Fraud investigation is not an easy matter. It requires a qualified and experienced investigator to conduct and complete an investigation. An investigation framework is important as it allows investigators to detect the incidence of fraud at its preliminary stage. It is a strategic plan and model which guide investigators to perform their tasks in a systematic manner in ensuring all important aspects, procedures and steps are followed closely. It also assures that the chain of documents and evidence will not be lost. In any fraud investigation, it is vital to first understand any report or complaint received. The report should provide the basis and direction of the investigation approach in the quest to find details regarding the facts of the case, the extent of the fraud, legal violations and the suspects. Investigators should always consider the 1H (How) and 5 W (What, Why, Who, When and Where) in every step of the investigation process to ensure that nothing is being overlooked.
Internal investigation can be summarized as followed and the details of each phase can be revealed in the flowing section:-
i. Problem recognition
ii. Investigation planning
iii. Method of Investigation
iv. Gathering evidence and analyzing available documents
v. Conducting interview and recoding statement
vi. Evaluation and preservation of evidence
vii. Reporting
The initial stage of the framework is identifying fraud exposure. This is considered as one of the most difficult stage as it is not easy to immediately identify fraud perpetrated by the top management of a company. Analyzing financial statement alone would not suffice to detect any fraudulent activity in a company. Thus, according to Albrecht et al. (2009), the fraud exposure rectangle is helpful in identifying management fraud exposure. Figure 1 illustrates the fraud exposure rectangle.
Adopted from ' Forensic Accounting and Management Case Studies' , a book co-authored by Azmi Abdul Hamid and Rozainun Abdul Aziz
Monday, 5 December 2011
FINANCIAL CRIMINOLOGY AND FRAUD
Fraud is defined by the Malaysian Approved Standards on Auditing (2001) as: an intentional act by one or more individuals among management, employees, or third parties, which results in a misrepresentation of financial statement. It is believed that fraud is among the most serious corporate problems. Management fraud can be defined as “deliberate fraud committed by management that injures investors and creditors through misleading financial statement” (Eliot and Willingham, 1980). According to Wallace (1995), fraud is “a scheme designed to deceive; it can be accomplished with fictitious documents and representations that support fraudulent financial statements”. The study of Vanasco (1998) on several fraud cases documented that cash, inventory, and related party transactions are more prone to fraud. Losses can occur in almost any area from cash to accounts receivable, expenditures and inventory losses (Spathis, 2002).
New Straits times (2001), reported that more than 60% of Malaysian listed companies surveyed had experienced some form of fraud. It was found that almost a quarter were found to have lost more than RM1 million each to fraud. However, there is no information or formal reports on the number of business failures that are caused by fraud. In Malaysia, for example, there were several cases involving public listed companies fraud schemes such as misappropriation of funds, submitting false statements to the Malaysian Securities Exchange Berhad (now known as Bursa Malaysia Securities Berhad), defrauding investors and other types of offences. Based on the Enforcement Related Press Releases produced by Securities Commission of Malaysia website, it is observed that most of the convicted case and the enforcement action taken included the top management personnel of the convicted listed companies. Chief Executive Officer, Managing Director, Chief Financial Controller were among persons convicted for misconduct. As such, accountability by all parties especially the board of directors play an important role in order for companies to reduce the number of financial fraud cases. This aspect is directly related to corporate governance good practices as stakeholders will be satisfied with all the information disclosed by the company that they have interest in. Accountability is a key point of interest in corporate governance and this also takes prominence in addressing issues relating to ethical conduct or behaviour.
