Auditors find it tough to unmask corporate fraud

It is on rising trend, increasing 14% from three years ago

MENTION corporate fraud and most Malaysians will give a blank stare. An impromptu survey done by StarBizWeek in Kuala Lumpur’s central business district revealed the extent to which people know about corporate fraud. Of the 25 people, 23 did not know or did not want to comment.

Experts say that corporate fraud is on the rise but that is difficult to ascertain since most research depends on survey respondents. Perhaps, the technology to detect such activities is better and the regulators have become more adept. But it is for sure that globalisation of economic activities and technology have also played a part in making fraudulent activities harder to detect or prosecute.

Kroll Inc, the New York-based corporate investigations and risk consulting firm, says in a report that fraud is on an increasing trend, up 14% in its Kroll Global Fraud Report 2015/2016, from three years ago. The report noted that three-quarters of survey respondents were victims in the past year. The report also says that the number of companies weighed down in terms of financial loss arising from fraud has also increased to 69% last year, compared with 64% in 2014.

An interesting observation among Malaysians is the equating of fraud with corruption. While its not exactly the same, there is often an element of corruption involved, as in people being paid off to turn the other way while fraudulent activity is being committed. Creative accounting is usually what comes to mind among people who have any opinion at all about corporate fraud.

Vestra Solutions managing consultant and certified fraud examiner Gerald Pillai points out that developing countries such as Malaysia can see fraudulent activities rising, especially in economically challenging times while Baker Tilly Monteiro Heng corporate advisory partner Andrew Heng (pic) says corporate fraud is becoming more complex and has become increasingly difficult for auditors to detect.

He adds that this is complicated by organisations forming shell companies abroad to create a semblance of legitimate business transactions.

“You can create companies overseas and pretend to buy things from you on paper which could look normal, until you see the place and there is nothing there.

“The level of detection and investigative work definitely will need to be increased, which will make it even harder for auditors to detect. It will not be something that you can instantly pick from the accounts,” Heng says.

Obviously, any report on corporate fraud in Malaysia cannot ignore 1Malaysia Development Bhd (1MDB), the controversial government-owned strategic investment firm. On July 20, the US Department of Justice (DOJ) announced a civil suit to seize more than US$1bil (RM4.02bil) in assets allegedly linked to 1MDB.

Following the DOJ action, Deloitte Malaysia, 1MDB’s auditor, notified 1MDB of its intention to resign. Deloitte, referring to the suit, also noted that its audit reports for 1MDB’s financial statements for the financial years ended March 31, 2013 (FY13) and FY14 can no longer be relied upon because of information in the civil suit that were not available during those periods. 1MDB also sent out a statement saying that the audited financial statements for the periods concerned should no longer be relied on in light of the DOJ suit.

Heng says the 1MDB case is not creative accounting per se but not having the right information on certain assets in certain companies that caused the auditors to withdraw their opinion.

Referring to the 1MDB case, he says the role of auditors have become increasingly tougher and that there is need to give the client the benefit of doubt.

However, in his experience, most corporate fraud involving listed companies here will have an element of creative accounting with the intention of manipulating the share price.

The Transmile Group Bhd case from 2007 comes to mind. This case saw company officials abetting in making misleading statements relating to the airfreight company’s revenue in its unaudited consolidated results for the financial year ended Dec 31, 2006. Heng says there is sometimes, an element of money-laundering involved.

Prominent fraud cases among listed companies in Malaysia in recent years include Kenmark Industrial Co (M) Bhd, Linear Corp Bhd and Axis Inc Bhd, all involving creative accounting. In Corporate Malaysia’s history, the Bumiputra Malaysia Finance Ltd (BMF) scandal of 1983 comes to mind as possibly the largest corporate scandal in the country then.

The Hong Kong-based subsidiary of the-then Bank Bumiputra Malaysia Bhd provided loans to several shady companies including units of Carrian Holdings Ltd, a conglomerate involved in property, finance and transportation.

It involved the murder of a bank auditor and ultimately saw Hong Kong’s largest bankcruptcy with the collapse of Carrian. The Government also pumped in billions of ringgit to support Bank Bumiputra.

Despite there being a royal commission of inquiry set up for this scandal, there were no prosecutions with BMF chairman Lorrain Esme Osman, living in exile until his death in London in 2011.

Gerald says fraud needs to be prosecuted rigorously or it becomes part of the corporate culture. This sends a wrong message, he asserts.

Given the number of prominent corporate scandals in the country in recent years, Gerald has this to say: “I think of late, we have this cover-up sort of attitude where we can always fix things and get away with it”.

It is not to say that nothing is being done where fraud committed by listed companies is concerned. The Securities Commission in its annual report for 2015, shows that 74% of active investigations last year were devoted to insider trading, with the remainder for other misconducts such as corporate governance issues, fraud and market manipulation.

However, experts say that there are still weaknesses in the active pursuit and prosecution of corporate fraud cases.

They say that the laws are sufficient but enforcement is weak.

The statutes that cover fraud and corruption in the country include the Malaysian Anti-Corruption Commission Act 2009, the Penal Code, Development Financial Institutions Act 2002, Customs Act 1967 and the Election Offences Act 1954.

“It probably comes down to enforcement whether relevant authorities understand these complications.

“There is a corporate crime division in the police force and whether they want to beef up that division is important,” says Heng.

Gerald stressed that the relevant authorities need to enforce the law without bias, only then can people consciously see that fraud is being taken seriously.

Experts such as Heng say if bribery and corruption is lumped in with fraud, then the levels of fraud committed in Malaysia may be far higher.