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Unstoppable Fraud, Scandals and Manipulation

An Urgent Call for an Islamic-based Code of
Ethics

Conference Paper January 2011

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 2011 International Conference on Sociality and Economics Development
IPEDR vol.10 (2011) (2011) IACSIT Press, Singapore

Unstoppable Fraud, Scandals and Manipulation An Urgent Call for

an Islamic-based Code of Ethics

Ahmad Saiful Azlin Puteh Salin1+, Norlela Kamaluddin 2 and Siti Khadijah Abdul Manan2
1
Accounting Research Institute (ARI) and Universiti Teknologi MARA (UiTM) Perak
2
ARI and Centre of Islamic Thought and Understanding (CITU) , UiTM Shah Alam
Abstract. The purpose of this paper is three-fold. First, it is to highlight corporate scandals that have
happened in Malaysia. Second, it is to discuss some major causes of these corporate scandals; and third, it is
to recommend the possible actions and preventive measures to curb these scandals from the Islamic point of
view. On the whole, the paper has given motivation to the researcher to embark and initiate a research in
Islamic Ethics and Governance.
Keywords: fraud, code of ethics, Islamic

1. Introduction
In the recent years, the public and business community have been surprised with the exposure of many
corporate scandals and accounting fraud by the managers of the company. It disappoints many stakeholders
as after the financial crisis in 1997, many efforts have been initiated and implemented to strengthen the
business control and foundation of the company. One of the important lessons learned from the financial
crisis in 1997 is the weaknesses in the governance of the company such as too much power is given to a
single person in managing the company, weak internal control and poor work of the directors that leads to
the failure of the company. Due to this, a total regulatory and governance were embarked all over the world.
Just to name a few, in the US, the Sarbanese Oxley Act was established, while in the UK the Code of
Corporate Governance was extensively revised to stop all these corporate diseases from spreading and
becoming a cancer for the global business community.
However, all this effort has seemed fruitless as after the heavy debate and discussion and huge struggle
by the regulator and market administrator, these corporate scandals are still returning but with more scaring
facts. This paper, therefore, is designed to address some major causes of the problems and suggest possible
action to solve these problems.

2. Corporate Scandals Malaysian Scenarios

Malaysia, like other developed and developing countries, is unable to run away from a number of
corporate scandals that have been highlighted by the media. After all the recommendations and efforts by the
various parties to eradicate these various scandals, it is still occurring and there is no sign that it will stop or
even reduce in the near future. The KPMG Malaysia Fraud Survey Report 2009 [1] for example revealed that
a total of 61% of the respondents believed that fraud would rise in the next two years by which more than
three quarters of the respondents believed that financial statement fraud will continue. A similar survey also
revealed that management did not take appropriate action of the fraud red flag. The major factors that
contributed to the fraud included poor internal control, collusion with external parties and unethical practices.

+
Corresponding author. Tel.: + 6053742544; fax: +6053742635
E-mail address: ahmad577@perak.uitm.edu.my
474
The total amount of losses during the survey period was RM63.95 million in which 87% was accounted from
internally perpetrated fraud, means committed by the management and non-management employees.
Apparently, there were a series of accounting scandals incurred in the prior years. One of the most
famous was the Transmile Group Berhad that overstated its groups revenue figures by 30% and 35% of the
consolidated revenues in the financial statement ending December 2006 and 2005 respectively. Other than
that, in Megan Media Holdings Berhad the optical disk maker was suspected to be involved in fictitious
trading of more than RM500 million. The other selected corporate fraud and misconduct are as per Figure 1.

Company Offence year Alleged offence

MEMS Technology Bhd
Fountain View Development Bhd
FTEC Resources Bhd
Polymate Holdings Bhd
Welli Multi Corp Bhd
GP Ocean Food Berhad
Pasaraya Hiong Kong Sdn Bhd
Hospitech Resources Bhd
Tat Sang Holdings Bhd
2007 Submission of misleading statement
2003-2004 Misleading appearance of companys activity trading
NA Misuse of company funds for personal benefit
2003 Submission of false statement
2006 Submission of misleading information
2006 Submission of misleading information
2003 Submission of false statement
2002 Submission of false statement
2000 Submission of false statement
Fig. 1: Corporate Fraud

It was however annoying to see this mismanagement relentlessly continuing. In one recent case, one
director of a company called Linear Corporation paid RM36 million to start the RM1.67 billion King Dome
project in Manjung, Perak. This contract was awarded by the Global Investment Group Inc, a Seychelles-
based company, but until now no significant progress of the project has been made and there has been no
evidence that a feasibility study has been conducted before the company started the construction.

