Friday, 16 December 2011


Accrual accounting provides many opportunities for unscrupulous managers or employees to commit fraud.

Accounts Receivable

The accounts receivable number that shows up in the asset section of a balancer sheet is almost always an estimate of what accounts are actually collectable. Why is the number an estimate? Because even if management can identify the precise amount its customers or clients owe the business, usually it is less than certain that this is the actual number that will ultimately be collected.

Sometimes the valuation of accounts receivable goes beyond simply making a good faith estimate of collectability. In some situations management may be tempted to commit outright fraud. Because no cash is collected when sales are made “on account”, a corrupt management can record fraudulent additional sales by simply creating fictitious customers and recording fictitious sales.

Another time honored-means of inflating accounts receivable and sales revenue involves “keeping the books open” at the end of the accounting period. In this case the customers and sales are real, but January sales are recorded as December sales so the end of year financial statements include inflated assets and revenue.

Part of the audit function is to test the existence and collectability of accounts receivable and this can serve as a brake on such fraudulent practices. In the audit of large companies with millions of dollars of receivables and hundreds of thousands of individual accounts, the audit process relies on statistical sampling, which usually provides a reasonable, but not exact, estimate of collectable accounts.

Accounts Payable

Management may have a motive to understate payables, as this understates expenses and overstates net income. Usually the amount of payable understatement is not too great and such understatement can easily be detected.

Deferred Revenue and Prepaid Expenses

A manager can overstate income and understate liabilities by treating deferred revenue as earned revenue. Essentially, this shady practice seeks to recognize revenue before it is actually earned. Such mischief often is not easy to detect, because it is not always clear when the earnings process is fully complete.

A manager also can understate current year expenses by claiming they are prepaid expenses. This amounts to a fraudulent claim that payments for a certain service benefit future accounting periods when, in fact they do not.

Fixed Assets

Management can make a firm appear more profitable than it really is by understating depreciation expense. Depreciation expense can be understated by overstating the useful life of assets. Management can also overstate its assets by keeping obsolete and no longer used assets on its balance sheet. Maintaining obsolete assets on the balance sheet also overstates net income because losses on the disposal of these assets are not recorded.


Inventory offers a big opportunity for management to manipulate their financial statements. If they want gross profits and, hence, operating profits to appear higher, the value of ending inventory simply needs to be overstated. There are many ways this can be done.
The ending inventory value can be fudged upward by overstating the amount of inventory on hand. Unit costs assigned to ending inventory can be inflated as well. Or obsolete or damaged inventory can be included in the ending inventory count.

Sometimes for income tax purposes, management may want to show lower gross and operating profits. Ending inventory mis-measurement can be used for this purpose as well. In this situation, management seeks to undercount and undervalue ending inventory. As such, accrual accounting is a golden haven for white collar crime to flourish. All auditors should pay more attention on all the above by optimizing " investigative minds " rather than 'auditing minds'. This approach would lessen fraud and enhanced shareholders wealth. The government would also benefit when corporations pay their taxes accordingly.

(Adapted from an article by Michael Sack Elmaleh, C.P.A., C.V.A.)

ISKANDAR MALAYSIA’s Fifth Anniversary Review Underscores a Track Record of Investments and Delivery

ISKANDAR MALAYSIA moves strongly into its second phase of development, attracting RM77.8 billion worth of investment commitments during its first stage of its 20-year development plan. As at September 2011, more than RM38 billion or nearly half of the investments commitments has been actualized. A number of important developments have either been completed, nearing completion or getting off the ground, underscoring a strong track record of investments and delivery.

Interest among local and foreign investors remains high, with scheduled launches of significant projects and new investments. At the ISKANDAR MALAYSIA’s Fifth Anniversary event held at Puteri Harbour, Nusajaya recently, 12 new investment commitments amounting to RM1.73 billion were announced, from both domestic and foreign investors.

In addition, it is envisioned that RM1.05 billion in projected investments would be generated from the knowledge-economy over the next 7 years. It is particularly significant as the knowledge economy is envisaged to transform not only ISKANDAR MALAYSIA’s economy, but is also a key pillar of Malaysia’s Economic Transformation Programme.

