruptcy or changed status to private companies. As a consequence, information about the auditor for these four companies cannot be obtained.  Table 1.4 above shows that the financial reports were manipulated in three aspects namely audited accounts (11 companies), quarterly reports (7 companies) and corporate proposals (4 companies). Next, most of the fraudulent financial reporting cases have been caused by top management consisting of directors, chairman, chief executive officer and financial controller. Brennan & McGrath (2007) claimed that it is the ability of the top management to override controls and direct others to commit and conceal the fraud that gives rise to fraud.
Nevertheless, as a consequence of their actions, the law in Malaysia has sentenced them with a rather severe punishment. The highest amount of fine being imposed so far was RM2,500,000. It was imposed on former Chief Executive Officer and Executive Director of Transmile Group Berhad. The lowest amount of fine was RM100,000 which was imposed on the director of Linear Corporation Bhd. With regards to imprisonment, the longest period so far is 2 years. The sentence was imposed on two directors of Kosmo Technology Industrial Bhd. Apart from imprisonment, the two directors were also liable to a total fine of RM1.45 million each.

Conclusion
The objective of this study is to explore the background of the companies involved in fraudulent financial reporting and the impacts to the offenders as well as the companies after the fraud was revealed by the regulator. This study reveals that most fraudulent financial reporting cases occurred a few years before the introduction MCCG2000 and a few years before the MCCG was revised in 2007. Industrial product sector was the sector most frequently involved in fraudulent financial reporting. The study further discloses that annual report of four fraudulent companies were no longer available in Bursa Malaysia website after the companies were involved in fraud. Thirteen fraudulent companies were delisted after the offence was revealed. Six fraudulent companies were audited by the Big 5 then later the Big 4. The financial reports were manipulated in three aspects namely audited accounts, quarterly reports and corporate proposals. The study also found out that five companies changed name a few years after they were involved in fraud. In most cases, the offenders involved in such fraud scheme were the top management mostly directors. Next, the penalties and sentences imposed on offenders were considered fair in relation to offences committed. The highest amount being fined was RM2,500,000 and the longest period of imprisonment was 2 years. The limitation of this study is that it only identifies fraudulent companies from the criminal prosecution list of Securities Commission's website. Future research should extend to identify cases under case compounded and media releases of Securities Commission as well as media releases of Bursa Malaysia.
This study makes theoretical and contextual contributes to the existing knowledge in the following ways. Firstly, it highlights a few characteristics of fraudulent companies in Malaysia such as the business sector of the companies, the period fraud frequently occurred and the documents that were manipulated by the offenders. Secondly, it reveals the consequences to the offenders and the companies after the offenders were found guilty by the court. Thirdly, this study can be a source of reference for future research. Finally, it is expected that this study will provide useful information to the business players and regulators in relation to impacts of fraudulent financial reporting on the employment and economic growth of the nation.