3. Root of the cause

3.1. Ineffective governance
Basically, the current problem faced by problematic companies all over the world is the missing
directors (Schwartz et al., 2005). The meaning of missing here is not missing in action but the inability of
the directors to perform their jobs efficiently. These famous corporate scandals show that directors nowadays
are involved in many unethical practices such as assets misappropriations, misused companys assets for
personal benefits, financial statement fraud, recording fictitious revenue, concealing liability, inflating
reporting assets, corruption and bribery. Not only that, it costs the biggest audit firm in the world, Arthur
Andersen, to close their businesses and pay for the price of honesty.
In addition to that, the corporate governance and law for a long time have been criticised to be
insufficient in regulating companies generally and directors particularly. Many evaluation and assessment on
the current law reveal many weaknesses in preventing the unethical behaviour of directors. One of the
obvious weaknesses is the business judgment rule. These loopholes are always used by the directors in
making decisions without adequate investigation of aggressive risk opportunities in project taking and poor
investment in overseas projects. In the name of judgment rules, gut feeling, intuition, or whatever it is called,
just means that these means have been manipulated by directors to discharge their responsibilities improperly
and in the worst case, committing a fraud.
Due to this, as posited by Schwartz et al., (2005) now is the right time to emphasise the directors ethical
obligations. The business community now should stop from depending too much on the laws and regulations.
Revision, revamp and introduction of new rules and guidelines seem a fruitless effort to curb all the scandals
and corporate criminals. Dating back from the classic Cadbury Report (1992) in the UK that contributed to
the evolution of corporate governance, until the introduction of Sarbanese Oxley Act 2002 in the US as well
as the latest King Report III (2010) from South Africa, there has been a never ending problem of
mismanagement and manipulation by greedy directors.

475
 In Malaysia itself, the first introduction of the Malaysian Code of Corporate Governance in 2000, had
gone through its first revision in 2007 and is still currently under serious consideration by the relevant
regulatory bodies to come out with the third version of the code. In the next few years, this code will be
constantly reviewed and new guidelines will be introduced while at the same time, corporate scandals will
keep on recurring over time.

3.2. Poor implementation of laws and rules

Corporate crimes and these unethical behaviours have become worse due to the poor regulations
enforced by the relevant authorities. In the latest case of Pancaran Ikrab Berhad, the director had misused
RM52.5 million for personal benefits and it was disappointing to see that the judge only fined him RM2
million without recovering the prior lost money. The public interpreted this action as an evidence of the
countrys poor regulation and enforcer which has affected the judiciary system. Arguably, this becomes bad
as the judge has to meet certain key performance indicators (KPI) set by the government. As a result, not
only the judge but also the prosecutor is under pressure to meet the goal of the government, not the interest
of the public as a whole! What purpose is the regulation when these white-collar criminals can get away with
so much money with just a little fine? There is no proper enforcement of the existing laws and rules that will
act as a means to deter wrongful behaviours.
A summary of some of the examples of many unethical practices by corporate communities in Malaysia
and possibly, the poor outcome from the sentence given by the judge have been compiled from the various
sources as follows:
In Axis, RM100 million valued of debts were written off due to the unknown contract manufactures
as a result of missing documents. This can be a childish reason given by the company to run away
from the regulator punishment, or as a smart fraud planning. Instead of being charged for fraud for
the manipulation of RM100 million, it is better for the directors to be convicted for improper
documents kept in which the charges are substantially low.