Adopted from 'Forensic Accounting and Management Case Studies',book by Azmi Abdul Hamid and Rozainun Abdul Aziz
New Straits times (2001), reported that more than 60% of Malaysian listed companies surveyed had experienced some form of fraud. It was found that almost a quarter were found to have lost more than RM1 million each to fraud. However, there is no information or formal reports on the number of business failures that are caused by fraud. In Malaysia, for example, there were several cases involving public listed companies fraud schemes such as misappropriation of funds, submitting false statements to the Malaysian Securities Exchange Berhad (now known as Bursa Malaysia Securities Berhad), defrauding investors and other types of offences. Based on the Enforcement Related Press Releases produced by Securities Commission of Malaysia website, it is observed that most of the convicted case and the enforcement action taken included the top management personnel of the convicted listed companies. Chief Executive Officer, Managing Director, Chief Financial Controller were among persons convicted for misconduct. As such, accountability by all parties especially the board of directors play an important role in order for companies to reduce the number of financial fraud cases. This aspect is directly related to corporate governance good practices as stakeholders will be satisfied with all the information disclosed by the company that they have interest in. Accountability is a key point of interest in corporate governance and this also takes prominence in addressing issues relating to ethical conduct or behaviour.
Adopted from 'Forensic Accounting and Management Case Studies',book by Azmi Abdul Hamid and Rozainun Abdul Aziz
Saturday, 3 December 2011
What is a Learning Organization?
Recently Accounting Research Institute, the umbrella entity of Government Linked Companies Research Centre, organised a training in Islamic Finance. The two day training was conducted by IBFIM, a renowned training centre of Islamic Financing. The training was attended by 21 lecturers of the Faculty Of Accountancy, UiTM. It is part of our ongoing training to equip our lecturers in the skills of Islamic Finance.
Other than universities, , a corporation or companies also needs training. It has been shown in many research findings that a learning organizaton is able to perform well in their annual financial results. A learning organization starts from the top. If board of directors and senior management are serious in implementing learning and knowledge management in their corporations, middle and lower management including the lowest level of employees, would be more than ready to participate. A learning organization requires the board to commit to and act upon four conditions:
1. That each member of the organization is encouraged to learn regularly and rigorously from their daily work, and to ensure time is budgeted from this.
2. That there are systems in place to capture that learning, celebrate and reward it, and move it to where it is needed.
3. That the organization is encouraged by its owners and directors to transform itself continouslythrough its internal and external learning processes.
4. That such learning is valued in the appraisal and reward systems and in the asset base of the organization.
Other than universities, , a corporation or companies also needs training. It has been shown in many research findings that a learning organizaton is able to perform well in their annual financial results. A learning organization starts from the top. If board of directors and senior management are serious in implementing learning and knowledge management in their corporations, middle and lower management including the lowest level of employees, would be more than ready to participate. A learning organization requires the board to commit to and act upon four conditions:
1. That each member of the organization is encouraged to learn regularly and rigorously from their daily work, and to ensure time is budgeted from this.
2. That there are systems in place to capture that learning, celebrate and reward it, and move it to where it is needed.
3. That the organization is encouraged by its owners and directors to transform itself continouslythrough its internal and external learning processes.
4. That such learning is valued in the appraisal and reward systems and in the asset base of the organization.
WHO SHOULD RUN GLCs?
During the UMNO Convention at PWTC, Kuala Lumpur, a Perak delegate proposed that UMNO stalwarts should head GLCs to ensure that qualified Malay entrepreneurs and companies receive projects from GLCs. I doubt whether this is a good proposal.
Firstly, appointing politicians as directors could hamper firm performance. This is due to the fact that most of them do not possess appropriate expertise and skills in strategic goals, firm’s operations and products. Since they know very little about the nature of business of a corporation, what can they contribute to the board decision making? Running a political party is not the same as running a corporation. A corporation must be headed by a person who has the vision to enhance the shareholders’ value of the company. The company must be run with proper corporate governance mechanisms, with accountability, transparency and high integrity.
Since politicians were typically appointed as non-executive directors, they would have limited access to management except during board meetings. As such, their contribution to firm performance raises reservations. I would prefer GLCs be run by professionals who can deliver.
On top of that, tenders and contracts from GLCs cannot be distributed freely to all because only capable, and experienced companies, whether it is a bumi or non-bumi are allowed to make bidding.
