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Reforming Corporate Governance in Malaysia to Address
Fraudulent Financial Reporting Cases
Noora’in Omar
*
, Marzlin Marzuki, Roshidah Safeei
Faculty of Accountancy, University Teknologi MARA Cawangan Kedah, Kampus Sungai Petani, 08400,
Merbok, Kedah, Malaysia
*
Corresponding Author
DOI: https://dx.doi.org/10.47772/IJRISS.2025.910000165
Received: 08 October 2025; Accepted: 14 October 2025; Published: 06 November 2025
ABSTRACT
Fraudulent Financial Reporting has become an issue of great concern throughout the world. It is a global
phenomenon which has attracted attention of the business and financial community, regulatory bodies and the
public. It is harmful in many ways. As a result, various mechanisms have been introduced to mitigate the
occurrence of fraudulent financial reporting case. In Malaysia, the Malaysian regulatory authorities have
designed various controls and undertaken all kinds of actions and reforms to mitigate the occurrence of
fraudulent financial reporting case, to enhance the integrity of the capital markets and to restore investors’
confidence. The most important one is the reform of Malaysian Code of Corporate Governance (MCCG) which
emphasizes on the role of audit committee and external auditor in an organization. Such a committee should
possess certain characteristics in order for it to function effectively. From previous studies, it is apparent that not
many researches have been conducted into examining the reform of corporate governance in Malaysia. Hence,
the purpose of this study is to examine the reform that has been undertaken by the Malaysian regulatory
authorities from 1998 until 2012.
Keywords: Reform, Corporate Governance, Fraudulent Financial Reporting, Malaysia
INTRODUCTION
Financial reporting is an important tool of communication (Nicolaescu & Mot, 2013) in the case of public listed
company due to the separation of ownership and control (Jensen & Meckling, 1976). The purpose of financial
reporting is to provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decision about providing resources to the entity. Those decisions
involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms
of credit (MASB, 2011). In other words, it serves as the main means of communication between companies and
stakeholders by relieving fundamental asymmetry information between the directors who have access to
management information and providers of fund who are external to the company. The most common and well-
known form of financial reports made available to external parties of the company is the published corporate
annual reports. An annual report is a comprehensive report on a company's activities throughout the preceding
year. Companies used annual report to disseminate information about their past and future activities as well as
outcome of those activities (Crowther, 2000). Typically annual reports will include financial statements,
corporate information, operating and financial review, director's report, corporate governance information,
chairpersons statement, auditor's report and notes to the financial statements. Such a document represents a
measure of accountability on the part of the board of directors (Abdul Rahman, 1999). In total, the content of
annual reports should be of a quality that is useful to users of the reports and meets the information needs of
those users (Ismail et al., 2016).
In the context of Malaysian corporate law framework, Companies Act 1965 (now replaced by Companies Act
2016) (hereafter "The Act") expressly imposes the responsibility for the preparation and fair presentation of
financial statements on directors (part of the management which also include Chief Executive Officer and Chief
Financial Officer as per court interpretation). Section 166A(3), 166A(4) and 166A(5) of The Act state clearly
that the directors of a company shall ensure that the accounts of the company (including consolidated accounts,
INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
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where applicable) laid before the annual general meeting are in accordance with the applicable approved
accounting standards. Apart from that, the accounting information presented in the financial statements must
possess the following desirable qualities namely relevance and reliability (Subramanyam & Wild, 2009).
Relevance is the capacity of information to affect a decision. While for reliability, (Subramanyam & Wild, 2009)
stated that for information to be reliable, it must be verifiable, representationally faithful and neutral. Verifiability
means the information is confirmable. Representational faithfulness means the information reflects reality, and
neutrality means it is truthful and unbiased. These qualities are crucial because they will give great impact to the
investors’ investment decision.
