AFC713 Assignment 3NasionCom Holding Bhd Another Book Cooking Case in Malaysia MOHAMAD RADZWILL ABDULLAH, AMNI NAZMIN MOHD FAUZI, HAFIFAH ABU KASIM, NORLINDA JAMAL and ROZITA HJ BAKAR Master in Forensic Accounting and Financial Criminology, Faculty of Accountancy, Universiti Teknologi MARA, 40450 Shah Alam, Selangor, Malaysia Abstract— Malaysia is not immune from illegal earnings management. In Malaysia, the discovery of fraudulent financial reporting was increased over the period of financial crisis in 1997-1998. This was however found out after the company was already financially badly affected. A good comprehensive of investigation framework and method of collecting evidence can enlightened everybody on how to detect illegal earnings management during preliminary investigation stage and also after. Keywords—Earnings Management, Financial Statement Fraud, Malaysia, Bursa Malaysia, Securities Commission Introduction disclosure policy, obligations after listing and matters related to accounting standards and valuation or revaluation of assets. The guideline requires companies to comply with accounting standards and the minimum disclosure requirement in the Companies Act 1965. They also have to comply with the Listing Requirements. The Securities Industry Act 1983 also deals with respect to stock exchange and persons dealing in securities and for certain offences relating to trading in securities. However this act has been repealed by virtue of the Capital Market and Services Act 2007 (CMSA) in 28 September 2007 that consolidates the Security Industry Act 1983, Future Industry Act 1993 and Part IV of the Securities Commission Act 1993. III. NASIONCOM HOLDING BHD In early 2007, a couple of days before Chinese New Year (15.2.2007), SC reprimanded NasionCom for furnishing a false statement contained in NasionCom Holdings’ 2005 annual report. A couple of months later on 28.5.2007, the founder of the Company were charged in Session Court for submitting misleading and false information to the SC. Datuk Chee Kok Wing, the founder and owner of NasionCom (during the alleged crime committed he was the former Managing Director) was accused of causing the issuance of NasionCom Holdings’ 31 January 2005 prospectus that contained misleading information regarding the group’s top 10 customers for the period ended 31 July 2004. He was also accused of furnishing a false statement, contained in Nasioncom Holdings’ 2005 Annual report regarding its revenue to the SC between 28 June and 29 June 2006. For this charge, he was charged together with Shamsul Khalid (that time was the Executive Director or Nasioncom). Chee was also charged for an offence under the Companies Act 1965 for authorizing the making of false statements in documents (comprised of sales invoices, Earnings or sometimes called the ‘bottom line’ or ‘net income’ is the most significant item in financial statements. Given the importance of earnings, it is no surprise that company management has a vital interest in how they are reported. Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of accompany or influence contractual outcomes that depend on reported accounting numbers (Healy and Wahlen, 1999). II. LAW There are many laws in Malaysia related to the proper reporting of financial statement. Among others are Section 166A (3) of Companies Act 1965 that clearly states that the Directors of the company must ensure that the account of the company are made out in accordance to the approved accounting standard. Financial Reporting Act (1997) sets out regulations about the financial reporting. Both the Financial Reporting Act 1997 and the Companies Act 1965 (Amended) make mandatory compliance to MASB approved accounting standards. For public listed company, Securities Commission (SC) of Malaysia has issued a guideline dealing with the from Cisco.2008 23.86 million which were outstanding on two facilities agreements for a fixed and wireless broadband communication project.03. NasionCom claimed that they had invested RM 65 million in an Internet Data Center with 10 terabyte capacity at Mid Valley City in Kuala Lumpur. NasionCom was been awarded the status as a Network Facilities Provider (NFP) and Network Services Provider (NSP) by the Malaysian Communications and Multimedia Commission (MCMC).AFC713 Assignment 3 bank deposit slips. Microsoft.2007 24. Failed to submit Quarterly Report for 4Q2006 Failed to submit Annual Report for FYE 31/12/2006 BANK Pembangunan Malaysia Bhd has taken control of NasionCom Sdn Bhd. and is licensed to provide private spectrum wireless 3. Citrix and Trend Micro. on 10 February 2011. Financial Condition Announcement in relation to the Guidance Note No.2007 10. and had plans to invest RM 300 million over 2002 to 2007 in its first phase of broadband deployment in Malaysia. 