PERWAJA STEEL ; SCANDALS , FRAUD ACCOUNTING AND ETHICAL ISSUE Introduction
Perwaja Steel started in 1982 as a joint venture between the Terengganu State Government, government-owned Heavy ndustries !or"oration #H!$%&, and 'a"anese (om"any )i""on Steel !or"oration as %alaysian e*"erien(ed a shortage o+ steel in 19s. 19s. This (om"any manu+a(ture and sells iron and steel "rodu(ts in %alaysia +or lo(al and international distribution. They "reviously named as Perwaja Perwaja Terengganu Terengganu Sdn /hd and (hange to Perwaja Steel Sdn /hd in 1989 and the o++i(e is based in 0uala um"ur. t has two major "lants in 0emamam, Terengganu and Gurun , 0edah. This was su""osed to be a show(ase "roje(t in a "ush +or industrialiation, whi(h too3 "la(e during the ruling o+ our +ourth "rime minister 4 56ather $+ %oderniation7. However, Perwaja +ailed to ma3e "ro+it, and was asso(iated with great losses, and multi"le s(andals. %ost o+ these are "oliti(ally related. Company Background
ts +irst !$ was %r !hin Guan Pheng, who is an a((ountant by "ro+ession. He is a member at !P: :ustralia td, and a %ember at %alaysian nstitute o+ :((ountants. ts (ore business was steel "rodu(ts 4 +inished and semi+inshed steel "rodu(ts. Perwaja steel was a big "layer in steel mar3et both in domesti( and international. : steel "lant (osting ;%1 billion was built in Terengganu Terengganu to su""ly su"" ly the domesti( needs +or steel "rodu(ts. The (om"any started with a "aid (a"ital o+ 2< million. %inistry $+ 6inan(e "rovided guarantee +or the (om"any to ta3e a huge loan +rom a 'a"anese /an3 , 'a"anese *"ort /an3, amounting =en 81.< million # e>uivalent to ;% 8< million &.
S#$e O&ne'#ip ( Pe&$)$ Stee S*n +#*
Terengganu State Government 19%
HICOM Nippon Steel
HICOM 51%
Terengganu State Government
Nippon Stee !"%
However, in 198, )i""on Steel "ulled out o+ the "roje(t. :s the (om"any was +a(ing huge losses, the !$ ste""ed down, and re"la(ed by %r ri( !hia 4 a (lose +riend o+ the "rime minister at that time. He was brought in to do whatever ne(essary, and given +ull authority. There was additional +undings by government amounting nearly 2 billion. /an3 /umi"utra given out ;% 8? million, and P6 +unding ;% 1@ million. ri( !hia seems to be "er+orming well, in turning Perwaja into a money ma3ing +irm. /ut that was not the (ase seen a+ter he resigned in 199<. The debt in(reased +rom ;% 1 billion to ;% 2.A9 billion. )o legal a(tion was ta3en until ri( !hia was arrested in %ar(h 2A.
Issue and Scandals
Soon a+ter its o"eration started, Perwaja was said to be +a(ing "rodu(tion "roblems, and +a(ed huge debts. There were many auditing and review done on Perwaja a((ounting and transa(tions. %ost o+ them were 3e"t (on+idential, as many "oliti(ians were involved. Some that we (ould dete(t wereB 1& 6raud :((ounting -
Perwaja was blamed to be 5(reating7 a beauti+ul a((ounts just to 3ee" their share "ri(es high Perwaja was 5(aught7 to be "er+orming doubt+ul transa(tions. They were ma3ing "ayments to 5non e*isting7 (om"anies. There were numerous
-
ina((urate re(ords and they are "ur(hasing o+ "arts not used by the (om"any and o+ >uestionable >uality. :bsent e*ternal auditors +rom 1992 to 199<, in regards to Perwaja losses. nvestigation revealed that there was an alarming la(3 o+ an internal (ontrol system within Perwaja #'eyasingam 2A&. Coubt+ul !ontra(ts amounting nearly ;% 292 million # ;% 2, "er month +or gardening ,(leaning and maintenan(e o+ vehi(les & Payment o+ DSE2.1 million to a mysterious (om"any in Hong 0ong. %isuse o+ DS E 19? million loan
2& %is(ondu(t in Cire(torshi" -
-
The dire(tor was (aught to be "aying an amount o+ ;% A.? million to 'a"ans )00 !or"oration. t was +ound that this "ayment was made via a Hong 0ong based (om"any. This transa(tion was made without "rior a""roval +rom /oard o+ Cire(tors or tender (ommittee. !on+li(t $+ nterest B :warding (ontra(ts to (om"anies related to !$ himsel+. :ward o+ ;%9< million (ontra(t to (om"anies o+ a long time asso(iate o+ ri( !hia. There was no o"en tender, and "ri(e bidding.
