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a. Introduction about the company and the chronology of the fraud event.

Company Background

Transmile Group Berhad is an investment group company engaged with in provision of air

transportation and related services. It also deals in aircraft, aircraft parts and equipment. It also

provides express distribution and logistics management services and aircraft leasing services. The

company was founded in 1993 and was listed on the Bursa Malaysia on 27 June 1997 and is

based in Subang, Malaysia. . Transmile shareholding as at 28 April 2006 showed a mixture of

local and foreign shareholders with the largest shareholder being Trinity Coral Sdn Bhd (19.5%),

a company that was part of the diversified international conglomerate, the Kuok Group.

Transmile's customer base which incorporated a portion of the easily recognized name

organizations, for example, DHL Worldwide Express, United Parcel Service (UPS), Pos

Malaysia Berhad, Nationwide Express, Citylink, BaxGlobal and Nippon Express. Operationally,

Transmile had kept up standard flights between Peninsular Malaysia and East Malaysia, to

nations like China, Thailand, India and to some significant urban communities in the Asia Pacific

district. With a wide range network of operations, Transmile reported increasing revenues and

profits since 1998 until 2006. The share price has increased substantially.

Board of Member

Name Position

Tan Shin Liu Chairman and Managing Director

Teong Boon Tan Head of Corporate Affairs and Director


Krishnasamy Rengasamy General Manager of Flight Operations and Director

Mohd Lutfi Bin Mat Lazim Members of Board of Director

The chronology of the fraud event

The company has faced accounting scandal during the year 2007 as it is being found that

the company has overstated its revenue and profits in the financial statement since 2004. The first

problem occur when the company has failed to submit the company audited annual report that on

the year 2006 to Bursa Malaysia which is a period on not exceeding more than 4 months from its

year ended report. On May 2007, the company external auditor which is Deloitte & Touche did

not want to approved the company annual account due to lack of supporting document. The BOD

has decided to appoint Moores Rowland Risk Management to conduct a special audit to solve

the issues that has been told by Deloitte & Touche.

After being investigate, it is found that the company has overstated their revenues and

profit since 2004 annual account for a total of RM622 million . After the actual amount was

calculated, the truth has been found that the company actually has gain loss instead of profit that

has been stated in the company financial statement. The company has been found to made

payments totaling RM189 million without supporting payment vouchers. The newly appointed

director has lodged a police report regarding the false statement on revenue, property plant and

equipment, and payment to third parties.


Gan (CEO) and former executives, Khiudin Mohd and Lo Chok Ping were charged by

the Securities Commission (SC) due to providing false statement and figures in the company

annual account for the 4th quarter year ended 2006 under section 86(b) of the SIA read together

with section 122C(c) of the SIA and they were also charged under section 122B of the SIA in the

alternative. Lo Chok Ping has paid RM 700000 of compound for the charges that has been

charged to him. The SC also offered compounds of RM500,000 each to the two non-executive

directors of Transmile, Chin Keem Feung and Shukri Sheikh Abdul Tawab, for an offence under

section 122B(b)(bb) SIA 1983 for knowingly permitting the making of misleading statements and

sending it to Bursa Malaysia. Besides SC, Bursa Malaysia also reprimanded Transmile and four

of its directors who is Gan, Khiudin, Chin and Shukri for breaching the Listing Requirements

pertaining to timely and accurate disclosures of the company financial information. Both Gan and

Khiudin were fined RM781,500 each and Chin and Shukri, RM162,600 each.

Due to the scandal, the company share price has fall down from RM 14 to RM 8.

The company accounting scandal has happened due to the BOD has conveniently leave the

responsibilities on managing the company and monitoring the company performance to its agent

and the management. The Audit Committee also has member of its own Executive Director who

is Khiudin Bin Mohd@ Bidin. On 14 February 2007 and 15 February 2007, the audit committee

has been told by the auditor about the serious accounting issues that happened on the 4th quarter

2006 company financial statement. Despite being alerted, the Audit Committee still proceed to

get the approval for the company annual account from their BOD. These has given a shocked to

the management and BOD.

Transmile had outsourced its internal audit function to Moores Rowland Risk

Management Sdn Bhd but their scope has been restricted to specific area only which has give
some problems as they did not get much information since the Audit Committee has controlled

the other specific information like sales and finance information. Deloitte & Touche has failed to

detect the material errors in 2004 and 2005 which has cost doubts on the auditor’s competence

and due care. Deloitte also has been the company’s auditor for a log time because of its low fees

and these has lead to lack of independent.

General red flag for financial statement fraud has occured as one of the leading

local research houses was rating Transmile’s share as a strong buy with an expected total return

exceeding 20% in the next 12 months, underpinned by the reported net profit growth of 110.5%.