3/2006 Failed to submit Quarterly Report for 1Q2007 Failed to submit Quarterly Report for 2Q2007 Failed to submit Quarterly Report for 3Q2007 Failed to submit Quarterly Report for 4Q2007 Resignation of auditor : Messrs Deloitte KassimChan Delisted of NasionCom Holdings Berhad 01.2007 28.5 GHz.02.Virtual Private Network (IP .VPN) services and info-communication application services. after it failed to service a loan.06.2005 15.2007 Events Admission into MESDAQ Submission of Research Report Press release issued by SC on Financial Fraud Charged in Session Court with submitting misleading and false information to SC Material Litigation – SiS Distribution (M) SB v NasionCom SB Bank Pembangunan issued a notice of demand for the sum of RM17. the High Court overturned the Sessions Court’s ruling and ordered the trial of the three accused to be jointly heard.2005 07.06. dealer agreements and debtor ledgers) which were used in the preparation of the financial statements contained in the 2005 Annual Report.2007 23. These licenses enabled the company to provide customers throughout Malaysia a full suite of value-added services such as Internet Protocol Telephony services. 10 GHz. The Internet Data Center utilizes state-of-the-art technologies 06. Mah (who was at that time the Managing Director of NasionCom Sdn Bhd) was charged with abetting NasioncCom in submitting false information contained NasionCom’s 2005 Annual Report to the SC.08. 26 GHz and 28 GHz bands.02.2007 29. Managed Internet Protocol . On 19 August 2011.2008 03.08.07.02.05.2007 NasionCom was a player in the Malaysian telecommunication industry. broadband internet access services.2008 . Compaq.02.07.2008 13. EMC Corporation. The company also claimed that they had secured telecommunication infrastructural backbone connecting strategic metropolitan areas throughout Malaysia. especially in the area of Voice Over Internet Protocol (VoIP) telephony services.05.08. Pursuant to a revision application made by the SC against the Sessions Court ruling to sever the trial of the three accused. Chee however has filed an appeal to the Court of Appeal which is scheduled to be heard on 29 September 2011.12. Date 23.2007 22.03. Veritas. the Sessions Court fixed 7 October 2011 for mention upon the disposal of Chee’s appeal at the Court of Appeal.2007 18. The lender appointed Jeyaraj Ratnasamy and Mustapha Mohamed of Messrs Mustapha Raj as receivers and managers of NasionCom Sdn Bhd and its assets that are charged as collateral. Oracle.3 million and RM21. a unit of NasionCom Holdings Bhd.2007 04. investigator will analyze the evidence from witnesses and try to tally it to the evidence that been gather before . Investigation framework start with the planning stage(preliminary stage). skills and knowledge that are essential to direct and manage the business and affairs of the Group toward greater height. The investigation will starts with performing fact-finding procedures to ascertain the scope of the issues and gain an understanding of the facts and circumstances relayed to us in the allegation . At the stage of analyzing of findings and evidence. we quickly gain an understanding of the issues involved and determine if it is necessary to collect information from additional people. Investigator will compile the findings either by documents. workshops. Board meeting – The Board meets on a scheduled basis at least five (5) times a year and has a formal schedule of matters reserved to it. We then take that data and put it into a searchable format. Directors are encourage to attend talks. board of directors or other members of management will hire an investigator officer to conduct an investigation. allocation of resources and enhancement of controls and governance. involves collecting emails and other documents belonging to the person or persons mentioned in the contact with that person. After gathering the information. Directors’ Training – All Directors have attended the Mandatory Accreditation Programmed (MAP) as required by Bursa Securities. audit committee. The board members are from various professions with broad range of experience. Investigator Officer will open paper and study the referral and identity of the offences. they will determine witnesses that can be called up to assist the investigations. The company has complied with the Listing Requirement of Bursa Malaysia to have at least a third of independent directors on the board. This typically . The Group Managing Directors has overall responsibilities over the Group’s day to day operations and organizational effectiveness. the investigator will come out with a question is there a Securities Law breach in the case. METHODS OF INVESTIGATION FRAMEWORK When a company is facing allegations of impropriety. If all the document is said to be sufficient. Analyzing a document is one of most critical part because during this stage they have to come out with any suspicious information or red flag. There is a clear division of responsibilities between the Chairman and the Group Managing Director to ensure a proper balance of power and authority. conferences and other training programmers to update themselves on new developments in business environment. emails. we then obtain information to review and perform forensic analytical procedures. Malaysia Code of Corporate Governance suggest of the separation of roles of Chairman and Director to promote better monitoring and implementation roles and balance the power. If the offences is seems