ETHICS IN FINANCE:

FRAUDULENT FINANCIAL

REPORTING (FFR) AT MEGAN MEDIA HOLDINGS BERHAD

B Y :

A S M A L I Y A N A J A A F A R

I N T A N S Y A M I M I S U H A I M I

S Y A H I R A H A M I R A M D . D I N

OUTLINE

I n t r o d u c t i o n

P r o b l e m S t a t e m e n t & I s s u e

L i t e r a t u r e R e v i e w

S o l u t i o n s

C o n c l u s i o n s

INTRODUCTION

Fraudulent Financial Reporting (FFR)

Major concern for two primary regulators of

Malaysias capital market (SC & BM)

45% of companies worldwide have fallen

victim to economic crime

10% of incidents concerning white collar

crime (ACFE)

Transmile Berhad (2004, 2005, 2006;

RM622 millions

Megan Media Holdings Berhad (MMHB)

Established in early 1994 - plastic injection

components

Ventured into the manufacturing of 3.5"

multi-function disk (MFD) and videotapes

(1996)

1st Malaysian company received pioneer

status from the MITI

Second Board of the Kuala Lumpur Stock

Exchange

PROBLEM STATEMENT & ISSUE

Charged with falsifying the companys revenue figures

Kenneth Kok - Section 122B (a) (bb) read together with Section 122C (c) of the Securities Industry Act 1983 (SIA)

They are: RM1.03 billion - year ended April 30, 2006

RM230.36 million - period ended July 31, 2006

RM238.13 million - period ended Oct 31, 2006

RM306.15 million - period ended Jan 31, 2007

PROBLEM STATEMENT & ISSUE

Mohd Adam - charged with furnishing a false statement to Bursa Malaysia on the revenue figure of RM306.15 million

Fined

(RM3 million or a maximum jail term of 10 years or both)

Defaulted on developing trade facilities amounting to RM47.36 million

(Memory Tech & MJC Singapore Pte Ltd)

Appointed Ferrier Hodgson (forensic accountant)

Unaudited net loss of RM1.27 billion for the year ended April 2007

LITERATURE REVIEWDEFINITION AUTHORS

DEFINITION OF FRAUD

Fraud is an ever present threat to the effective utilization

of resources and it will always be an important concern

of management.

Brink and Witt (1982)

A deliberate deceit planned and executed with the intent

to deprive another person of his property or rights

directly or indirectly, regardless of whether the

perpetrator benefits from his/her actions.

KPMG Forensic Malaysia

(2005:5)

Fraud as a deliberate misrepresentation, which causes

one to suffer damages, usually monetary losses.Pollick (2006)

LITERATURE REVIEW

DEFINITION AUTHORS

FRAUDULENT FINANCIAL

REPORTING (FFR)

FFR as a deliberate fraud committed by management

that injures investors and creditors through misleading

financial statements.

Eliott and Willingham (1980)

The intentional, deliberate, misstatement or omission of

material facts, or accounting data to mislead and, when

considered with all the information made available,

would cause the reader to alter his or her judgment in

making a decision, usually with regards to investments.

The Association of Certified

Fraud Examiners (ACFE)

FFR is described as a scheme designed to deceive,

accomplished with fictitious documents and

representations.

Wallace (1995)

LITERATURE REVIEW

DEFINITION AUTHORS

ETHICS OF FINANCIAL REPORTING

Ethics is a branch of philosophy dealing with values relating to

human conduct, with respect to the rightness and wrongness

of certain actions and to the goodness and badness of the

motives and ends of such actions.

Houghton Mifflin Company (2005)

Truthfulness of and trust in the financial reporting system

depend on far more than the actions and decisions of

individuals or sophisticated mechanisms for the whole

system.

Enderle (2004b)

They should be generated by trustworthy people who are

competent and motivated by the knowledge that they are

being trusted and by a moral commitment to honour this

trust.

Hausman (2002)

PROVIDERS CERTIFIERS USERS

MACRO LEVELGovernmental and regulatory bodies that set up and enforce the rules (Congress, SEC, FASB, Intern.

Accounting Standard Board, boards of accounting)

MESO LEVEL

-Companies

-Firms issuing new securities

-Investment research divisions

-Professional associations of

accountants and investment researchers

-Auditing companies

-Public Company Accounting

Oversight Board (since July

2002) Credit rating agencies

-Professional associations of

accountants and auditors

-Investor firms

-Creditor firms (banks, etc.)

-Government agencies

(collecting taxes, etc.)

MICRO LEVEL

-Corporate management aided by

management accountants

-Board of directors

-Chief financial officers

-Investment researchers

-Internal auditors

-External auditors

-Individual investors

-Individual bank employees

-Government officers

-Investment researchers

Source: Georges Enderle (2004b)

Table 2.1 Structuring the Field of Financial Reporting

SOLUTION

IMPROVEMENT IN AUDITING SYSTEM

The evolution of primary objective in auditing has limits the auditor to detect the fraud.

ISA 200 requires an audit to be designed so that it provides reasonable assurance of detecting

both material errors and fraud in the financial statements.

THE RESPONSIBILITY OF THE AUDITOR

An auditor has the responsibility for the prevention, detection and reporting of fraud, other

illegal acts and errors (Schelluch & Reid, 1997).

They are expected to play a significant role in maintaining good corporate governance (Ali, 1999).

SOLUTION

EMPHASIZES ON ETHICS

The previous study puts forward ethical elements, which have been recommended by Arjoon

(2005) and Mackenzie (2004) as part of the solution to corporate failures.

Ethics training is crucial to instil ethical behaviour (Zaleha & Rashidah, 2010).

FINANCIAL RATIOS APPROACH TO DETECT FRAUD

Many fraud investigators recommend financial ratios as an effective tool to detect fraud (Bai, Yen,

& Yang, 2008).

The new method and more effective method is needed to detect fraud.

CONCLUSION

It has generally been agreed that the main failure leading to the financial crisis stemmed directly

from the lack of financial disclosure and inadequate governance practices. Beekes and Brown

(2005) found out that companies with better governance also disclose more information.

The importance of transparency has been widely recognized by both academics and market

regulators, resulting in numerous rules and regulations being introduced over time to ensure timely

and reliable disclosure of financial information, creating standards to which companies must adhere

and avoid frauds.

Studies have shown that greater bank disclosure and the consequences of bank transparency have

positive economic effects on the stability of the banking sector (Tadesse, 2006). A high level of

transparency leads to a higher supervision level, lower financing cost and also a lower risk profile

thus limiting the likelihood of failure (Nier, 2005).