Prior on, in February 2007, the board had endorsed an unaudited result that had demonstrated a

80% expansion in revenue, doubled its net benefit, and trade receivables that had expanded to

RM381 million from RM111 million in 2005.

In July 2007, the company announced the winding up of its subsidiaries due to

larger group liabilities and finally the shareholders suffered a loss of their investment from the

massive drop in the company’s share price, which was the highest on 3 January 2007 at

RM14.40, to RM4.64 on 3 July 2007 and below RM0.50 since March 2010. On 24 May 2011,

the company was delisted from the exchange. Furthermore, the shareholder funds decreased from

RM424 million in 2007 to a negative of RM289 million and loss in market capitalization of

RM1.2 billion.

b) The impact of the fraud on relevant parties.

Every wrong doing or fraud that has been done by any perpetrator would have their own

impact on several individual, organization or other entities. Injured Parties for the case of

Transmile scandal has affected the following parties:


1. Shareholders

The shareholders also adversely affected from the discovery of accounting fraud in

Transmile and the shareholders have to endure a huge loss in their investment in Transmile.

The massive dropped of share price from as high as RM14.40 on 3 January 2007 to RM0.50 at

the end of March 2010 caused the huge loss to the shareholder’s wealth. The largest

shareholder as at 28 April 2006 was Trinity Coral Sdn Bhd (19.5%), a company that was part of

diversified international conglomerate, the Kuok Group and other notable shareholder like POS

Malaysia Bhd (17.3%) and JP Morgan (4.4%).

2. Employees

After the investigation conducted, the party authorities found Transmile’s scandal case

have collusion between some groups of employees who are responsible for the organization and

with suppliers who are outside from the organization. This causes a huge impact on Transmile

employees or former employees of the company. Which leads to tarnishing of the good name of

employees of the company either the one who involve directly to the fraud or the one who has

no idea about the wrong doing. All employees of Transmile has been affected, while some of

them did not know anything regarding the fraud. This would highly affected their career in the

future.

3. Stock Market

Capital stock markets were also affected by this scandal, which led to sudden fall in the

value of shares in Transmile. The shares in Transmile had reached RM14.40 prices in early

year 2007, but after this scandal cases were exposed. In general, we see it worn a surprise for

everyone, especially for investors and when the current value of shares fell to RM4.64 in 6
months. Looking at the case of this scandal is a huge issue, the stock continues to fall until

RM0.50 per share in March 2010. The decline in prices has led to eliminate large market

capitalization and delisted from market exchange. The share price for companies in the industry

also have possibly dropped because of the negative image about the industry. The share price of

other companies also dropped because of the high preference for Transmile for its shares before

the bubble burst.

4. Deloitte & Touche

Deloitte & Touche was the external auditor who audited the Transmile Group Bhd.

Deloitte & Touche who has enjoyed a long-term relationship with Transmile, stretching more

than a decade. The long-standing relationship could however to a certain extent pose the

familiarities threats. Familiarity, could negatively affect auditors’ independence of mind and

therefore their auditing quality. Since scandal case exposed, it also affected Deloitte &

Touche’s reputation and could be issues of possible conflict of interests and independence of

auditors. It could raise the public doubt to the credibility of the auditing profession and affects

the public’s confidence in auditors’ duties.

5. Malaysia Government

The Transmile scandal has tarnished the credibility of Malaysia in corporate governance

and transparency in Malaysia. Scandal case like Transmile could affect reputation of the

government in order to promote corporate accountability and integrity, which encourage the

practice of ethical values higher through the implementation of the National Integrity Plan.

6. Transmile Group Bhd


The most highly affected by the fraud was the company itself. A fall of a national cargo

carrier from a top listed company to a company with no business activity and a few subsidiaries

and associates that either have stop operating or dormant company. On July 16, 2013 they

completed the disposal of their wholly-owned subsidiary, Transmile Air Services Sdn Bhd

which was once named a designated national cargo carrier by the Transport Ministry in 1996.

Their reputation has been hugely tarnished that their scandal is considered as one of the biggest

scandal in Malaysia and the most highlighted example for corporate governance failure. Their

shares were delisted on 24 May 2011 and they still cannot revive or rise from the failure up to

this moment.

7. The Guilty Parties

The guilty parties or those morally responsible on the case and the wrongdoing are listed

below:

1. Jimmy Chin Keem Feung, Independent director and Members of Audit

Committee.

2. Shukri Sheikh Abdul Tawab,Independent director and Members of Audit

Committee.