Investors, either individuals or institutions, commit their personal funds to companies in expectation of some
returns in the future either in the form of dividend income, interest income or capital gain. In making investment
decision, investors rely highly on the board’s representation and the auditor’s opinion that a company’s financial
statements in the audited annual report fairly reflect the financial position, results of operations and cash flow of
the company. Investment generally involves huge amount of money which can be represented by market
capitalization as shown below in Table 1.1.
Table 1.1: Market capitalization of top 10 public listed companies in Malaysia as of October 2025
No.
Code
Name
Stock
1.
1155
Malayan Banking Berhad
MAYBANK
2.
1295
Public Bank Berhad
PBBANK
3.
1023
CIMB Group Holdings Berhad
CIMB
4.
5347
Tenaga Nasional Berhad
TENAGA
5.
5225
IHH Healthcare Berhad
IHH
6.
8869
Press Metal Aluminium Berhad
PMETAL
7.
6947
Celcomdigi Berhad
CDB
8.
5819
Hong Leong Bank Berhad
HLBANK
9.
6033
Petronas Gas Berhad
PETGAS
10.
5285
Sime Darby Plantation Berhad
SDG
Sources: companiesmarketcap.com website
Table 1.1 shows market capitalization of top 10 public listed companies in Malaysia as of October 2025. Market
capitalization is calculated by multiplying the number of company’s shares outstanding with current market price
of the share. The investment community uses this figure to determine a company’s size as opposed to sales or
total asset figures. From the market capitalization amounts above we can see that huge amount of money have
been invested by shareholders. Hence, the management of any public listed companies must exercise reasonable
care in the financial reporting process to ensure that the financial information provided to the existing and
potential investors is free from deliberate material misstatements or omissions. Should this condition is not, then
what is termed as fraudulent financial reporting (or financial statement fraud) would arise and the investors
would lose their money.
LITERATURE REVIEW
Fraudulent financial reporting is defined (Association of Certified Fraud Examiners (ACFE), 2018) as "The
intentional, deliberate, misstatement or omission of material facts, or accounting data to mislead and, when
considered with all the information made available, would cause the reader to alter his or her judgment in making
a decision, usually with regards to investments". In fact, there are many other definitions that can be found in
the literatures. Fraudulent financial reporting is different from earnings management with respect to the
acceptability of accounting treatment, while earnings management is still within generally accepted accounting
principles (GAAP) but pushing its limits (Hasnan et al., 2014). GAAP is a collection of commonly followed
accounting rules and standards for financial reporting. Nevertheless, since earnings management is not the
central theme of this study, it shall not be further discussed.
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Fraudulent financial reporting has become an issue of great concern to the business and financial community,
regulatory bodies and the public around the globe (Rezaee, 2005) since late 80’s. This is based on the number
of literatures that are available in the online database. Using the Scopus database with the following search string
"Fraudulent financial reporting" OR "Fraudulent Financial Statement*" OR "Financial Statement Fraud*" OR
"Fraudulent Reporting" OR "Accounting Fraud*" OR "Accounting Manipulation" OR "Accounting Scandal*",
676 articles were found to be written related to fraudulent financial reporting from 1989 to 2021.
Figure 1.1: Number of articles related to fraudulent financial reporting (1989-2021)
Based on Figure 1.1 above, we can see the increasing trend in the research related to fraudulent financial
reporting. This trend indicates that even after more than two decades the issue related to fraudulent financial
reporting continue to be of interest by researchers of various countries. The main reason for the non-stop research
in this area could be due to the severe economic consequences that the fraudulent financial reporting incidence
could bring. A study by (Mark S. Beasley et al., 1999) found that, over 50 percent of the fraud companies in the
USA from 1987-1997 filed for bankruptcy, became defunct, experienced a significant change in ownership
following the fraud disclosure or in some cases the company executives were terminated or forced to resign. The
collapse of Enron in 2001 obliterated more than $60 billion market value, $2.1 billion pension plans and 5,600
jobs (Gilpin, 2001). Enron scandal has also led to the demised of once renowned audit firm, Arthur Anderson.