@& !orru"tion in Tender and ;ewarding !ontra(t -
-
-
%ah Sun was rewarded a tender worth ;% 9? billion worth o+ (ontra(ts, and there were no do(uments regarding authoriation +rom board o+ dire(tors. They were awarded another tender worth ;% 1@ million, and similarly no do(uments tra(ed, and board o+ dire(tors 5doesnt seem to 3now7. ;%<29 million (onstru(tion (ontra(t awarded to %an Shoon Grou" o+ (om"anies, (ontrolled by a long-time asso(iate o+ ri( !hia without as3ing +or (om"etitive bids or re+erring the deals to Perwajas tender (ommittee. Payment to a 'a"anese +irm named as Tomen as a (ommission whi(h is higher than mar3et "ri(e at that time 4 the mar3et rate +or (ommission "er metri( tonne o+ ore "ur(hased was DSE.<, however Perwaja "aid DSE@ "er metri( tonne. They lost nearly ;% A.? million due to this transa(tion.
A& %isa""ro"riation o+ 6unds and oans -
-
%isuse o+ loan amounting EDSC 19? million. oan was in =en, as it was borrowed +rom 'a"anese ban3. nterest rates were (limbing high sin(e =en was a""re(iating +ast at that "oint o+ time. Pur(hasing o+ "arts whi(h are not re>uired by the (om"any, and (ertain "rodu(ts o+ low >uality. Perwaja dire(t redu(ed "rodu(ts were mar3eted via a Singa"orean (ommodity trading +irm at DSE @8 "er tonne below mar3et "ri(e . # Steel dire(t redu(d "rodu(ts B nternational "ri(e 4 DSE 1< "er tonne, mar3eted DSE 112 "er tonne. &
<& ;e"eated Huge 6unding /y Government, Government /odies :nd Publi( 6undings.
-
Perwaja +a(ed 5near ban3ru"t(y7 many times, whereby at all this times government de(ided to inje(t huge +undings. The result o+ it, more and more money were lost, not even small amount regained.
?& gnoran(e o+ !or"orate !rime -
-
t was announ(ed in the "arliament on(e that Perwaja Steel was insolvent. There was no legal a(tion ta3en to any o+ the dire(tors, until a "oli(e re"ort made in 1999, and therea+ter the man # %r ri( !hia & was arrested in 2A. Ces"ite the arrest, no mu(h a(tions were ta3en. Today, Perwaja is still running its o"eration, being said have already been trans+ormed.
Ethical Issues
1& :((ounting 6raud 2& !or"orate Governan(e Dnauthoried (ontra(ts between Perwaja and both lo(al and international (om"anies show +ailure o+ (or"orate governan(e as internal (ontrol "ro(ess has been +ailure due to (on+li(ts o+ interest that give advantage to (ertain dire(tos. Possible Recommendation
1& 6ind a new res"onsible management to handle the (om"any with trans"aren(y The business management should wor3 together with government o++i(ials to establish regulatory "ra(ti(es that will redu(e administrative dis(retion and will "romote trans"aren(y that give e++i(ient out(ome. ;es"onsible management will re(ognie that an e++e(tive business is based on every a(tivity and de(ision o+ an organiation. This management should establish stronger auditing and assuran(e standards. The (ode o+ "ro+essional ethi( should be (ontinually u"dated and "ra(ti(ed. The audit (ommittee should be review the "er+orman(e o+ management and must be (onsist +rom inde"endent dire(tors .: strong ethi(al environment also (an be easily (reated by hiring more ethi(al and high standard o+ moral em"loyee in(luding management sta++s. Human (a"ital with good value re>uired to (reate sin(ere governan(e in order to have me(hanism o+ a((ounatbility : revised (ode o+ ethi(s (ondu(t should be introdu(ed that will outline +or the "ro"er "ra(ti(es +or an individual or organiation. The ethi(al (ode should in(lude the integrity and "er+orman(e o+ duties with the (om"lian(e o+ the rule o+ law. The rules should be in(lude "rohibiting the a((e"tan(e o+ 3i(3ba(3s and im"ro"er gi+ts and also the misa""ro"riation o+ (or"orate in+ormation and assets. 2& Ta3e a legal a(tion to settle the "roblem without no "oliti(al inter+eren(e and avoid ta3ing or re(eiving bribes.