3. Gan Boon Aun, Chief Executive Officer.

4. Khiudin Mohd, Executive Director.

5. Lo Chok Ping, Chief Financial Officer.

Most of them were charged in court for trial and some of them have already been found guilty for

the misleading financial statement. Both members of Audit Committee has been sentenced for the
charge imposed to them. While charged for Lo Chok Ping has been withdrew since he paid the

compound of RM700,000 and others were still pending.

c) The ‘Red Flag’ / symptoms of the case

In this case, the persons who are responsible for the accounting scandal may include the

audit committee, the board of director, the internal auditor, the external auditor and the research

analysts. However, in our opinion, we strongly believe that the external auditor is the main

culprits who cause the accounting scandal in the company due to few issues against the

regulations and accounting standards caused by the external auditor during their audit works.

The 1 symptoms of the case are on 15 February 2007, the board of Transmile approved
st

the unaudited results and released them to Bursa Malaysia which had shown an 80% increase in

revenue (revenue for 2006 and 2005 were RM 989.2 million and RM 550.1 million respectively),

87% increase in pre-tax profit (pre-tax profit for 2006 and 2005 were RM 206.7 million and RM

110.4 million respectively) and 243% increase in trade receivables (trade receivables for 2006

and 2005 were reported at RM 381.2 million and RM 111.1 respectively). It caused Transmile
Group Berhad failed to submit its audited annual accounts for the financial year ended 31

December 2006 to Bursa Malaysia for public release. The submission should be within a period

not exceeding four months from the close of the financial year which was on or before 30 April

2007 as required by the Listing Requirements of the Exchange. In addition, the auditor found that

the “revenue for three financial years ending Dec 31, 2004 (FY04), FY05 and FY06 had been

overstated by RM622mil, much

higher than the RM530mil stated in an interim finding for two fiscal years” ( The Star, 2007).

The 2 symptoms of fraud is another cash outflow RM 341 million was “purported
nd

property plan and equipment” because there was discovered to be little supporting documentation

for that transaction. Furthermore, the company was said to have made payments totaling RM 189

million without supporting payment vouchers and found that items on related-party sales

transactions in which the subsidiary owed to the business more than RM103 million.

The 3 symptoms of fraud are Deloitte& Touch and Transmile Group have a very long
rd

relationship that is more than a decade. This can be proven or supported by the statement given

by ChalyMah Chee Kheong, Chief Executive Officer (CEO) for Asia- Pacific of Deloitte&

Touch said “We have been serving them for a number of years, even before their initial public

offering”. The long-standing relationship could however to a certain extent pose the familiarity

threats. Familiarity, could negatively affect auditors’ independence of mind and therefore their

auditing quality. This can be supported when Deloitte& Touch seemed to be relying on the

auditing fees of the Transmile Group where they charge low audit fees (2006 and 2005, the fees

were RM150,000 and RM73,000 when revenue were RM655.8 million and RM356.4 million
respectively), especially with the intense of competition in the market, and it could be the reason

why they have been hesitating to report the overstatement to the authority.

The 4 symptoms of fraud is begin with the question that why large capitalized company
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like Transmile choose to outsource its internal audit works to a third party such as Moores

Rowland Risk Management Sdn Bhd, an independent professional firm. However, the scope of

auditing had only been on several specific areas as instructed by the Audit Committee. The

internal audit was not expanded to some critical areas such as the sales and finance divisions of

the company. Hence, it did not cover the review of financial statement.

The 5 symptoms of accounting scandal is the suspicion arise when the analysts could
th

have gotten wind of the information from insiders in Transmile. It is because both local and

foreign analysts, agreed with it by giving positive assessments on the company’s prospect and

high target prices after the company released its unaudited 4 Quarter of 2006 report. These,
th

despite the fact that profit growth were unusually high – a common general red flag for financial

statement fraud.
d) Application of the fraud triangle theory in relation to the case

i) pressure

Every fraud perpetrator faces some kind of perceived pressure. Most pressures occurred when

there is a need especially on financial need. It is a major catalyst that causes an individual to

commit fraud in order to fulfil their needs (Zimberlman, F.M., Albrecht, C.C., Albrecht, S.W. &

Albrecht, O.C., 2012). From this case,

ii) opportunity

A perceived opportunity to commit fraud, conceal it, or avoid being punished is the second

element of the fraud triangle found in this case. Opportunity is the the biggest factor in the Fraud

Triangle. It is because even if a person is under a severe pressure to commit fraud or has

rationalized the idea to the point of no return, it’s impossible to commit fraud without having an

opportunity to do so. In this case

iii) rationalization
Rationalization is based on justification of the fraud or in other words it defines the behavior as

appropriate in a given circumstances. Perpetrator tends to formulate some type of morally

acceptable rationalization before he or she engaging in unethical behavior (Rabi’u Abdullahi,

2015).

e) Discuss the conviction and sentencing of the case.