The ACFE (2002) reported that companies lost approximately six percent of their revenue to fraud and the cost
to U.S. corporations from fraud approximates more than $600 billion per year or $4,500 per employee.
Furthermore, following the financial scandals, many of the fraudulent companies saw their equity values
plummet dramatically and experienced a decline in the credit ratings of their debt issues, often to junk status
(Agrawal & Chadha, 2005). Carcello & Hermanson (2008) stated that the misstated financial statements due to
fraud often lead to large investor loss, subsequently followed by intense media and regulatory scrutiny.
Employees lose their jobs, investors do not get optimal return on their investments and creditors are unable to
get their payments, and as a result, the public lose their faith on the legislation (Omar et al., 2016). Another
reason fraudulent financial reporting becomes a subject of considerable interest in current literature is due to the
devastating consequences it can cause which include loss of investor confidence, reputation damage, potential
fines and criminal actions Ernst & Young (2010). In addition, Vlad et al., 2011 claimed that fraudulent financial
reporting undermines the reliability, quality, transparency, and integrity of financial reporting. Fraudulent
financial reporting cases also eroded confidence towards the financial markets, financial information and also
the accounting profession worldwide (Law, 2011). According to the 2020 Global study on occupational fraud
and abuse which analyzed 2,504 cases between January 2018 and September 2019, fraudulent financial reporting
is the least used scheme (10% of cases) yet the costliest category of occupational fraud. It results in median loss
of USD 954,000 per case (ACFE, 2002). In other words, it is reported as the first rank of enormous losses as
0
10
20
30
40
50
60
70
80
90
1985 1990 1995 2000 2005 2010 2015 2020 2025
Number of articles
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compared to the other two occupational frauds namely asset misappropriation and corruption. In short, when
fraudulent financial reporting occurs, the consequences to investors, the entity itself, employees, the fraud
perpetrators, the financial markets and the accounting and auditing profession often are severe.
Another thing to highlight is that fraudulent financial reporting is a global phenomenon (Albrecht & Albrecht,
2002) with Enron in the USA being the most remembered corporate fraud case. It was one of the largest
securities fraud scandals in history. Enron was forced to file for bankruptcy in December 2001. Other examples
of the same fraud in the USA are Xerox, HealthSouth and Global Crossing which committed fraudulent financial
reporting mainly by manipulating of revenues (Frieswick, 2003). WorldCom which is also in the USA, on the
other hand, committed financial fraud by reducing reserve account and understated expenses (Frieswick, 2003).
In Italy, a dairy and food corporation, Parmalat was caught involving in fraudulent financial reporting by
overstating revenues. Adecco International which is an employment services company in Switzerland committed
fraudulent financial reporting through manipulation of current assets and revenues. Ahold NV, a food retailer
company in The Netherlands involved in fraudulent financial reporting via fictitious rebates which overstated
earnings. Vivendi Universal, a mass media and telecommunications violated accounting principle (Badawi,
2005). The summary of corporate frauds cases around the globe is as in Table 1.2 and Table 1.3. Both tables also
highlight various types of manipulation used by the perpetrators in committing the fraud with overstated revenue
being the most popular type.
Table 1.2:List of corporate frauds in USA
No.
Name
Industry
Year
Type of manipulation
1.
Xerox
Photocopier company
2000
Overstated revenues
2.
Enron
Energy company
2001
Inflated earning and money laundering (used special
purpose entities to hide losses)
3.
WorldCom
Telecommunication company
2002
Reduced reserve account and understated expenses
4.
Global Crossing
Telecommunication company
2002
Overstated revenues
5.
HealthSouth
Healthcare services
2003
Overstated revenues
Table 1.3: List of corporate frauds in Europe
No.
Name
Industry
Year
Type of manipulation
1.
Asea Brown Boveri
(Sweden)
Digital Technologies
2002
Theft of cash &$148 million by CEO
2.