Speaking at the event, Managing Director of Khazanah , Tan Sri Dato’ Azman Hj. Mokhtar said: “After five years, it is clear that ISKANDAR MALAYSIA has achieved a strong momentum with the timely delivery of major infrastructure, iconic developments and catalyst projects.”
“Stemming from traditional and knowledge economies, the opportunities and benefits for the rakyat and businesses in ISKANDAR MALAYSIA in the near future are very encouraging: increased tourist arrivals are expected from 2012 onwards, thousands of students in a thriving education sector, further improved public infrastructure, more than 55,000 estimated new jobs, and enhanced safety and security overall,” added Tan Sri Azman.

The year 2012 will see major developments such as Legoland Malaysia theme park, Marlborough College and EduCity scheduled to come fully on stream. The realisation of these projects has translated strongly into enhanced investor and public confidence in ISKANDAR MALAYSIA, evidenced by increasing domestic and foreign participation and investment into the region.

( Adapted from Latest News at Khazanah Nasional Berhad website )

Tuesday, 13 December 2011


The three giant institutional investors(IV) in Malaysia, namely Employees Provident Fund (EPF), Lembaga Tabung Haji (TH) and Permodalan Nasional Berhad (PNB) have been venturing into overseas property market lately. All the three IVs are also known as Government Linked Investment Companies (GLICs). GLICs are an entities that invested most of their funds into GLCs in Malaysia. Like the EPF, both TH and PNB are looking to buy into existing premium properties for their yield. All three IVs had targeted London as their first choice, followed by Australian cities. However, it still isn't clear how much both funds are aiming to spend on overseas properties.

Last year, PNB bought an upmarket office block in Brisbane, Australia, called Santos Place, reportedly for more than A$290mil (RM928mil). The 37-storey building has 373,508 sq ft of lettable space with about two-thirds of that leased to Australian oil and gas giant, Santos. To date, the EPF has been the most aggressive among the Malaysian-based IV with most, if not all, its overseas investments in Britain.

The pension fund has so far confirmed the purchase of four British properties costing a total of 634mil (RM3.1bil). It issued a statement last year that it was putting aside 1bil (RM4.85bil) for its British property investments. Most of Tabung Haji's overseas investments to date have been in Mecca and Madina in the Middle East. It also has property investments locally.
PNB manages a fund size totalling RM150bil while Tabung Haji manages funds totalling RM28bil. Sources said both funds were looking to invest in properties primarily in London, Sydney, Melbourne and Perth, although they were open to other locations.

Unlike the EPF, which was putting aside RM1bil for overseas property investments, both PNB and Tabung Haji did not disclose any figures. The only criteria was that, their property investment must be syariah-compliant and has so far been very firm about this.

However, as responsible IVs in Malaysia, they should observe the main objective of their stakeholders. All investments must be really viable and transparent. Before going into the overseas market, risks analysis should be conducted to ensure that invested capital will not be lost along the way. There must be a short, medium and long term goals on each investment made. At the end of the day, these IVs should be accountable to their stakeholders.

Monday, 12 December 2011

G20 companies are growing strongly

GLCs and government-linked transformation companies are playing significant roles in the country's government transformation and economic transformation programmes. G20 is a selection of 20 largest government-linked companies (GLCs) where currently there are 19 companies in the list due to mergers, demergers and other corporate restructuring exercise.

Khazanah Nasional Berhad reported that the G20 under the government-linked companies (GLCs) transformation programme, which is at the final stage now, are on a strong growth trajectory where key financial indicators for 2010 have actually exceeded the highs recorded in 2007.G20 companies net income is expected to grow to RM22.1 bil this year from RM17.3bil last year. In 2010, G20 net income grew 49% year-on-year (yoy) to RM17.3bil. G20's total shareholders return generated a compounded annual return of 16.4% from May 14, 2004 (start of the GLCs transformation programme), outperforming non-G20 FBM KLCI by 1.9%. As at April 1 this year, its market capitalisation has more than doubled to RM353bil since 2004.
G20 delivered return on equity of 10.5% in 2010, up from 7.7% in 2009 while economic profit increased to RM765mil last year compared to an economic loss of RM647mil in 2009.

The GLCs transformation programme that started in 2004 is a ten-year programme where it is now at phase four, the final phase of the programme.
The final phase of the GLCs transformation programme coincides with an exciting period in the Malaysian economic landscape as we charge towards Vision 2020.