like to be involves or suspect in the case. one (1) Non-Independent Non-Executive Directors and two (2) Independent Non-Executive Directors. Witnesses will be called up for a interview session and investigator will prepare a question that is relevant to be ask. DIRECTORS PROFILE ANALYSIS Board composition of NasionCom Holding Berhad currently consists of nine (9) members: one (1) Independent Non-Executive Chairman. they will analyze the documents. The Chairman holds and independent nonexecutive position and is primarily responsible for the conduct of the Board while overseeing the implementation of the board’s decision and policies. Investigator Officer normally will focus on the enforcement planning which they will instruct the company to serve notice to produce any relevant documents that me reliable to the case that been investigate. The remaining Executive Directors take on the primary responsibilities of managing and monitoring the Group’s business. During this initial forensic review of the unstructured data. We then present our findings to members of management in written or oral format. Investigator will proceed the investigation by getting all the supporting documents and evidence and that offences shall be take either a criminal or civil action based on the investigation. They might be new information from the witnesses that can help the investigator to further investigate. the general counsel.After gaining a general understanding. V. seminars. Preparation of investigation report is important with the relevant evidence and proves to show that either the offences is liable or not in the case. one (1) Group Managing Director. Investigator team will start to prepare an investigation report before proceed to forward the case to the prosecution for charged. all the questions and answers will be recorded from the witnesses and again after interview session is done.AFC713 Assignment 3 IV. During the study. After all the investigation stage had been done. investigator will compile the findings based on all evidence that already been gathered. four (4) Executive Directors. During the session. We also analyze the structured data and selected financial information and selected individuals to find and better understand the magnitude of the issues at hand. interview statement and files to conclude the investigations. the frequency of meetings and the need for audit committee members to attend continuous training to keep abreast with developments in relevant financial and other related developments. In the year 2007. together with alternative practices adopted. Evidence that had been / may been gathered are: 1. as the gatekeeper for a director's appointment and reappointment. for RM90. Limit of authority 7. To ensure that the audit committee serves as an effective check on the management of a company. ANALYSIS OF THE CASE Revenue recognition practices of the company found to be the biggest default. and to identify and give reasons for areas of non-compliance.AFC713 Assignment 3 VI. Concentration of shares Datuk Chee’s shares represent 11. expertise and experience to discharge his duties and responsibilities as a board member. In particular. are expected to evaluate the professionalism and integrity of a proposed director. Interview/ interrogation 3.In order to ensure that the audit committee serves as an effective check on the management on a company. Analysis of past years event such as IPO 5. 2005 and 2006 3. in addition to ensuring the basic requirements of possessing the necessary skills. Organisation chart 6. NasionCom was in volatile industry which dealt with shorter life products where communication devices expand very fast. if any. It was found out that PricewaterhouseCoopers did a good job in 2004 and of opinion that the company’s account showed a true and fair view of the company financial affair. Standard Operating Procedure 8. This showed that he had the highest interest on the company and it might be possible . Therefore. The practice may seem to work in a short term but for a long term. knowledge. Insider information After investigators have prima facie case.19 million and Express Top-up Sdn Bhd. Independent non-executive directors are expected to provide a more meaningful and independent oversight function. the composition of the board of directors and the role of the nominating committee. Preliminary investigation normally done before further physical investigation action was made. NasionCom was thrown into receivership after it failed to service its loan with Malaysian Development and Infrastructure Bank. the revised Code spells out the eligibility criteria for appointment of directors. In addition. The reason of such practice was to show higher profit of NasionCom. MOA & AOA VII. The nominating committee. the composition of audit committees should be stress on . Several key executives of NasionCom were charged in court for falsifying accounting record where 73% of NasionCom revenue was based on deals that were not transacted. The SC revealed that the group's revenue for the year 2005 of RM195. Ratio analysis of past year results of Financial Statement 4. NasionCom