Speech by

Y Bhg Tan Sri Zarinah Anwar
Chairman, Securities Commission Malaysia

Launch of KPMG Fraud Survey Report 2009

at Securities Commission Malaysia
on 11 January 2010


Mr Ooi Woon Chee, Joint Head of KPMG Malaysia’s Financial Advisory Services and Partners form KPMG Malaysia

Distinguished guests

Members of the press

Ladies and gentlemen


It is a great pleasure to be here this morning at the launch of the fourth KPMG Fraud Survey Report 2009. Today, much of business is defined by frequent change – new products, new systems, and vigorous competition. In this climate, developments in business practices will frequently outpace any regulator’s ability to develop specific rules governing these practices, and they will further outpace any professional’s ability to provide definitive guidance and assurance with respect to compliance with rules and requirements. Professional firms and industry bodies can, therefore contribute towards a better understanding of these changes and the desired responses in a variety of ways.


As such I would like to congratulate KPMG for undertaking this survey. This survey report is a timely and significant document as it provides comprehensive insights into contemporary fraud issues faced by companies in Malaysia during challenging times.


The findings of the survey are very telling. On the one hand, the survey shows that there is a relatively high degree of awareness and concern about fraud within the business community in Malaysia. On the other hand, it also shows that fraud is very often the product of both poor governance and a deficient corporate culture. Of particular concern is that 61% of respondents expect the level of fraud to increase over the next two years. In addition, 89% believe that the trend of fraud as well as financial statement fraud will significantly rise as a result of the economic crisis. This indicates that a heightened level of vigilance and scrutiny is required within companies.


It is also interesting to note that 75% of companies that experienced fraud had an annual turnover exceeding RM50 million revealing that in today’s environment, even relatively established companies face significant challenges that test the robustness of their internal control systems and the limits of their corporate conscience.

Ladies and gentlemen


Our capital market today plays a far bigger role in the economy than before. More people and businesses use the capital market to invest their savings and raise funds. Liberalisation too has brought more financing and investment options, and has prompted more cross-border flows. As a result, our capital market now is a more efficient source of capital for economic development and is more globally integrated. In this regard, the Securities Commission has focused our efforts on promoting confidence and trust in Malaysia’s capital market, and on helping the market to function efficiently, providing lower financing cost while remaining resilient. Learning from events in other markets, and taking into account our own circumstances, we continue to strive to promote responsible corporate conduct and practices, through the maintenance of a fair, transparent and orderly market, and swift enforcement action against those who betray the trust and confidence of the market.


Nevertheless, while we can do all that we can to make the capital market more accessible and lower the cost of financing, the success of the capital market ultimately depends on market participants themselves. Malaysian companies listed on the exchange for instance need to be well managed, realise their potential to grow, create value for their shareholders and contribute towards the competitiveness of the stock market. Only an exchange populated with quality companies will be able to attract and sustain demand from both domestic and foreign investors.


A hallmark of quality companies is adherence to internationally-benchmarked principles of corporate governance. While Malaysia has succeeded in improving our governance framework in line with global best practices, there are still lingering concerns about the way it is implemented. It is very easy for a company to have sound corporate governance practice in form and yet possess none in substance. The financial crisis has pointed, in a large number of cases, to boards of companies that were ineffective and not capable of exercising objective and independent judgement. The structure, quality, composition and skills of these boards have also been weak. I cannot over-emphasise the fact that leadership inevitably sets the “tone at the top”, and developing a culture of ethical governance is the responsibility of the board.


The impact of this demand for greater professionalism within the boardroom will be far reaching. One of the most challenging tests of board professionalism is putting the company’s interests before its own and properly managing conflicts of interest. An independent, effective, vigorous, and diligent board of directors is the key to a corporation’s governance. To accomplish this, directors must not only be independent according to evolving laws or listing requirements or best practice standards, but also independent in thought and action. Such qualitative aspects of independence will ensure that directors think and act independently without regard to management’s influence.


