QUESTION 2

Transmile: Accounting Fraud and Failure in Corporate Governance

Transmile Group Berhad (Transmile) is an investment holding company that provides air transportation and related services, and deals in aircraft and aircraft parts and equipment. The air cargo service provider was established in 1993 and listed on the Second Board Of Bursa Malaysia in 1997 before it was transferred to the Main Board in 2002. At its peak, its subsidiary Transmile Air Services Sdn 3hd (TAS) was named a designated national cargo carrier by the Transport Ministry in 1996 and Transmile counted personalities such as former Transport Minister and Malaysian Chinese Association (MCA) president Tan Sri Ling Liong Sik as its chairman.

In 2007, Transmile was hit with an accounting scandal when it missed its 30th April deadline for submission of its audited accounts for 2006 because its auditor, Deloitte & Touche. could not obtain from the management the necessary supporting documents for certain transactions relating to trade receivables and related sales, as well as purchases of property, plant and equipment. This led to allegations that its stellar results had been materially overstated as far back as 2004 and there was massive irregularities in its accounting,

In July 2007, the group's former CEO Gan Boon Aun, former CFO LO Chok Ping and former executive director Khiudin Mohamed were charged with abetting the company in making a misleading statements in its quarterly report. The charge was related to a Statement On the group's revenue of RM 338.4 million for the last quarter Of 2006 and RM 989 million for the financial year ended 31 December 2006, but a special audit revealed the company actually suffered losses up to RM 496 million for 2005 and 2006.

In 2006, its losses were RM 126.3 million instead of a profit of RM 157.5 million and in 2005, its losses were RM 369.6 million instead of a profit of RM 84.4 million as reported.

The scandal sent shock waves to the investment public and as a result, the company's share fell to around RM 8 from around RM 14 in early May 2007, It was reported that most of the selling came from foreign investors The price drop resulted in substantial wipe out of its market capitalization.

Governance end audit

The company's annual report stated that the responsibilities of the Board of Directors (BOD) including 'overseeing and monitoring the performance of management and the business of the Group, setting strategic and succession plans, developing and implementing shareholder communication policy, managing risks and putting in place adequate internal controls and reporting procedures'. In carrying out these duties, the BOD delegated some responsibilities to several agents, and in this matter, found it convenient to totally leave the business to their agents on the assumption that they would conduct the business with proper corporate governance and keep all directors informed.

The main objective of Transmile's Audit Committee is to assist the BOD in carrying out its statutory duties and responsibilities relating to accounting and reporting practices of the company and its subsidiaries. One of the ways to assist the BOD was for the Audit Committee to serve as a bridge to communicate between internal and external auditors and the BOC. Therefore, all material matters raised by the auditors were expected to be reported to the BOD for information and further deliberation. Unfortunately, this was not the case in Transmile as some pertinent information was not communicated to the BOD. The Audit Committee had been alerted on several occasions by the external auditors of serious accounting issues, but despite knowing the auditors' concerns, the Audit Committee did not immediately highlight them to the BOD and went ahead to seek the consideration and approval of the BOD for the release of the unaudited annual accounts.

There were concerns on the effectiveness and independence of the independent directors in the Audit Committee. Since the independent directors formed the majority in the Audit Committee, plus the fact that the BOD had authorized the Audit Committee to convene meetings with external auditors, excluding the attendance of the executive member(s) of the Audit Committee, the public expects that the quality of monitoring would be increasedbut this was not the case.

In 2010, Transmile became a Practice Note 17 company and its securities were suspended and delisted in 2011.

Sources: Corporate Governance: Principles and Practices in Malaysia, Oxford

You are required to:

1. Identify and explain who are the main characters.
2. Explain the ethical issues concerning each character.
3. Identify and explain three stakeholders who were affected by the above scenario. Support your answer how it is affected and what are the consequences on them.
4. Identifying what a "person of integrity" would do in this situation
5. The Board of Directors and the Audit Committee are supposed to be the safeguard to protect shareholders' interest in a company. In this case, have these groups failed to uphold their fiduciary and moral obligations? Evaluate.