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Transmile, Deloitte and Touche...

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1.0 Case Summary Transmile Group Berhad (Transmile) is one of the famous corporate scandal cases in Malaysia and we found some elements of whistleblowing in it. Whistleblower refers to a person who is exposed to any kind of information or activity that is deemed illegal, unethical or not correct within an organization and it can be either privately or publicly. The act of BOD of Transmile to hire a third party to investigate their financial statements as a result of external auditor didn’t want to sign the accounts and the newly appointed director’s police report regarding the false statement on their financial statements have the elements of whistleblowing. The company was hit with an accounting scandal in 2007. It started when the company failing to adhere to the deadline in submitting its audited annual accounts for the financial year ended 31 December 2006 to Bursa Malaysia for public release. The director also charged by the false statement about revenue and also the overstated of revenue. Things got worse when the external auditor declined to approve the annual accounts for lacking of certain supporting documents. This is because the external auditor did not want to sign the account as he couldn’t get the fundamental confirmation for the transactions related to trade receivables and the sale and purchase of property plants and equipment in the company and its subsidies. In this case, the fraud wasn’t detected by external auditor but through special audit of the company’s account by Moores Rowland. It was discovered that the revenue was overstated by RM622 million from 2004 to 2006 (Fong, 2007b).

2.0 Case Descriptions Transmile Group Berhad (Transmile) is an investment holding company, which principally involved in the provision of airfreight, aircraft engineering and maintenance services. The organization was established by Gan Boon Aun in November 1993 and was later recorded on the Bursa Malaysia Securities Berhad on 27 June 1997. 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. The Kuok Group had earlier in March 2004 bought a 28.5% stake in Transmile, via Trinity Coral Sdn Bhd, from Gan and Khiudin Mohd for RM282.5mil. In 28 April 2004, Transmile appointed Tun Dr Ling Liong Sik as its independent and non-executive chairman and the outgoing chairman cum executive director, Gan had been re-designated as director and chief executive officer (CEO) of the company. Other notable shareholders were Pos Malaysia Berhad (17.3%), JP Morgan Chase Bank (USA) (4.4%), Employee Provident Fund (3.9%), GAP Ltd (3.9%), Goldman Sachs International (3.4%) and Gan (2.5%). In 2006, the company was voted among Asia’s top 200 small–midsize companies by one of the renowned business publications, Forbes Magazine. Similarly great were 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 solid appearing in income and benefit were followed by its share value which had risen considerably. However, the company was hit with an accounting scandal in 2007. It started when the company failing to meet the deadline requirement in submitting its audited annual accounts for the financial year ended 31 December 2006 to Bursa Malaysia for public release. It was to be submitted 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.

It became worse when their external auditor, Deloitte & Touche via a letter to the Board of Directors (BOD) on 4 May 2007, refused to approve the annual accounts for lacking of certain supporting documents. This is because the external auditor did not want to sign the account as he was not able get enough evidence regarding fundamental confirmation for the transactions related to trade receivables and the sale and purchase of property plants and equipment in the company and its subsidiary. 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. A day prior, the review panel meeting highlighted a few issues in the records; notwithstanding, the issue was not raised amid the executive gatherings in the followings days, possibly as a result of the impact from individuals from the review board of trustees as they were the persons engaged in the activities. In May 2007, the new Board appointed a forensic auditor, Moores Rowland Risk Management to conduct a special audit of the company’s account and its subsidiaries, which the issues about its financial statements has been raised by external auditor, Deloitte & Touche. The auditor found that the revenue was overstated, not only for the financial year 2016 but for three consecutive financial years from 2004 to 2006 by a total of RM622 million (Fong, 2007b; Zaimee, 2007). With the overstating figures taken into consideration, Transmile’s profits for the effected years had reversed to a loss instead. In addition to that, another cash outflow of RM341 million was “purported property plant and equipment” because there was discovered to be little supporting documentation for that transaction (Zaimee, 2007). Furthermore, the company was said to have made payments totaling RM189 million without supporting payment vouchers (Zaimee, 2007). The special audit into its subsidiary accounts found items on related-party sales transactions in which that CEN Worldwide Sdn Bhd a major customer and associate of Transmile owed RM103 million and there were incidences of under billing or non-billing of CEN’s debts to Transmile. One of the directors of CEN Worldwide was a nephew of the founder and former director of Transmile. The search also showed Khiudin Mohd @ Bidin was one of three directors of CEN Worldwide. (Transmile also listed one Khiudin Mohd @ Bidin as having resigned as a non-independent executive director and audit committee member.) Other directors of CEN Worldwide are Gan Eu Jin and Mohd Affendi Mamat @ Muhamad.