Misappropriation of the rights issue of Kiara Emas Asia Industries Bhd. The estimated proceeds
amounting to RM17 million in December 1996 was used for personal purposes. Under the penal
code, the perpetrator was fined only RM600,000

Datuk Ishak Ismail, the director of Idris Hydraulic misused RM50 million of the proceeds from the
disposal of Kewangan Bersatu Berhad in 2003. He was fined only RM400,000

Former director of Aokam Perdana Berhad was alleged with misappropriation of funds of RM55
million. In 1998, the company was declared insolvent and could not pay some RM33.3 million in
debts. The director escaped without paying a single cent back to the company.

The co-founder of Omega Securities was fined RM3 million for defrauding RM424.9 million in
1999. In June 14, 2007, he again was fined RM3 million for each of the two charges of abetting the
submission of false statements to Bursa Malaysia relating to 44.592 million Omega shares.

A director of Ekran Berhad took some RM712.9 million from the company as an advance to inject
his private assets in 1996/1997. He was fined only RM500,000.

In November 1997, UEM purchased shares of its parent company at a market price of RM3.24 per
share, in total of RM2.34 billion. The former executive chairman entered into a put-and-call option,
giving an undertaking to buy back shares at RM3.24 inclusive of cost to please minority
shareholders and regulators. When the option was due on Feb 14, 2001, the entire amount was
RM3.3 billion, but there was no settlement. The executive chairman resigned. Khazanah took UEM
private and later cancelled the option. No charge was imposed to the person responsible.

3.3. Political governance

The Malaysian economic system is also highly dominated by political figures and actions. It is yet to
observe this country moving forward towards the pure market forces in determining and making a corrective
system in our economics. One good example is in the case of the former CEO of the national carmaker,

476
Proton Holdings Berhad, who received RM5 million from his previous employment. This is considered by
public as a payment for failure. This substantial amount of money should not be paid when Proton is
known as a laggard performer in the automobile industry (as compared to Kia for example) although it has
already been in business for almost 30 years. However, the payment was made due to the instruction of
prominent political figures that once sat on the top position of the company.
The biggest negative implication of the intervention by political decisions is that it paralyses the rules
and regulations and fails to achieve its primary objective a mechanism to safeguard the public interest. This
will provide perception that the rules and regulations are only a formality, while the political agenda to serve
the needs of some bureaucrats is above and beyond the essential need of the stakeholders.

4. Islamic Ethics A Possible Solution?

Beekun (1997) defined Islamic ethics as the set of moral principles that distinguished what is right and
wrong from the Islamic perspectives. As contrast to other type of ethics, the Islamic ethics is premierly
sourced from the Quran and Sunnah. Quran is the book of God that becomes the ultimate source of Islamic
teachings. As the guidance provided by Quran is general in nature, the Prophet Muhammad s.a.w became the
secondary source of teaching. All of his words, called Hadith provided an interpretation of the grey areas to
prevent confusion among the followers. His act is called Sunnah, which is important to guide the followers
towards the right way in practicing Islam in their lives.
Arguably, these scandals and corporate problems can be prevented by taking appropriate action and
approach from the religious perspective generally, particularly from the Islamic perspectives. The extensive
research on fraud and unethical practices provide many theories to support their research and arguments;
some of the most popular ones are agency theory1 and stakeholder theory2. These, however can be concluded
and criticised that there is a similarity of substantial lack in these theories which do not consider religion as
a part of the solution for the many problems faced by humans. These people do not believe in religion, and
even if they believe in it, they just put religion in the prayer house only, not as a part of a humans daily life.
This is true, as what has been said by Prophet Muhammad s.a.w. : A time will come when practicing Islam
will be as difficult as holding a fire ball with bare hands.(Hadith).
The auditor also seems to be unable to become a check and balance device as a comforting factor for
the stakeholders and shareholders. An interview with the audit practitioners that audit the state organisation,
finds that, in reality, although the auditor did discover many mistakes, irregularities, and incompliance with
governance, rules and regulations without any satisfactory explanation, majority of these findings were
dropped out without any concrete reasons. The only reason given by the Auditor General was the findings
were not relevant anymore as they already happened and nothing could be done. From the ethical point of
view, it is not an issue whether the findings are relevant or not, but it is the issue of the taxpayers money
that has been used and spent for nothing by the state organisation. Some actions and mechanisms should be
taken so that similar irregularities are not repeated in the future. This is clearly stated in the holy Al Quran:
O ye that believe! Betray not the trust of Allah and the Messenger, nor misappropriate knowingly things
entrusted to you. (Al-Anfaal: 27).
This statement from the Al-Quran clearly indicates that people, irrespective of who they are, shall
uphold the trust given as this trust will be queried and raised by Allah in the hereafter and severe punishment
will be guaranteed for all the mismanagements done in this world. In the other part of the holy Al-Quran it is
precisely stated:That Allah may reward the true men for their truth, and punish the hypocrites if He will, or
relent towards them (if He will). Lo! Allah is forgiving, merciful.(Al-Ahzab: 73)
In addition to that, the Prophet Muhammad s.a.w. also said:A time will come when people will not care
whether they earn the money by permissible (halal) means or not(Al-Hadith)

