Discovering corporate crime: a case study in Malaysia.

• Author: Puah, Chin-Hong
• Position: Case study

1. INTRODUCTION

   Corporate fraud is a worldwide problem which has become increasingly prominent in the eyes of the public and world's regulators. Frauds are committed by individuals across all profession. Based on a recent survey on global economic crime 2005 written by Skalak and Nestler (2005), about 45 percent of companies worldwide have fallen victim to economic crime in the past two years. Rabarts (1978) defines fraud as 'deliberate steps by one or more individuals to deceive or mislead with the objective of misappropriating assets of a business, distorting an organization's apparent financial performance or strength, or otherwise obtaining an unfair advantage'. Fraud can also be defined as an intentional act by one or more individuals among management, employees, or third parties, which results in misrepresentation of financial statements [Malaysia Approved Standards on Auditing (2001), AI No.240].

   Fraud is not a new issue that confronts the Malaysian corporate sector. Indeed, it represents a serious corporate problem for Malaysian businesses as number of fraud cases documented has increased considerably over the recent years. It is believed that this trend is likely to continue. According to the Commercial Angles' Newsletter (2001), most frauds involved an employee or manager of the victims' organization. Serious corporate crime has not only caused most organizations to suffer from loss of assets and monetary figures, it also caused an organization a loss of reputation, decreased staff motivation and impaired business and industrial relations. Consequently, existing and potential investors will lose their confidence and trust in the organization. The corporate crime not only affects the individual victims and organizations, but it further generates a ripple effect on a nation's financial standing. Woon (2009) reports that in Malaysia, white collar crimes accounted for RM788 million of loses in year 2008. This sum has increased dramatically as compared to RM393 million during 1999-2002 (Clarence, 2005). The growth in fraud cases indicates that there is a strong need for research that aims to identify effective methods for detecting potential frauds. Indeed, McNeil (1992) argues that fraud, in whatever nature and guise, has to be detected first, since detection is an important prerequisite of rooting out any sort of fraud.

   The purpose of this study is to identify the methods for detecting corporate crime activities in public listed companies in Malaysia. The remainder of this paper is organized according to the following sections: literature review, research method, empirical result and conclusion.

2. LITERATURE REVIEW

   Weirich and Reinstein (2000) describe fraud as intentional deception, cheating, or stealing and can be committed against users such as investors, creditors, customers or government entities. On the other hand, Albrecht et al. (1995) categorize fraud into employee embezzlement, management fraud investment scams, vendor fraud, customer fraud, and miscellaneous fraud. In addition, they also identify the factors that caused individuals to commit fraud, namely situational pressures, perceived opportunities and rationalization. Situational pressures arise from underpaid and overworked staff, excessive debt and lifestyle whereas perceived opportunities allow fraud to happen due to poor internal controls or negligence (Alleyne and Howard, 2005). Moyes and Hasan (1996) define rationalization as the process where an individual justifies the behaviour as being acceptable with seemingly plausible but false reason.

   Detecting fraud is a difficult task for auditors especially those who never experienced it in their career (Pany and Whittington, 2001; Montgomery et al., 2002). Besides, the development of modern technology has led to the widespread use of computers and this has caused the auditor to be unable to trace the fraud in which the fraudster uses the computer as the main tool of the crime. Fraud detection is an examination of the facts to identify the indicators of fraud to sufficiently warrant recommending an investigation (Seetharaman et al., 2004). Nevertheless, only a handful of research has looked exclusively at detecting fraud (see for example, Loebbecke et al., 1989; Blocher...