Firstly, appointing politicians as directors could hamper firm performance. This is due to the fact that most of them do not possess appropriate expertise and skills in strategic goals, firm’s operations and products. Since they know very little about the nature of business of a corporation, what can they contribute to the board decision making? Running a political party is not the same as running a corporation. A corporation must be headed by a person who has the vision to enhance the shareholders’ value of the company. The company must be run with proper corporate governance mechanisms, with accountability, transparency and high integrity.
Since politicians were typically appointed as non-executive directors, they would have limited access to management except during board meetings. As such, their contribution to firm performance raises reservations. I would prefer GLCs be run by professionals who can deliver.
On top of that, tenders and contracts from GLCs cannot be distributed freely to all because only capable, and experienced companies, whether it is a bumi or non-bumi are allowed to make bidding.
Wednesday, 30 November 2011
HOW CORPORATE GOVERNANCE AFFECTS THE CAPITAL MARKET?
Although Corporate Governance Codes that were released by many countries towards the end of the twentieth century and into the 21 st century was only a mechanism to check on the boards of directors and top management in running corporations, just imagine, what would be the situation of the corporate world without all these Codes? As I mentioned in my earlier posting, Enron, the largest corporation that collapsed at the beginning of this century, took into consideration all the best practices of good corporate governance. Yet, corporate governance best practices could not dig up and traced the corporate scandal until it was too late.
Nonetheless, just imagine if there were no governance codes at all. I am optimistic that a lot more corporate scandals and wrongdoings might have incurred in all these years. In Malaysia, the Asian Financial Crisis was a wake-up call for the country to study and eventually released its Corporate Governance Codes in year 2000. Even when the code was already in place, many corporations in Malaysia involved in activities that are contrary to the spirit of good governance practices.
Good ethical behaviors of corporate players are the main factor for corporate governance to have good impact on firm performance. These ethical behaviors would eventually reflect itself in their Annual Reports and Financial Statements. In turn, companies that performed well and provide good returns to shareholders are able to attract potential shareholders to invest in listed companies. This will eventually create a better capital marketplace for investors be they retail players, institutional investors or foreign investors to enter the capital market.
There are many advantages of good practices of corporate governance.
First, there will be an increased access to external financing by firms. This in turn can lead to larger investment, higher growth, and greater employment creation.
Secondly, good corporate governance is able to lower the cost of capital and associated higher firm valuation. This makes more investments attractive to investors, also leading to growth and more employment.
Third, there will be better operational performance through better allocation of resources and better management. This creates wealth more generally.
Fourth, good corporate governance can be associated with a reduced risk of financial crises. This is particularly important, as financial crises can have large economic and social costs.
Fifth, good corporate governance can mean generally better relationships with all stakeholders. This helps improve social and labor relationships and aspects such as environmental protection.
All these advantages matter for growth, employment, poverty, and well-being of corporations and countries.
Nonetheless, just imagine if there were no governance codes at all. I am optimistic that a lot more corporate scandals and wrongdoings might have incurred in all these years. In Malaysia, the Asian Financial Crisis was a wake-up call for the country to study and eventually released its Corporate Governance Codes in year 2000. Even when the code was already in place, many corporations in Malaysia involved in activities that are contrary to the spirit of good governance practices.
Good ethical behaviors of corporate players are the main factor for corporate governance to have good impact on firm performance. These ethical behaviors would eventually reflect itself in their Annual Reports and Financial Statements. In turn, companies that performed well and provide good returns to shareholders are able to attract potential shareholders to invest in listed companies. This will eventually create a better capital marketplace for investors be they retail players, institutional investors or foreign investors to enter the capital market.
There are many advantages of good practices of corporate governance.
First, there will be an increased access to external financing by firms. This in turn can lead to larger investment, higher growth, and greater employment creation.
Secondly, good corporate governance is able to lower the cost of capital and associated higher firm valuation. This makes more investments attractive to investors, also leading to growth and more employment.
Third, there will be better operational performance through better allocation of resources and better management. This creates wealth more generally.
Fourth, good corporate governance can be associated with a reduced risk of financial crises. This is particularly important, as financial crises can have large economic and social costs.
Fifth, good corporate governance can mean generally better relationships with all stakeholders. This helps improve social and labor relationships and aspects such as environmental protection.