1
Agency theory suggests that there is a conflict between the owner of the firm, called principal with the managers/directors that he hires to manage
the firm on his behalf, called agent
2
Stakeholder theory argued that managers/directors, when running the company must consider the benefits to all parties that have the interest in the
company.
477
 Islamic ethics also put education at a major part of developing a good person that upholds moral values
at the utmost importance in their lives. For example, in the education institution, from the lowest level such
as kindergarten to the highest level such as university, the educator should always, when time permits and
when the situation is appropriate, advise the students on the importance of ethics, honesty and integrity in
their daily lives. The educator must encourage his students to always observe the right thing because it is
right, not because the laws require them to do and suggest students to always look at every matter spiritually
rather than the letter of law.
For example, there should be no toleration for unethical practices such as copying during the exam and
plagiarism. The educator must emphasise and educate the students that many kinds of immoral behaviour
normally start at a very young age. It is better for the student to graduate with a lower class degree which is
solely based on his effort rather than a higher class without honesty and integrity. The educator should fail
his student rather than let him graduate and become a manager or director who will damage the country in
the future. Let the university lose a few thousand ringgit now rather than the country and nation lose millions
or billons of money due to unethical behaviours. This is also true as what has been stated in the holy Al-
Quran: Oh believers! Fear Allah, and say the right thing. (Al-Ahzab:70)
Prophet Muhammad s.a.w also has said that:If you guarantee me six things on your part, I shall
guarantee you paradise: Speak the truth when you talk, keep a promise when you make, when you are
trusted with something fulfill your trust, avoid sexual immorality, lower your eyes and restrain your hand
from injustice (Hadith).
Islam also posits that the best way to regulate and educate a person is by regulating and educating their
heart or from the inside first. Prophet Muhammad s.a.w said:There is a piece of flesh in the human body. If
this is good, all the organs will be good. If this is evil, all the organs will be evil. This piece of flesh is the
heart (Hadith).

5. Conclusion
It is believed that how a human draws a picture in his life such as a school, house, or office and puts
values like honesty, integrity and transparency begins from his heart and soul. The best education ever is
education for our inner strength. Empirical findings show that the laws and regulations just work as a
complementary education. As people become smarter and the environment, politics, economy and social
continuously change, these laws and regulations become out-dated fast and cannot work appropriately. Thus,
self-regulation is a more powerful tool than any other type of monitoring mechanism that gives humans a
better life, higher kindness and first class integrity.

6. Acknowledgements
The authors wish to express their thanks to the Accounting Research Institute (ARI) for the financial
assistance in the administration and preparation of this paper.

7. References
[1] Beekun, R. (1997) Islamic Business Ethics. International Institute of Islamic Thaught. Virginia, US.
[2] KPMG (2009) KPMG Malaysia Fraud Survey Report 2009. Retrieved from
http://www.kpmg.com.my/KPMG/publications/home/fraud%20survey%20report%2009_Final.pdf
on 22 November 2009
[3] Schwartz, M.S., Dunfee, T.W., Kline, M.J. (2005), Tone at the Top: An Ethics Code for Directors? Journal of
Business Ethics, vol. 58, pp. 79-100

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