WHEN the accounts of a listed company turn out to be unreflective of the company’s financial performance and position, there are several options for enforcement action. The worst-case scenario (for those responsible for the accounts, that is) is when the regulators take court action that may lead to heavy punishment.
Perhaps the best-known example began in July 2007, when three former top executives of Transmile Group Bhd were charged with abetting the cargo airline in making a misleading statement about reported revenue of RM338mil. This referred to the company’s quarterly report that contained the unaudited consolidated results for the financial year ended December 2006.
If convicted, the trio – Gan Boon Aun, Lo Chok Ping and Khiudin Mohd – are liable to a fine of not less than RM1mil and a prison term of up to 10 years.
At the same time, the Securities Commission (SC) offered compounds of RM500,000 to two independent directors of Transmile, Shukri Sheikh Abdul Tawab and Jimmy Chin Keem Feung, for knowingly permitting the making of misleading statements to Bursa Malaysia. The two, who were also members of the company’s audit committee, had approved the release of the revenue figure despite knowing that the auditors had raised “serious accounting issues” regarding the unaudited 2006 results.
When the two independent directors failed to pay up, the SC brought criminal charges against them in November 2007. They each faced a fine not exceeding RM3mil or a maximum jail sentence of 10 years or both.
In May 2008, the SC withdrew the charge against Lo after he had paid a compound of RM700,000. But for the other four men, their court cases have been long-drawn affairs.
The Kuala Lumpur Sessions Court found Shukri and Chin guilty in October 2011 and sentenced them to one year in prison and a RM300,000 fine. “Notably, it was the first time audit committee members, who were also non-executive directors, were jailed for their involvement in the furnishing of misleading disclosures of financial information to the stock exchange,” said the SC in its annual report 2011.
The duo appealed against the decision but on Thursday, the Kuala Lumpur High Court upheld the conviction and sentence.
This latest development may have prompted people to now focus on the court action against Gan and Khiudin, which is pending in the Court of Appeal because the defence has raised a constitutional question. In March 2011, the two were called to enter their defence after the close of the prosecution case. However, the trial is on hold while the awaiting the disposal of the appeal.
The enforcement action in the wake of the Transmile accounting scandal is as strong as it gets in Malaysia, and this has drawn a fair amount of attention. But there are other regulatory responses to accounting irregularities that deserve some awareness.
We need to understand, for example, that not all accounting-related problems are linked to fraud. Sometimes, financial statements give a wrong picture because of flawed judgement or poor accounting knowledge. Such factors may lead to a failure to comply with the mandatory accounting standards.
Although such cases are not attempts to falsely represent facts, they can be equally damaging because many people rely on the information in the financial statements, which are assumed to follow the accounting standards.
The Securities Industry (Compliance with Approved Accounting Standards) Regulations 1999 comes into play whenever the SC comes across instances of companies that deviate from Malaysia’s set of accounting standards.
According to the regulations, it’s the responsibility of a listed company and its directors and chief executive to prepare and present financial statements in accordance with approved accounting standards, that is, the standards issued or adopted by the Malaysian Accounting Standards Board. Failure to fulfil this obligation is an offence.
There haven’t been many occasions for the SC to wield these regulations, which allow the SC to direct the companies to rectify and reissue the affected accounts. The few listed companies that have been hauled up under the regulations include Oilcorp Bhd, Goh Ban Huat Bhd and Aktif Lifestyle Corp Bhd in 2005, Talam Corp Bhd in 2007 and Mems Technology Bhd in 2009.
The latest name on that short list is Niche Capital Emas Holdings Bhd (NICE), formerly known as Yikon Corp Bhd. Last week, the company announced that the SC had imposed sanctions because NICE had not measured its obligations under corporate guarantees on a former subsidiary’s bank borrowings. This is a departure from the FRS 139, the accounting standard that covers the recognition and measurement of financial instruments. This offence relates to NICE’s audited financial statements for 2011 and 2012.
In addition, the company had recognised RM11.5mil as an asset under the “Other Receivables” item in the 2013 accounts although this isn’t in accordance with MFRS 137, which spells out the accounting treatment for provisions, contingent liabilities and contingent assets.
The Sept 4 announcement to Bursa says the SC sanctions against NICE include a reprimand, and a directive to rectify and reissue the 2013 audited financial statement and all quarterly results that came out subsequent to the issuance of the original 2013 audited accounts.
NICE, which manufactures and sells gold jewellery and ornaments, is also required to make a detailed announcement to Bursa to explain the reasons and effects, financial or otherwise, of the rectification.
The company says its board will deliberate on the SC action and will issue further updates in due course. To date, there has been no new announcement on the matter.
The disclosure by NICE is not the entire story. In fact, the SC has also acted against seven individuals who were directors when the respective accounts were issued. They were each reprimanded and fined between RM20,000 and RM75,000.
The administrative actions against these directors are lightweight when compared with the sentences handed out to those convicted for accounting fraud. Nevertheless, there should be more publicity on such reprimands and fines so that people (including those who prepare financial statements) are reminded of the importance of accounting standards, and so that directors are ever conscious of the fact that they are held responsible for the companies’ audited accounts.