KMPG’s survey shows that overall, most fraud was detected internally. 55% of respondents indicated internal controls being the most common method of fraud detection, followed by notification by employee (33%), internal audit review (30%), notification by customer/ supplier (25%) and anonymous letters or whistleblowers (25%). The survey findings also clearly highlight poor internal controls as one of the factors contributing to major frauds. All too often, pressure to “make the numbers” induces “creative” conduct, which, in the absence of strong internal control systems, may result in short term gains that can have adverse longer term consequences. Increasingly therefore, internal controls are looked upon as a mechanism to mitigate corporate fraudulent practices. An effective internal audit function plays a key role in assisting the board to discharge its governance responsibilities.


In Malaysia the revised Code on Corporate Governance) recognises the importance of the internal audit function by requiring all companies to establish an internal audit function within the company. The Code also requires the head of internal audit to report directly to the audit committee to ensure independence of the internal audit function.


The crucial role of principal officers and auditors in detecting fraud is reflected in the growing number of whistleblowers that have provided information to the SC under section 320 of the Capital Market and Services Act – which imposes a mandatory duty upon auditors and specific employees of listed corporations to report breaches of securities law and the rules of the stock exchange to the authority. Since the introduction of the whistleblowing provisions several years ago, we have received 40 section 320 reports mainly from external auditors of PLCs. Some of these reports have led to enforcement action being taken against the perpetrators – often the directors and senior management of the company. While we would like to see more come forward, it is encouraging to note an emergent culture of public accountability and integrity.

Ladies and gentlemen


Amendments to the securities laws that were passed by Parliament late last year will bring about two very critical regulatory developments in the SC’s continuing efforts to improve the quality and governance of PLCs. The first is the establishment of the Audit Oversight Board (AOB) under the auspices of the Securities Commission. The AOB will provide independent oversight over auditors who audit public-interest entities, which include PLCs, banks, insurance companies and capital market intermediaries. Now more than ever the accounting industry’s role as gatekeeper in terms of auditing, and otherwise servicing, public companies is critical to promoting transparency of financial reporting in our market.


The second is the introduction of two new sections (317A and 320A) in the CMSA that will enable the SC to pursue enforcement action against directors and officers of PLCs for causing wrongful loss to the PLC. Action can also now be taken against directors and officers of PLCs who influences any person who prepares or audits the financial statements or a PLC causing the financial statement to be false or misleading. We have over the years intensified our efforts in rooting out corporate fraud, insider trading and deceptive practices. The new provisions provide even more scope for us to quickly step in and take action where action is needed. Those who cheat and defraud must be punished, and the newly introduced provisions have equipped us with better enforcement tools.


As I hope you have sensed, the Securities Commission is operating with a sense of urgency. Through rulemaking efforts, as well as our strengthened enforcement and supervision activities, we are determined to ensure that the capital market effectively serves the genuine needs of investors and businesses alike in facilitating the nation’s economic growth. And while we redefine what we do, we are also redefining how we do it.


Laws and regulations alone will not completely insulate investors against poor governance practices or fraud, but it is important that these are kept updated and that regulatory and enforcement agencies have the requisite powers to institute action to protect innocent investors from unscrupulous conduct. Companies must establish the necessary systems and processes to enhance their ability to pre-empt and detect fraud. Although there is a cost involved, this cost pales in comparison to the damage brought about by the fraud, and the cost of investigating these infractions. There are enough examples at home and abroad, to show that fraud can very quickly destroy the reputation of even the best of companies. In many cases fraud has brought about the demise of big and previously reputable companies. Hence the old adage, ‘an ounce of prevention beats a pound of cure’ rings true, and from a governance and reputational standpoint, is a necessary cost of doing business.

Ladies and Gentlemen


On this note I hope that the findings of this survey will be carefully studied by all PLCs so that gaps and weaknesses can be plugged and addressed. What is also really needed is a change in mindset, one that fosters not only a culture of compliance but also a company-wide environment that fosters ethical behavior and decision-making. Creating that culture means developing good policies, systems and processes, and their effective implementation from the board room to the assembly line, with the Board and senior management setting the “tone at the top”. These objectives will not be realised by having each company simply adopt a written code of ethics. Courage and commitment of the company’s leaders are needed to question whether a particular practice is truly ethical or is truly in the best interests of the company.

Thank you