All these advantages matter for growth, employment, poverty, and well-being of corporations and countries.
Tuesday, 29 November 2011
CORPORATE GOVERNANCE AND INVESTORS' CONFIDENCE IN THE CAPITAL MARKET
Malaysia’s capital market is expected to grow more than double to RM4.5 trillion by 2020 under current forecasts and could hit RM5.8 if internationalization efforts succeed. The Malaysian capital market is now worth more than RM2 trillion and is home to more public listed companies than any other Asean country and its bond market is the third largest in Asia as a ratio of GDP as at March 17, 2011. The capital market had achieved an annual compounded growth of 11% from RM717.5 billion in 2000 to RM2,033.9 billion in 2010 due to rapid industry expansion and investors’ confidence in the Malaysian capital market. Out of total capital market capitalization RM2,033.9 billion in 2010, 61% or RM1,246.7 billion comes from the stock market, the balance of 39% or RM758.7 billion is from the bond market.
Equity market capitalisation grew by 27% from RM979 billion in 2009 to RM1.2 trillion in 2010 as the market sentiment improved on the back of the launch of new economic programmes. The FBMKLCI also closed at an all-time high of 1,528.01 points on 10 November and has consistently outperformed emerging and advanced market indices
The 2nd Capital Market Masterplan emphasized on good corporate governance practices in order to attract the domestic and foreign market. However, good practices of corporate governance is not enough to attract investors into the market. ENRON, the collapsed U.S company also practices good corporate governance. They even separated the role of CEO and Chairman, despite at that particular time, most American companies combined the two roles. ENRON also appointed independent outside directors to ensure no one individual director can control the board decision making process. Besides that, they also established various board committees such as audit, nomination and remuneration. Despite all the good practices of corporate governance were in place, yet ENRON collapsed?
What went wrong? Although Corporate governance good practices is important in ensuring excellent management, it doesn’t guarantee that a company can performed. What is important are the ethical behaviors of boards of directors, CEOs and senior managers in running a corporation. If the ethical values are embedded solidly in the mind and heart of corporate players, the financial rewards would surely come by easily.
Equity market capitalisation grew by 27% from RM979 billion in 2009 to RM1.2 trillion in 2010 as the market sentiment improved on the back of the launch of new economic programmes. The FBMKLCI also closed at an all-time high of 1,528.01 points on 10 November and has consistently outperformed emerging and advanced market indices
The 2nd Capital Market Masterplan emphasized on good corporate governance practices in order to attract the domestic and foreign market. However, good practices of corporate governance is not enough to attract investors into the market. ENRON, the collapsed U.S company also practices good corporate governance. They even separated the role of CEO and Chairman, despite at that particular time, most American companies combined the two roles. ENRON also appointed independent outside directors to ensure no one individual director can control the board decision making process. Besides that, they also established various board committees such as audit, nomination and remuneration. Despite all the good practices of corporate governance were in place, yet ENRON collapsed?
What went wrong? Although Corporate governance good practices is important in ensuring excellent management, it doesn’t guarantee that a company can performed. What is important are the ethical behaviors of boards of directors, CEOs and senior managers in running a corporation. If the ethical values are embedded solidly in the mind and heart of corporate players, the financial rewards would surely come by easily.
Saturday, 26 November 2011
16 th Malaysian Capital Market Summit
The Capital Market Masterplan 2 (CMP2) was launched by the Prime Minister on 12 April 2011. This was a momentous landmark in the growth of the Malaysian capital market and also signifies the successful execution and completion of the first Capital Market Masterplan (CMP1) in the past decade. CMP1 managed to establish a diversified Malaysian capital market with strong intermediaries operating in a well-regulated environment. With the current capital market valued at RM2 trillion, it is anticipated that under CMP2, the markets will reach RM5.8 trillion within the next 10 years.
Following that, on 24th and 25th November 2011, ASLI (Asian Strategic Leadership Institute) organized The 16th Malaysian Capital Market Summit which was held at Sheraton Imperial, Kuala Lumpur. The President of ASLI, Mr.Mirzan Mahathir presented his welcoming remarks at about 9.30 am. The Minister of Finance II, YB Dato Seri Ahmad Husni Hanazlah presented the opening keynote address.
