Thursday 21 June 2012
Friday 17 February 2012
ICGA 2012 CONFERENCE, Kuching, Sarawak
Recently, I attended the 2nd International Conference on Governance and Accountability 2012 at Hilton, Kuching, Sarawak. The conference was officiated by Yang Berbahagia Dato' Sri Wong Soon Koh, Minister of Finance (II) and Minister of Local Government & Community Development,Sarawak. Other VIPs included Professor Dr Noorsaadah Ismail, Deputy Vice Canselor, UiTM, UiTM Sarawak's Rector, Professor Dato' Dr Jamil Hamali, Professor Dr. Rozainun Abdul Aziz, Dean of the Faculty of Accountancy, Universiti Teknologi MARA and Prof. Dr. Normah Hj. Omar, Director, Accounting Research Institute, Malaysia. The theme of the conference is Ethics, Accountability and Governance: Towards Sustaining Value Creation. After the opening ceremony, two keynote speeches were presented by Ms Rikke Netterstrom from CSR Asia and Prof. Dr. Lee Parker. Sixty papers were presented at the conference. Prof. Dr. Rozainun and I presented a paper, entitled, ‘The relationships of board and audit committees characteristics: Pre-and post MCCG(2007) and its effect on performance in GLCs’. Congratulation to the organizer, APCES-ACCA UiTM, Faculty of Accountancy, UiTM, and Accounting Research Institute, Malaysia. The 3 rd conference will be held in Istanbul, Turkey.
Monday 30 January 2012
CORPORATE GOVERNANCE AND HUMAN GOVERNANCE: ETHICS
It was reported in the Star today that the Malaysian Anti-Corruption Commission (MACC) encourages government-linked companies (GLCs) and private companies to sign the corporate integrity pledge in an effort to stamp out corruption. The move would create a business environment free of corruption. GLCs and private companies are encouraged to do so to reflect a consensus among corporation to combat corruption and enhance the confidence among foreign investors that there is healthy competition among businesses in Malaysia. Among the important elements of the pledge was the Corporate Integrity Pact, which would be signed by companies involved in the procurement of a project.
Through the pact, those offering and accepting a project would pledge not to engage in any corrupt practice throughout the process and to report to the MACC if there was any bribery attempt. In turn, the MACC would cooperate with the companies involved to ensure that their operations were free of corruption and help resolve possible incidences of corruption. It was pointed out that stiff competition among companies had caused some to resort to corrupt practices. Nonetheless, companies with high ethics would use their actual capabilities to obtain a contract. But there are also those who take the easy way out by offering bribes. This move is seen as an enhancement of corporate governance in Malaysia.
A couple of months ago, the Securities Commission unveil their 2 nd Capital Market Masterplan. It was anticipated that the by 2020, the capital market in Malaysia will be around RM 4.8 trillion from the current RM 1.2 trillion. In order to achieve that, corporations in Malaysia should adhere more to ethics, which is an important component of human governance. Hence, corporate governance must be complimented with human governance in order to eradicate corruptions. The authorities should also look at more stringent penalties imposed on corporate wrongdoers. It is irony to penalize a white collar crook with RM 100,000 or two months jail if he /she absconded RM 10 million. To curb corruptions more effectively, all assets of perpetrators should be frozen and all monies absconded should be returned to the rightful owner.
Through the pact, those offering and accepting a project would pledge not to engage in any corrupt practice throughout the process and to report to the MACC if there was any bribery attempt. In turn, the MACC would cooperate with the companies involved to ensure that their operations were free of corruption and help resolve possible incidences of corruption. It was pointed out that stiff competition among companies had caused some to resort to corrupt practices. Nonetheless, companies with high ethics would use their actual capabilities to obtain a contract. But there are also those who take the easy way out by offering bribes. This move is seen as an enhancement of corporate governance in Malaysia.
A couple of months ago, the Securities Commission unveil their 2 nd Capital Market Masterplan. It was anticipated that the by 2020, the capital market in Malaysia will be around RM 4.8 trillion from the current RM 1.2 trillion. In order to achieve that, corporations in Malaysia should adhere more to ethics, which is an important component of human governance. Hence, corporate governance must be complimented with human governance in order to eradicate corruptions. The authorities should also look at more stringent penalties imposed on corporate wrongdoers. It is irony to penalize a white collar crook with RM 100,000 or two months jail if he /she absconded RM 10 million. To curb corruptions more effectively, all assets of perpetrators should be frozen and all monies absconded should be returned to the rightful owner.
Monday 26 December 2011
Khazanah and GLC roles in National Transformation Agenda
At Invest Malaysia in March last year, at the launch of the New
Economic Model (NEM), Khazanah had outlined a five-point approach to play their
part in executing the NEM.