Vivendi Universal
(France)
Mass media and
telecommunications company
2002
Violated accounting principles
3.
Adecco International
(Switzerland)
Employment services
2003
Manipulation of current assets and revenues
4.
Ahold NV
(Netherlands)
Food
2003
Overstating earnings by $800 million over two
years through invented cost savings called
"promotional allowances"
5.
Parmalat (Italy)
Food and dairy conglomerate
2003
Overstated revenues
6.
Elan (Ireland)
Pharmaceutical company
2004
Use off-balance sheet
7.
Royal Dutch/Shell
Group (Netherlands)
Oil company
2004
Overstated oil and gas reserves
Sources: Badawi (2005)
Being a global phenomenon, emerging countries such as Malaysia is of no exception to also experience their
share of such fraud. In fact, such incidences have started to surface in Malaysia even before the collapse of
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Enron. Based on the Securities Commission’s enforcement record, the first case of submitting false information
was committed by the director of Ganad Corporation Bhd in 1995. The information in the listing proposal about
turnover, trade debtors and profit before tax was inflated for two financial year ends. The director admitted
committing the offence and was fined RM600,000. Towards the end of 1990’s, a few more similar cases arose
in companies such as Westmont Industries Bhd, TCL Premier Holdings Bhd and Kiara Emas Asia Industries
Bhd. Most fraudulent financial reporting cases occurred between 2000-2004 involving companies such as Chin
Foh Bhd, UCP Resources Bhd, Sinmah Resources Bhd, Polymate Holdings Bhd and United U-Li Corporation
Bhd. Later, between 2005 and 2007, among the companies that announced at least some form of financial
irregularities during this time are Transmile Group Bhd, Megan Media Holdings Bhd, WelliMulti Corporation
Bhd, Satang Holdings Bhd and LFE Corporation Berhad. In the Transmile fiasco, the share price was down to
around RM8 from its peak of around RM14 in early May 2007 and Bursa Malaysia reprimanded Transmile and
its Chief Executive Officer as well as all the three audit committee members (Wan Abdullah et al., 2012).
The latest fraudulent financial reporting case in Malaysia occurred in 2011 involving Silver Bird Group Bhd
(now known as High-5 Conglomerate Bhd), a bread manufacturing company. This case really shocked local
auditors because Silver Bird Group Bhd's shareholders filed a lawsuit not only against two of its former directors
and an ex-general manager but also against its internal and external auditors (Crowe Horwath) at the Kuala
Lumpur High Court claiming RM125.03 million as special damages, general damages, punitive and aggravated
damages, interest and costs. Based on the latest record in the Securities Commission website, the case is still
ongoing. The case was thought to have ended the 8-year legal saga when the Court of Appeal on 10 June 2020
had acquitted of all 134 charges of cheating charged on former Silver Bird Group Bhd managing director, Datuk
Jackson Tan Han Kook and its former chief executive officer, Derec Ching Siew Cheong. Nevertheless, on 9
Dec 2020, Sessions Judge, Hasbullah Adam ruled that the appellate court's decision on June 10 2020 was not
binding on his court as estoppel did not arise. As a result, both the former managing director and the former chief
executive officer of Silver Bird continue to stand trial for providing false information to Bursa Malaysia.
DISCUSSION
The Malaysian regulatory authorities have designed various controls and undertaken all kinds of actions and
reforms to mitigate the fraudulent financial reporting case, to enhance the integrity of the capital markets and to
restore investors’ confidence. The most important one is the installation corporate governance in corporate
organization (Kamarudin & Wan Ismail, 2014). This action was stimulated and driven by actions of other
countries such as in Table 1.4 below.
Table 1.4: Regulations to improve corporate governance environments
No.
Country
New legislation/regulation
1.
United Kingdom
Cadbury Report
2.
United States
Sarbanes Oxley
3.