The newly appointed Director had lodged a police report towards the matters of false statement

on revenue, property, plant and equipment, and payment to the third parties. Thus, former Chief

Financial Officer, former Chief Executive Officer and Executive Director were convicted by the

Court due to providing or submission of misleading financial statements; unaudited

consolidated reports for the 4th Quarter to the Bursa Malaysia Security Berhad for the financial

year ended 31 December 2006. The two persons who is the former Independent Director and

Audit Committee were convicted due to authorizing release of a misleading financial statement;

unaudited consolidated reports for the 4th Quarter to the Bursa Malaysia Security Berhad for the

financial year ended 31 December 2006. This is the first case in Malaysia which charged on

Independent Directors and portray to the market that Independent Directors cannot simply

endorse everything that was given to them. Until now, the two directors, undergo with their

sentence. While charge for Chief Financial Officer, has been withdrew as he paid a compound.

Charged for the other two directors, still pending in the Court of Appeal. Besides Securities

Commission Malaysia (SC), Bursa Malaysia also reprimanded Transmile and its directors for

breaching the Listing Requirements pertaining to timely and accurate disclosures of financial

information. The conviction and sentence towards the offenders were summarized as below:
Offenders Position Held Section Charged Conviction Sentence

Lo Chok Chief Financial SC: Section 86(b) of Provides Charge were

Ping Officer the Securities misleading withdrew towards

Industry Act 1983 financial him after he paid a

(SIA) read together statement; compound of RM

with Section 122C(c) unaudited 700,000

of the SIA. consolidated

Reports.

Gan Boon Chief SC: Section 86(b) of Provides Liable to a fine of

Aun Executive the SIA read together misleading not less than RM

Officer with the Section financial 1,000,000 and a

122C(c) of the SIA. statement; prison term of up to

Also charged under unaudited ten (10) years.

Section 122B of the consolidated

SIA.
Reports.
Khiudin Executive SC: Section 86(b) of Providing Liable to a fine of

Mohd Director the SIA read together misleading not less than RM

with the Section unaudited 1,000,000 and a

122C(c) of the SIA. consolidated prison term of up to

Also charged under ten (10) years.


Reports.
Section 122B of the

SIA.

Jimmy Independent SC: Section Authorizing the One (1) year

Chin Keem Director and 122B(b)(bb) of the furnishing of a imprisonment and a

Feung Audit SIA. misleading fine of RM 300,000

Committee financial

Members statement to the

stock exchange.

Shukri Independent SC: Section Authorizing the One (1) year

Sheikh Director and 122B(b)(bb) of the furnishing of a imprisonment & a

Abdul Audit SIA. misleading fine of RM 300,000

Tawab Committee financial

Members statement to the

stock exchange.

f) What could have been done by the organization and authorities to prevent a similar case.

1. The company should hire expert


Certified Financial Forensics and Certified Fraud Examiner should be hired by the

company as it will help the company by suggesting antifraud policies and the procedures.

These expert can help the company by completing and checking the internal control audit

and make forensic analysis. By these way, the company can prevent another fraud from

happening.

2. Strengthen the internal control

The company should strengthen their internal control to prevent the fraud and also to

ensure the integrity. By ensuring that the internal control is safe, it can help the company

by checking and maintaining their accounting record much safer as only authorize people

can see the company accounting record and cannot change it easily.

3. Controlling the segregation of duties

The company should control their segregation duties in order to reduce the risk of fraud

occurring. The number of person who can authorize the company accounting should be

controlled as it help to reduce the number of fraud. For example, the management need to

key in the accounting record should key in the data only and let the BOD or the

accountant to authorize the accounting record and make any decision.

4. The internal and external auditor should be given more power

The external auditor should be independent as it will give them more power to give the

opinion about the company accounting report. If the auditor is being controlled by the

company then the independent will be questioned. The company also should change the
external auditor at least 1 time in 5 years to avoid the independent and the dependency of

the auditor to the company that are paying them.

g) Highlight any unsolved issues/questions.

Transmile scandal case has left many unsolved issues or question, some of them are as follows:

1. Who are the masterminds of the scandal?

2. How was the internal control in Transmile?

3. BOD and Audit Committee supposed to be the one who protect the shareholders’ interest of the

company. In Transmile case, have they failed to uphold their obligation?

4. What are the cause of the conflict of interest on the BOD and Audit Committee?

5. How independent was the external auditor for Transmile has been?
References

Eva Yeong. (2014). Transmile - the fall of a national cargo carrier. Retrieved November 30,

2017, from

http://www.thesundaily.my/news/1157215

Bernama. (2015). Court upholds sentence on two former Transmile group directors.

http://www.themalaymailonline.com/malaysia/article/court-upholds-sentence-on-two-

former-transmile-group-directors

Lopez, G. P. (2007, February 25). Transparency key to National Integrity Plan. Retrieved

November 30, 2017, from https://www.thestar.com.my/business/business-

news/2007/02/26/transparency-key-to-national-integrity-plan/