ETHICS IN FINANCE:

FRAUDULENT FINANCIAL
REPORTING (FFR) AT MEGAN
MEDIA HOLDINGS BERHAD
BY:
ASMA LIYANA JAAFAR
INTAN SYAMIMI SUHAIMI
SYAHIRAH AMIRA MD. DIN

OUTLINE
Introduction

Problem Statement & Issue

Literature Review
Solutions

Conclusions

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 REVIEW
DEFINITION

AUTHORS

Fraud is an ever present threat to the effective utilization

of resources and it will always be an important concern

Brink and Witt (1982)

of management.
A deliberate deceit planned and executed with the intent
DEFINITION OF FRAUD

to deprive another person of his property or rights

KPMG Forensic Malaysia

directly or indirectly, regardless of whether the

(2005:5)

perpetrator benefits from his/her actions.

Fraud as a deliberate misrepresentation, which causes
one to suffer damages, usually monetary losses.

Pollick (2006)

LITERATURE REVIEW
DEFINITION

AUTHORS

FFR as a deliberate fraud committed by management

that injures investors and creditors through misleading

Eliott and Willingham (1980)

financial statements.
The intentional, deliberate, misstatement or omission of
FRAUDULENT FINANCIAL
REPORTING (FFR)

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

The Association of Certified

Fraud Examiners (ACFE)

making a decision, usually with regards to investments.

FFR is described as a scheme designed to deceive,
accomplished
representations.

with

fictitious

documents

and

Wallace (1995)

LITERATURE REVIEW
DEFINITION

AUTHORS

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

Houghton Mifflin Company (2005)

motives and ends of such actions.

Truthfulness of and trust in the financial reporting system

ETHICS OF FINANCIAL REPORTING depend on far more than the actions and decisions of
individuals or sophisticated mechanisms for the whole

Enderle (2004b)

system.
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)

Table 2.1 Structuring the Field of Financial Reporting

PROVIDERS
MACRO LEVEL

CERTIFIERS

Governmental and regulatory bodies that set up and enforce the rules (Congress, SEC, FASB, Intern.
Accounting Standard Board, boards of accounting)
-Auditing companies

-Companies
-Firms issuing new securities
MESO LEVEL

-Investment research divisions

-Professional associations of
accountants and investment researchers

-Public Company Accounting

-Investor firms

Oversight Board (since July

-Creditor firms (banks, etc.)

2002) Credit rating agencies

-Government agencies

-Professional associations of

(collecting taxes, etc.)

accountants and auditors

-Corporate management aided by

management accountants
MICRO LEVEL

USERS

-Board of directors
-Chief financial officers

-Individual investors
-Internal auditors

-Individual bank employees

-External auditors

-Government officers
-Investment researchers

-Investment researchers
Source: Georges Enderle (2004b)

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).