Announcement at Bursa Malaysia 2. it will cause a financial disaster to the company.3% of the total shares of the company and the biggest percentage compared to other directors. GATHERING OF EVIDENCES that he had overruled some of the decisions made for the company. Compliance with the Code is not mandatory but listed companies are required under the Listing Requirements of Bursa Malaysia to include in their annual reports a narrative account of how they have applied the principles and best practices set out in the Code. why and for what reason NasionCom changed its auditor to Deloitte KassimChan? VIII. Fake invoices 4.08 million contained a total of RM143 million in sales that were fictitious sales. CORPORATE GOVERNANCE The Malaysian Code on Corporate Governance (Code) was first issued in March 2000. namely NasionCom Sdn Bhd for RM104. Further actions were/can be taken and further evidences can/ had been gathered: 1. Auditor’s accountability The change of the auditor from PricewaterhouseCoopers to Deloitte KassimChan in the year of 2005 was also one of the main issues.89 million. Police Report 2. These sales were recorded in the financial statements of its two subsidiaries. Bank statement 5. executive directors will no longer be allowed to become members of an audit committee in order to preserve the independence of the committee. NasionCom’s Annual Report for the year 2004. Former Ind Dir – Wan Azizul Wan Yusoff – Fined RM51.5. As the law is sufficient to regulate the crime. He was also been charged under s. Case that relates to the ‘cooking up the book’ is still pending in court.000 (Failure to submit 4QFY06) 2. 2006 Annual Report.5. Financial Statement Analysis must be conducted all the time. 1QFY07) 5. 2006 Annual Report. Report of any suspicious transaction or else get advice from professional regarding the suspicious transaction.800 (Failure to submit 2006 Annual Report) This is all relates to the failure of submission of quarterly report and annual report on time. Main culprit. 2006 Annual Report) 3. SC reprimanded Deloitte and barred him from submitting any proposal as the reporting accountant for 6 months.000 (Failure to submit 4QFY06. Other company’s bigwigs are: 1.000 (Failure to submit 1QFY07. .00. in which could be charged with a fine not exceeding RM3 million or to imprisonment for a term not exceeding 10 years or both. Datuk Chee Kok Wing – Former Executive Director was fined RM20. WHO ELSO TO BLAME Media also must play their role in highlighting the illegal earnings management and how severe the crime to the country. Former Chairman – Tan Sri Mohamad Noor Abdul Rahim – Fined RM51. BESIDES DIRECTORS. Former MD – Tham Kok Sing – Fined RM12. VIII. What were the auditor’s doing? In August 2006. and to stop investigations into the said company by the Commission (Alleged offence committed from 19. Former Ind Dir – Datuk Wan Kassim Ahmed – Fined RM12. LEGAL IMPLICATIONS SC said NasionCom had breached Section 122B (a) (bb) of the Securities Act 1983. 1QFY07) 4. The role of audit committee should be enhancing to oversee the company financial reporting. NasionCom’s external auditor was Deloitte Kassim Chan.300.06). A dollar loss due to the financial fraud can give a huge dominoes effect to the economy of the society. CONCLUSION The public and investor must always be cautious about the annual report of the company. the effectiveness of the execution of the law must also take place.000 (Failure to submit 4QFY06.AFC713 Assignment 3 IX. They must attend the AGM and raised any questions in mind. The authority must take fast and necessary action against the company that involve in financial fraud.0631. 10(a)(bb) of the Anti-Corruption Act 1997 for the purpose of inducing a Securities Commission's officer to help with the listing of a company called Gropoint Ocean Food Sdn Bhd. ED – Omar Zolkifli – Fined RM25. . IIUM Mohd Firdaus Zakaria.2. December 1999. www.2006 –A guide to Forensic Accounting Investigation.com Financial misreporting and securities fraud – public and private enforcement.M. A review of the earnings management literature and its implications for standard setting.2007). 2006 Annual Report Nasioncom Holding BHD v Suruhanjaya Sekuriti (2007) Chee Kok Wing v PP (2009) Asst Professor Loganathan Krishnan.wikipedia.my/current_news/BT. fined (19. P.Mona M.biznewsdb.org/wiki/NasionCom http://www.theedgedaily. Shamsul Khalid Ismail and Mah Soon Chai Nasioncom Holding BHD 2004.Clayton. Lekshmi Gunasekaran.The role of auditors in the context of corporate governance http://en.AFC713 Assignment 3 REFERENCE [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] Healy. and Wahlen J. Accounting Horizons.txt http://www. Aiman Nariman Mohd Sulaiman (2008).12.Hamizan Wasoh. (1999).Steven L. Norhazwani Hanis Ismail. 2005.2007). M.monda y/column/BT609532. PP 365-383.com/english/newspage/newsp age. PP v Chee Kok Wing. The Edge Nasioncom Directors Reprimanded.com.Golden.btimes.Salak.asp? id=70215121&file1=7&bulan=02&kw=wwqq SC raps Nasioncom for Submitting False Information (Surin Murugiah 15. Universiti Putra Malaysia – Cases of Directors and Company Secretaries Misconduct Thomas E.