First, for the GLC Transformation Programme, to diligently stay the course as they
moved into the seventh year of the ten-year programme. Khazanah have outlined
clearly the various programmes and “rainbow-coloured books” and the use of KPIs and
so on in delivering this first principle. Governance and integrity is also part of this track,
and it is critical as the program grows, and even more so as it gets some successes, that
they must remain vigilant against such impostors that can breed complacency and hubris.
Second, to continue with the gradual regionalization programme of their key
companies so as to benchmark and integrate their national champions to compete to
become regional champions and beyond.
Third, to contribute significantly to private sector investments in new areas of growth
for the new economy, especially in targeted sectors including, inter alia, leisure &
tourism, healthcare, education services, Islamic finance, information and
communication technology (ICT) and creative industries.
Fourth, to intensify the collaboration and co-investments between Khazanah and
GLCs and non-GLCs private sector, both at home and abroad.
Fifth, to diligently focus on core competencies. This means continuing with the
orderly exit of non-core and non-competitive assets at the appropriate time. A
corollary of this is for a better, more level playing field and better regulatory
management to emerge, working with the Government and other industry players in
the process.
These are the five key roles of GLCs that they have charted and are indeed implementing,
to not just produce the “Gold” in the New Economic Model era and the new Malaysia Inc. but, to help contribute towards a new and better economic success.
It is in this regard, GLCs are taking the principle of focusing on core competencies, of taking no free lunch, but to instead build a strong kitchen and develop good cooks, continues to be at the top of our agenda. While those are the five specific roles for GLCs under the New Economic Model, indeed, there is now, in addition, a sixth role, specifically for Government Linked Investment
Companies (“GLICs”)
That is the imperative to better optimize the pools of national savings and funds residing in GLICs through a streamlining of investment styles and mandates. Perhaps an early manifestation
of this is the co-investment and streamlining of ownership between EPF and UEM in the ongoing PLUS acquisition and toll restructuring. In this case, with some careful design and proper execution, khazanah will be able to solve concurrently and balance the interests of minority shareholders, bond holders, toll users, taxpayers and indeed better match the different risk appetites and return objectives of two different GLICs. Khazanah is striving to complete this imminently and this efforts reflect an example of innovative and proper rebalancing that serves the interests of all valid stakeholders.
( Source: Adapted from a speech by Tan Sri Azman Mokhtar, CEO of Khazanah Nasional Berhad )
Economic Model (NEM), Khazanah had outlined a five-point approach to play their
part in executing the NEM.
First, for the GLC Transformation Programme, to diligently stay the course as they
moved into the seventh year of the ten-year programme. Khazanah have outlined
clearly the various programmes and “rainbow-coloured books” and the use of KPIs and
so on in delivering this first principle. Governance and integrity is also part of this track,
and it is critical as the program grows, and even more so as it gets some successes, that
they must remain vigilant against such impostors that can breed complacency and hubris.
Second, to continue with the gradual regionalization programme of their key
companies so as to benchmark and integrate their national champions to compete to
become regional champions and beyond.
Third, to contribute significantly to private sector investments in new areas of growth
for the new economy, especially in targeted sectors including, inter alia, leisure &
tourism, healthcare, education services, Islamic finance, information and
communication technology (ICT) and creative industries.
Fourth, to intensify the collaboration and co-investments between Khazanah and
GLCs and non-GLCs private sector, both at home and abroad.
Fifth, to diligently focus on core competencies. This means continuing with the
orderly exit of non-core and non-competitive assets at the appropriate time. A
corollary of this is for a better, more level playing field and better regulatory
management to emerge, working with the Government and other industry players in
the process.
These are the five key roles of GLCs that they have charted and are indeed implementing,
to not just produce the “Gold” in the New Economic Model era and the new Malaysia Inc. but, to help contribute towards a new and better economic success.
It is in this regard, GLCs are taking the principle of focusing on core competencies, of taking no free lunch, but to instead build a strong kitchen and develop good cooks, continues to be at the top of our agenda. While those are the five specific roles for GLCs under the New Economic Model, indeed, there is now, in addition, a sixth role, specifically for Government Linked Investment
Companies (“GLICs”)
That is the imperative to better optimize the pools of national savings and funds residing in GLICs through a streamlining of investment styles and mandates. Perhaps an early manifestation
of this is the co-investment and streamlining of ownership between EPF and UEM in the ongoing PLUS acquisition and toll restructuring. In this case, with some careful design and proper execution, khazanah will be able to solve concurrently and balance the interests of minority shareholders, bond holders, toll users, taxpayers and indeed better match the different risk appetites and return objectives of two different GLICs. Khazanah is striving to complete this imminently and this efforts reflect an example of innovative and proper rebalancing that serves the interests of all valid stakeholders.
( Source: Adapted from a speech by Tan Sri Azman Mokhtar, CEO of Khazanah Nasional Berhad )
Friday 16 December 2011
ACCRUAL ACCOUNTING AND FRAUD
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
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.)
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
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 )
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
INVESTING INTO FOREIGN PROPERTY MARKETS
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.
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.
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