Canada
The Dey Report
4.
France
Vienot report
5.
Spain
Olivencia Report
6.
South Africa
King's Report
7.
New Zealand
Principles and Guidelines on Corporate
Governance
8.
Germany
Cromme Code
Sources: Bhagat & Bolton (2009)
In Malaysia, the effort to reform corporate governance commenced amid Asian financial crisis. The
chronological events in relation to the reform in presented in Table 1.5 below.
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Table 1.5: Corporate Governance Reforms in Malaysia
Year
Initiatives and Reforms
1998
The formation of the High-Level Finance Committee to conduct a detailed study on corporate governance
and to make recommendations for improvements.
1998
Amendments were made to the Security Industry Central Depository Act (SICDA) with a view to
enhancing transparency in share ownership amidst other improvements.
1998
The Malaysian Institute of Corporate Governance was established.
1998
The regulations for directors and CEOs to disclose interest in the publicly listed company were
introduced.
1999
Quarterly reporting was introduced.
1999
A revamp of takeovers and merger code was done.
2000
The Malaysian Code on Corporate Governance was introduced.
2000
Amendments were made to the Securities Commission Act 1993 by making the Securities Commissions
the sole regulator for fund raising activities and the corporate bond market.
2001
The audit committee must have a member who is financially trained.
2001
The Malaysian Capital Market master plan was launched to further streamline and regulate the capital
market and to chart the course for the capital market for the next ten years.
2001
The financial sector master plan was launched to chart the future direction of the financial system over
the next ten years. It outlined the strategies to achieve a diversified, effective, efficient and resilient
financial system.
2001
The mandatory disclosure of corporate governance code compliance was introduced.
2001
The establishment of a minority shareholders watchdog group.
2001
The mandatory accreditation programme for director was introduced.
2002
The internal audit guidelines for PLCs were introduced.
2003
Guidance notes on share splits, guidance for companies to meet compliance and internal control
requirements were introduced.
2004
Amendments to the security laws and takeover codes for better investor’s protection were made.
2005
A review in respect of accounting minority interests in companies’ financial statements and guidelines
on compliance functions for fund managers to further strengthen investor’s protection were introduced.
2006
Revised guidelines on securities borrowing and lending were made and the enhanced guidelines for
placement of securities for greater shareholder’s and investor protection were issued.
2007
The Malaysian Code on Corporate Governance was revised. Amendments in relation to corporate
governance to Companies Act 1965 were made.
2012
Malaysia Code of Corporate Governance 2012 deliverable through Corporate
Governance Blueprint 2012
Source: Jamil (2017)
With regards to Malaysian Code on Corporate Governance (MCCG), it was first introduced in March 2000,
marked a significant milestone in corporate governance reform in Malaysia. It codified the principles and best
practices of good governance and described optimal corporate governance structures and internal processes. The
best practices being emphasized are the responsibilities of the board of directors, the establishment of audit
committee and the relationship between the board and the shareholders. The Code was later revised in 2007 to
strengthen the role and responsibilities of the board, audit committee and the internal audit function. The revision
of The Code in 2007 was mainly following the judgement by the court related to the Transmile case. In the case,
the auditor of the company at that time, Deloittee and Touche had discovered accounting irregularities and had
brought up the material issues to the attention of the management, the Chief Executive Officer and the audit
committee but these parties had failed to inform the board of directors about the findings (Wan Abdullah et al.,
2012). In passing the sentence of one-year imprisonment and a fine of RM300,000 (in default six months
imprisonment) to two former audit committee members, the Sessions Court Judge, Justice Dato’ Jagjit Singh
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Bant Singh stated that the public interest factor must be given paramount consideration. He said that the audit
committee is a vital organ of the company and particularly important in the corporate governance of a company.
The judge emphasized that the audit committee has specific duties, functions and responsibilities and that the
investing public rely on them very much. The judge further highlighted that the independent non-executive
directors of a company or audit committee members are not a decorative-pieces-of-a-company.
