PENANG, Malaysia - Dodgy accounting at a
handful of prominent listed companies has put the
spotlight back on Malaysia's financial reporting
and corporate governance. Not only has it taken
the shine off the stock market's recent good
performance, which is only now emerging from the
doldrums of the 1997-98 Asian financial crisis,
but it has cast a shadow over recent upbeat
investor sentiment.
A few cases have hit
the business headlines for all the wrong reasons.
Air-freight firm Transmile Group's share price
took a
beating when it was revealed
that a probe into its books was being carried out
after auditors refused to sign off on the accounts
because some of the company's 2006 revenues and
receivables could not be substantiated.
Transmile's share price plummeted on the news,
wiping out gains made over the past two years and
erasing about RM1.2 billion (US$354 million) in
its market capitalization.
The company's
major shareholder, the Kuok Group, has initiated a
probe and distanced itself from management led by
chief executive officer Gan Boon Aun and chairman
Ling Liong Sik, a former Malaysian transport
minister. Kuok holds a 17% stake in the company.
In February, Transmile announced an unaudited
pre-tax profit for the year ended December 31,
2006, of RM208 million, driven by an 80%
year-on-year jump in revenues and a tripling of
trade receivables.
Three months later, on
May 7, the company's board expressed its concern
about the figures' reliability and the counter was
suspended. Transmile's directors said they had
been informed by the firm's auditors, Deloitte
& Touche, in early May that they had not been
able to obtain relevant supporting documentation
from management to confirm the validity of
"certain transactions involving trade receivables
and related sales and additions to property, plant
and equipment".
The board later announced
that Moores Rowland Risk Management had been
appointed to conduct a special audit on issues
relating to those transactions. The Malaysian
stock exchange, Bursa Malaysia, had earlier
rejected Transmile's application for an extension
of its April 30 deadline for the submission of
audited financial statements on the grounds that
the application was made too late.
In a
media release, Bursa Malaysia said it "takes a
very serious view on the non-availability of
reliable financial information on Transmile" for
the financial year. It reminded the firm to "make
the necessary disclosures on their actual
financial position to the market as soon as
possible". Tellingly, it urged investors to
exercise due care and diligence in their
investment decisions on Transmile.
Transmile's board says it now aims to
ensure that financial statements are finalized in
time for its annual general meeting in June, but
there seems little doubt that the damage to the
company's reputation has been done and the
unaudited profit figures will have to be
significantly revised downward.
Muddled
merger Transmile is not the only listed
company coming under scrutiny. The banking giant
CIMB Group recently appointed
PricewaterhouseCoopers (PwC) to review the 2005
financial statements of Southern Bank Berhad
(SBB), which it acquired via Bumiputra-Commerce
Holdings Berhad (BCHB) Group in a hostile takeover
last year and has since merged with its banking
operations.
CIMB chief executive officer
Nazir Razak expressed frustration last year with
SBB's financial statements, claiming that SBB had
been "relatively imprudent in provisioning and its
historical earnings were inflated consequently".
Although he was apparently aware of this at the
time of the merger, Nazir said he had not
anticipated the extent of the provisions against
bad loans that would eventually be required. "I
was disappointed at the fancy accounting that was
practiced at SBB," he was quoted as saying, "like
the way bonuses were accrued on a one-year-lag
basis and the consulting fees being capitalized".
BCHB finally had to make hefty provisions
and additional adjustments of close to RM600
million in SBB's accounts last June after a
due-diligence review and audit. That cast a shadow
over Malaysia's largest ever corporate merger.
Though CIMB said PwC's ongoing review would have
no financial impact on BCHB - now part of the CIMB
Group - it also hinted that BCHB might decide to
"seek legal redress in the future". PwC is now
tasked with determining whether SBB's consolidated
accounts as at December 31, 2005, provide a true
and fair view of SBB's finances in the light of
the audit and due-diligence findings.
In
yet a third, lower-profile case, the former
managing director and a former director of
telecommunications and broadband-service provider
NasionCom Holdings were charged in court on Monday
with providing misleading information about the
firm to the Securities Commission. They both
pleaded not guilty to the charges.
In
February, the Securities Commission had
reprimanded NasionCom Holdings Berhad and directed
the company to rectify and reissue its financial
statements for the year ended December 31, 2005,
within a month. Its investigation had revealed
that NasionCom had submitted false information
with respect to revenue on sales that were not
transacted in its 2005 financial statements. The
group's revenue of RM195 million contained a total
of RM143 million in sales that were not
transacted, the commission said in a statement.
Although corrective measures have already
been taken in both the Transmile and BCHB-SBB
cases, they also raise hard new questions about
the reliability of financial statements, the role
of auditors and management, and the state of
corporate governance in Malaysia.
In the
case of Transmile, analysts wonder whether it was
merely a case of poor accounting standards or if
management was trying to hide something in the
accounts. If it was merely bad bookkeeping, which
could be easily rectified, auditors most likely
would not have held back on signing the accounts,
they say. If it was something more serious,
standard practice is to sign it with certain
reservations highlighted.
One big question
looming over the Transmile case is whether the
auditors reported the matter to the Securities
Commission, as required by law. Questions are also
being asked as to why Transmile had to wait until
the April 30 deadline to inform the stock exchange
that the audited accounts would not be ready in
time.
P Gunasegaram, group executive
editor of The Edge business weekly, was scathing
in a recent commentary piece. "Transmile Group
management, directors and external auditors should
walk a mile in the minority shareholders' shoes,"
he wrote. "Then they will know the kind of
distress that they have caused them, including
many prominent funds and long-term investors."
In the case of SBB, the question arises as
to why SBB management and auditors allowed
imprudent provisioning when one of the basic
tenets of accounting is the concept of prudence in
reporting financial results. In both cases, the
current main shareholders have in effect
undertaken a second audit or review - after the
first audit apparently raised more questions than
answers.
"Obviously in the Transmile case,
the key shareholders were caught unaware," said
Kuala Lumpur-based economist Subramaniam Pillay,
who specializes in international finance. "It's
very hard to say if it represents the start of the
uncovering of more cases of corporate fraud in
Malaysia or if it was just an isolated incident."
He suggested broadly that the practice of
issuing stock options to key management personnel
should be reviewed. "It encourages them to do
things to raise share prices, and in the process,
some of them might resort to illegal practices to
inflate profit figures."
Anil
Netto is a freelance writer based in Penang,
Malaysia.
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