The newly appointed director has lodged a police report regarding the false statement on revenue, property plant and equipment, and payment to third parties. As a result of that, the former chief executive officer, former chief financial officer and executive director were charged by the court for the submission of misleading financial statements. Furthermore, the two former independent directors as well as audit committee, Chin Keem Feung and Shukri Sheikh Abdul Tawab were compounded RM500,000 each under the Securities Act for the authorized release of a misleading financial statement to the stock exchange (the first case in Malaysia to impose a charge on independent directors and give a signal to the market that independent directors cannot just endorse everything given to them). 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 (Oh, 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. Up to this date, two of its directors, Shukri Sheikh Abdul Tawab and Jimmy Chin Keem Feung were found guilty by Sessions Court for authorizing the furnishing of a misleading statement to Bursa Malaysia for Financial Year Ended 31 December 2006 with sentence one year imprisonment and a fine of RM300,000. While charge for Chief Financial Officer, Lo Chok Ping, has been withdrew as he paid a compound of RM700,000 and charge for the other directors, Gan Boon Aun and Khiudin bin Mohd are still pending in the Court of Appeal.

3.0 Discussion 3.1 Whistleblowing Reality in Malaysia Whistle-blowing action is not a popular way of reporting wrongdoing in organizations (Ghani, Galbreath, & Evans, 2011). Based on our understanding in the topic that have been learnt in management ethics course, whistleblowing is morally justified when it is clearly wrong, other method have failed, it will prevent the wrong and the wrong is serious enough to justify the costs of whistleblowing. Even though in Malaysia there’s a protection for whistleblower under Whistleblower Protection Act 2010 (WPA). We believe that the Act is not good enough to enhance whistleblower to reveal acts of crime or mismanagement in an organization. For example there are strict rule to follow, such as the disclosure must be reported to an enforcement agency and information must not be made public by the whistleblower himself. We believe that public whistleblowing is probably the most effective way to uncover the misconduct. If the company is too big and have a good relationship with the government, the agency may cover up the possible misconduct of the company. The protection under WPA has its own limitations when it clashed with other laws such as the Official Secrets Act 1972 (OSA) and the Financial Service Act 2013. The whistleblower can be accused under those laws. The ambiguous reward system for whistleblower also reduces the desire to reveal the misconduct. In the case of Transmile, it’s clear that there are some elements of whistleblowing. The act of BOD of Transmile to hire a third party to investigate their financial statements as a result of external auditor didn’t want to sign the accounts and the newly appointed director’s police report regarding the false statement on their financial statements have the elements of whistleblowing. As the result, the share price drop from the highest on 3 January 2007 at RM14.40 to RM4.64 in 6 months. The two former directors who also audit committee members were found guilty. (Hamid, Shafie, Othman, Hussin and Fadzil, 2013)

3.2 Whistleblowing and Organization If there is a case of misconduct, the whistleblowing is one of the best techniques to prevent and detect the misconduct. So company must have channels to ensure that they are done

inside the organization. Any reported of fraud in an organization should be reported to whistleblowing committee or audit committee members. (Mohamed, 2014) The Audit Committees in the case of Transmile was led by Chin Keem Feung when it was found with serious accounting issues. Their role of the Audit Committee in assisting the BOD in carrying out the statutory duties is very important, but it was not in the case of Transmile where some vital information regarding the financial statements which rose by external auditor, Deloitte & Touche was not communicated to BODs. Next, the confidentiality and protection of the informer should be the concern of the organization to encourage the whistleblower to reveal the misconduct. In the case of transmile, it was most likely the employees, accountants and the managers who involved direct and indirectly in the fraud knew about it but choose to remain silent since there is no procedure or policy to protect them in case of whistleblowing happened . Lastly, as another channel to report misconduct, the organizations can set up a good system to manage the complains and problems in an organization. It can be done through a website or special email address to manage all the complains. It can be run by any responsible person such as internal audit, audit committee or whistleblowing committee.