The most significant amendments in MCCG 2007 related to the composition of audit committee are that the
audit committee should comprises of at least three members, a majority of whom are independent, all must be
non-executive directors, all must be financially literate and at least one should be a member of an accounting
association or body (Securities Commission Malaysia (SC), 2007). In addition, the MCCG 2007 requires a higher
frequency of meetings between audit committee and external auditors without the presence of executive board
members (Husnin et al., 2016) and places emphasis on the need for continuous training. The revision of MCCG
2007 was then followed by the amendments of securities and companies law including the amendment of The
Companies Act 1965 (now Companies Act 2016). Then, the Audit Oversight Board (AOB) was established in
2010 to provide independent oversight over external auditors of companies. The Securities Industry Dispute
Resolution Center was established to facilitate the resolution of small claims by investors. Statutory derivative
action was introduced to encourage private enforcement action by shareholders.
In 2012, The Code was revised for the second time. The MCCG 2012 focuses on strengthening board structure
and composition recognizing the role of directors as active and responsible fiduciaries (Securities Commission,
2016). Nevertheless, in relation to upholding the integrity of financial reporting, responsibility is placed
explicitly on audit committee which is responsible in appointing the external auditor. The characteristics of these
two control mechanisms (audit committee and audit firms) of financial reporting shall be the main focus of this
study.
The role of the audit committee is to assist board of directors in monitoring management mainly in overseeing
the financial matters of a company. The audit committee is expected to detect and stop any attempt by the
management to engage in manipulation of earnings or misappropriation of assets. The fiduciary duties of the
audit committee include monitoring the financial reporting process, monitoring the internal control system,
oversee the external and internal audit functions, reporting findings to the board of directors and monitor and
oversee the whistle-blower policy and hotline (AICPA, 2010). The main emphasis in MCCG 2012 is that the
audit committee should ensure financial statements comply with applicable financial reporting standards and
assess the suitability and independence of external auditors. The quality of earning is an indirect measure of the
effectiveness of audit committee. Audit committee is considered effective if it can ensure that the interest of the
shareholders in relation to financial reporting quality is protected and also ensure that the external audit process
is working properly.
The role of the external auditor, on the other hand is to give independent professional opinion on the truth and
fairness of the financial statements. On top of that, the external auditor also play important role in detecting
fraudulent information. Despite the fact that the board of directors (management) is ultimately responsible for
the fair presentation of the financial statements, a greater responsibility has been placed on auditors to assess the
risk that fraud might be occurring within the organization. Auditors are engaged based on scope of activities laid
out under the International Standards on Auditing and Fraud Detection. Auditors do not examine every
transaction and event, so there is no guarantee that all material misstatements, whether caused by error or fraud,
will be detected. Auditors could have the ability to detect fraud or financial irregularities at an earlier stage with
the involvement of forensic techniques, but this would require increased cost and time.
CONCLUSION
Fraudulent financial reporting is a serious problem in any jurisdiction with WorldCom in the USA ranks first in
the list of largest bankruptcy filings by AICPA in year 2005. Its lost assets value amounted to USD103.9 billlion
when filed in 2002. In general, if the occurrence of fraudulent financial reporting is not curbed, it will eventually
dampen the economic growth of a country. Despites the introduction of various control mechanisms by
regulatory authorities, the fraudulent financial reporting case continue to occur with a large number goes
unreported (ACFE, 2020). Thus, it is essential to carry out this study to further understand the right
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characteristics of the audit committee and the audit firm. The adoption of the right characteristics of audit
committee and audit firm is expected to be able to mitigate the occurrence of fraudulent financial reporting case
more effectively in the future.
ACKNOWLEDGEMENTS
We would like to thank Reviewers for taking the time and effort necessary to review the manuscript. We
sincerely appreciate all valuable comments and suggestions, which helped us to improve the quality of the
manuscript.
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