The detailed investigation should be (arried out without inter+eren(e o+ any "oliti(al in+luen(ed "arty. The investigation should be (ondu(ted trans"arently with the +inan(ial re"orting should be done with high integrity .The trans"aren(y in(lude the a((ura(y re"orting o+ (om"anys +inan(ial re"orting with an a((e"table >uality standard. :n ethi(s (ommittees should be (reated and develo"ed that monitor em"loyee and (om"any behaviours. :ny violation o+ ethi(al guideline should be investigated thoroughly and the rules en+or(ed without (onsidering their "oliti(al in+luen(es, national "osition or their "ast (redibility. @& Fhistle /lowers Poli(y m"lementation This (an be done by establishing whistle blower "oli(y where these whistle blowers will be anonymous and be "rote(ted. Fhistle-blower will be very hel"+ul in order to "revent and dete(t o+ any (orru"tion "ra(ti(es as (orru"tion is a very se(retive a(tivity and only those engaged or wor3 with them are aware o+ it .These whistle-blowers should be "rote(ted +or their honesty re"orting (on(erns. This whistle blowing "ro(edures should also in(lude number o+ easy a((essible and (lear assist line (hannels to re"ort any wrong-doings su(h as ethi(s (ommittee, the $mbuds"erson, internal hotlines or web based re"orting systems. The whistle blower "oli(y should also (lear give the guidan(e and "ro(edures +or internal and e*ternal re"orting, "rovide su++i(ient +eedba(3 to whistleblowers, (reate a""ro"riate +ollow u" me(hanism with time+rames and also "rote(ts these "eo"le +rom any (onse>uen(es. The whistle blowers identity should be "rote(ted and only (an be dis(losed i+ the "erson agree to do so or re>uired by law. This is be(ause to build trust o+ the whistle-blowers as they +a(ing numerous ris3s when re"orting the wrongdoings and also allow the (om"any to establish the +a(t o+ the (ase. thi(s o++i(er or ombuds"erson who (oordinate ethi(s "oli(ies should "rovide (ounselling on ethi(al dilemmas and investigate any allegations o+ unethi(al behaviour. A& ++e(tive nternal !ontrol Systems : strong internal (ontrols must be im"lemented by the management. The internal (ontrols su(h as authoriation o+ (om"anys "ro(edure and "hysi(al (ontrol over the (om"anys assets and re(ords are an im"ortant element +or strong internal (ontrol. The two main ty"e o+ internal (ontrols are "reventative (ontrols and dete(tive (ontrols .The e*am"le o+ "reventative (ontrols are su(h as re>uiring double signatures on (he>ues and having "assword "rote(ted +ile. This (ontrol will "rote(t and limit the a((ess to business assets. The dete(tive (ontrol is su(h as re(on(iling the ban3 or inventory (ounts. This (an only be done i+ any need to be (orre(ted .$ther (ontrols are submitting a""ro"riate do(uments that su""orting the transa(tions as the evident o+ business transa(tion will in(rease the trans"aren(y o+ the (om"anys +inan(ial re"orting. %ajor ethi(al (hanges (an be done by enlisting the management to demonstrate ethi(al behaviour and also establishing written set o+ ethi(s "oli(ies. This "oli(y should be "re(isely highlight the (onse>uen(es when the "ro(edures are disobeyed in order to give (lear "i(ture that the organiation does not tolerate any wrongdoings. <& Segregations o+ Cuties Segregations duties in business is able to redu(e the ris3 o+ ina""ro"riate a(tions by em"loyees. Dsually segregation duties is hel"s to "revent any the+t or +raud as it need more than one "eo"le to hide the ina""ro"riate transa(tions and also ensure a review to
(at(h any mista3es. Fhen the a((ounting +un(tions se"arated +or e*am"les re(ord3ee"ing, authoriation and review +un(tions in the a((ounting "ro(ess is done by di++erent "erson, this will involve more than one "erson in the +inan(ial statement "re"aration "ro(ess. ventually, i+ the +raud to ha""en, two wor3ers must (ollude to e*e(ute the (rime.
?& *ternal :udit !ondu(ted The annual +inan(ial investigation should be (ondu(ted by an inde"endent "arty. %anagement tend to (ommit a((ounting +raud when they +eel "ressure to meet the +inan(ial goals in order to re(eive in(entives. :n e*ternal and inde"endent audit should be (ondu(ted yearly to "er+orm +inan(ial statement analysis and review to hel" "revent the management "arti(i"ating in overly aggressive adjustment o+ the +inan(ial statements. *ternal auditor should be someone who +ree +rom any (on+li(t o+ interest any other "ersonal or business relationshi"s when (ondu(ting audit servi(es. : trans"arent +inan(ial auditing should be (ondu(ted by auditor with high a((ountability. !on(lusion The obje(tive o+ business +or "ro+it ma*imiation should be (onstrained by the re>uirement that "ro+its be obtained through legal and ethi(al ways. The main sour(e o+ this s(andal is the desire to earn money >ui(3ly and the management e*"e(tation whi(h is o""osite to the "rin(i"les o+ "ro+essional ethi(s. The ethi(s should be monitored and edu(ated as the (ommitment to "rodu(e a good ethi(al organiation and restoring the loss o+ (on+iden(e .: (lear (ommuni(ation should be im"lemented to all the em"loyees about the e*"e(ted behaviours in the organiation as only ethi(al methods are the only way o+ doing business. The en+or(ement and monitoring "ro(ess should be (ondu(ted ethi(ally +or enhan(ing good governan(e "ra(ti(e with better +inan(ial re"orting
;6;)!S
1& 2& @& A& <& ?& &
htt"Btitan.a"iit.edu.myu(ti"agol"roje(tin+o.as"t*tCITP@@?? htt"Bwww.members.tri"od.(omterengganu3ite"erwaja.htm htt"sBwt+re"ort.word"ress.(om211121<the-"erwaja-steel-s(andal htt"Bsmallbusiness.(hron.(om"revent-+inan(ial-statement-+raud-@89.html htt"Btrans"aren(y.iesitesde+ault+ilesTFhistleblowing."d+ htt"sBwww.marsdd.(ommars-libraryinternal-(ontrols-a((ounting-3ey-bene+its