3.3 Type of Unethical Action and Moral Responsibility The guilty parties or those morally responsible on the case and the wrongdoing are listed below : Name

Title

Jimmy

Chin Independent

Keem Feung

director

Charges

Latest Result

Security Commission:

One

and Section 122B(b)(bb) of the Securities imprisonment

Members of Audit Industry Committee

Year

Act

1983

authorizing the

“knowingly and a fine of

furnishing of

a RM300,000

misleading statement” Shukri Sheikh Independent Abdul Tawab

director

Security and 122B(b)(bb)

Commission: of

the

Section One

Year

Securities imprisonment

Members of Audit Industry Act 1983 Committee

“knowingly

and a fine of

authorizing

the RM300,000

furnishing of a misleading statement”

Gan Boon Aun

Chief

Executive Security Commission:

Officer

Liable to a fine of

Section 86(b) of the SIA read not

less

than

together with section 122C(c)

RM1mil and a

of the SIA

prison term of up

“providing

misleading

unaudited to

10

years.

consolidated reports”

Khiudin Mohd

Executive Director

Security Commission:

Liable to a fine of

section 86(b) of the SIA read together not

less

than

with section 122C(c)

RM1mil and a

of the SIA

prison term of up

“providing

misleading

unaudited to 10 years.

consolidated reports”

Lo Chok Ping

Chief Officer

Financial Security Commission:

Charge withdrew

Section 86(b) of the SIA read against him after together with section 122C(c)

he paid a

of the SIA

compound

“providing consolidated reports”

misleading

unaudited of RM700,000

3.4 Injured Parties / Stakeholders The air cargo operator which once flew high today has shrunk into a company with no business activity and a few subsidiaries and associates that have long ceased operations and are dormant. In the case of Transmile scandals, ethical issues that occur in Transmile have affected the following parties:

1.

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

Transmile and the stockholders have to endure a huge loss in their investment in Transmile. As a result of the scandal in Transmile, a meeting was held and the members of the meeting agreed to dispose of a wholly owned subsidiary, Transmile Air Services (TAS). Overall sales revenue of RM40 million has been paid to the creditors of the group following the scheme and TAS has been waived, released and discharged from all claims, guarantees and other obligations as part of the debt restructuring scheme. The sales proceeds of US$2.74 million (about RM8.81 million) was used to meet outstanding and overdue expenses including legal and other professional fees. 2.

Employee After an investigation conducted, the party authorities found Transmile’s scandal cases

have collusion between some groups of workers who are responsible for the organization and with suppliers who are outside from the organization. This leads to the good name of another employees who were not involved also affected, while some of them did not know anything regarding the fraud and weren’t directly involved in this scandal case. 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 Transmile

up to RM0.50 per share in March 2010. The decline in prices has led to eliminate large market capitalization and delisted from market exchange. 4.

Deloitte & Touche Deloitte & Touche is 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.

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.

4.0 Conclusion There are many factor that lead to the fraud in the Transmile case. One of the main factors are the managerial behavior that wants to make the company appear to be good in term of performance, which lead to the activity of reporting a higher profit than the actual amount. Beside that, the lacks of internal control system to prevent and detect the misconduct also lead to the fraud to occur without notice. Another factor is lack of monitoring and detecting by the BOD themselves. Transmile should identify why there are a significant increase in the profit. Whistleblowing has influenced many changes within the business and industry practices. Before the Whistleblower Protection Act 2010 (DPA) has been introduced, whistleblowing retaliation against anyone who would provide information of corruption within a business was quite common. DPA is one of the Malaysian laws introduced to combat corruption and unethical doings. It is important by encouraging and facilitating disclosures of improper conduct in the public and private sector, to protect persons making those disclosures from detrimental action, to provide for the matter disclosed to be investigated and dealt with and to provide for the remedies connected therewith. Whistleblowing has many impacts and effects on a business including loss of credibility, a decline in customers which results in a decline financially for the business. Whistleblowing can cause a business to lose future business endeavors. Whistleblower needs a clear sign of support from the organization. Therefore, companies should give strong support to them by continuously monitor the whistleblower’s welfare, encourage the whistleblower to report any retaliation against him or her as well as ensure their job security. By doing so, the whistleblower will feel they are being protected and supported. It is important for corporate to use whistleblowing as a tool to detect fraud in the company even though there might be a side effect of the fraud being exposed, as it is for the protection of the shareholders and the company itself in long term developments and growths.

REFERENCES (1)Ghani, N. A., Galbreath, J., & Evans, R. (2011). Predicting whistle-blowing intentio...