Among topics that were presented and discussed on the first day were:
1. ‘The Global Economic and Investment Outlook: The New Normal in the Market’
Speakers were:
a. Mr P.K. Basu, Former Managing Director/ Chief Economist(Asia Ex-Japan, Daiwa Capital Market, Singapore and
b. Mr Alan Tan, Chief Economist, Affin Investment Bank Berhad
Later, the Chairman of Bursa Malaysia Berhad, YABhg. Tun Mohamed Dzaiddin presented his luncheon address entitled ‘The ASEAN Opportunity: An Exchange Perspective’
The event was continued into the afternoon with two more papers discussed.
2. ‘The Capital Market Masterplan 2 and the Corporate Governance Blueprint 2011- What’s New?- How Effective Will This Be?’
Speakers were: Mr. David Burry, Executive Director, Boustead Heavy Industries Corporation Berhad, Dato Charon Mokzani, CEO, CIMB Investment Bank Berhad, Mrs Rita Benoy Bushon, CEO, MSWG, Mr Zaki Ahmad Shariff, CEO, FA Securities Sdn. Bhd and Mr. Ahmad Shahab Din CEO, MICG
3. The last session paper was ‘How will the Economic Transformation Programme Impact on the Capital Market?’
Speakers for this topic were: Datuk Nicholas Zefferys , Former President, American Malaysia Chamber of Commerce/ Member, National Economic Advisory Council, and Dr. Nazri Khan Adam Khan, VP, Head of Retail Research, Affin Investment Bank Bhd
I was invited to speak on the platform of GLCs Leaders –Transformation of GLCs –Creation of Wealth. My specific topic was ‘ The Capital Market- The importance of Corporate Governance.
I will write more about that in my next posting…….
Following that, on 24th and 25th November 2011, ASLI (Asian Strategic Leadership Institute) organized The 16th Malaysian Capital Market Summit which was held at Sheraton Imperial, Kuala Lumpur. The President of ASLI, Mr.Mirzan Mahathir presented his welcoming remarks at about 9.30 am. The Minister of Finance II, YB Dato Seri Ahmad Husni Hanazlah presented the opening keynote address.
Among topics that were presented and discussed on the first day were:
1. ‘The Global Economic and Investment Outlook: The New Normal in the Market’
Speakers were:
a. Mr P.K. Basu, Former Managing Director/ Chief Economist(Asia Ex-Japan, Daiwa Capital Market, Singapore and
b. Mr Alan Tan, Chief Economist, Affin Investment Bank Berhad
Later, the Chairman of Bursa Malaysia Berhad, YABhg. Tun Mohamed Dzaiddin presented his luncheon address entitled ‘The ASEAN Opportunity: An Exchange Perspective’
The event was continued into the afternoon with two more papers discussed.
2. ‘The Capital Market Masterplan 2 and the Corporate Governance Blueprint 2011- What’s New?- How Effective Will This Be?’
Speakers were: Mr. David Burry, Executive Director, Boustead Heavy Industries Corporation Berhad, Dato Charon Mokzani, CEO, CIMB Investment Bank Berhad, Mrs Rita Benoy Bushon, CEO, MSWG, Mr Zaki Ahmad Shariff, CEO, FA Securities Sdn. Bhd and Mr. Ahmad Shahab Din CEO, MICG
3. The last session paper was ‘How will the Economic Transformation Programme Impact on the Capital Market?’
Speakers for this topic were: Datuk Nicholas Zefferys , Former President, American Malaysia Chamber of Commerce/ Member, National Economic Advisory Council, and Dr. Nazri Khan Adam Khan, VP, Head of Retail Research, Affin Investment Bank Bhd
I was invited to speak on the platform of GLCs Leaders –Transformation of GLCs –Creation of Wealth. My specific topic was ‘ The Capital Market- The importance of Corporate Governance.
I will write more about that in my next posting…….
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