Transmile’s RM333m shocker: Cooking the books in Malaysia

So a special audit of Transmile Group has discovered that its revenue for 2005 and 2006 may have been overstated by over RM500 million ringgit. Gulp! Let me say that again s-l-o-w-l-y: over RM500 million.

And its pre-tax profit for 2006 of RM207 million may have been inflated by RM333 million – which means that its real bottom line should have been a pre-tax loss of RM126 million.

Uh-oh, someone has been very naughty here. Cooking the books, it would appear. A fine work of “creative accounting”, indeed.

And investment analysts have got egg on their face, expressing shock and horror at this turn of events. When news first emerged that something was amiss at Transmile after the firm failed to submit their audited account before the 30 April deadline, it seemed that the market consensus was that the bottom line was overstated by about RM50 million or so.

But I knew something was seriously wrong when I first heard that the external auditors had refused to sign the declaration stating that the accounts showed a true and fair view of the state of affairs of the firm. That refusal should have sent up a wave of red flags. It simply couldn’t have been merely because of a book-keeping error, which could have been easily rectified.

Auditors rarely refuse to sign the accounts – unless something is seriously, seriously wrong.

The real question we should now ask is: how widespread is such dodgy accounting in Malaysia?

Most accountants would be familiar with the tricks of the trade – “creative accounting”, they call it. This involves creating fictitious invoices and dummy sales contracts, for instance. You know, the stuff they don’t teach you in accountancy school. Basic book-keeping entries – such as credit sales, debit debtors – can do “magic” to your bottom line. Another common trick involves playing with provisions for doubtful debts and stock losses – or not making enough provisions.

Accountants and management often have an intuitive feel for what kind of bottom-line the market (or their board of directors or key shareholders) is expecting. When their promotion prospects, stock option prices or bonuses depend on what kind of profit they deliver, devious management staff can easily “massage” the figures until they reach a “profit” that is within the range the market (or top management) is expecting. As for junior accounting staff, they often know when they see accounting entries or dummy invoices that are false or concocted. But they are usually too afraid to refuse to enter such transactions in the books for fear of losing their jobs.

About a decade ago, I sent in an article to the journal of the Malaysian Institute of Accountants titled “My boss wants me to cook the books” or something to that effect. In that article, I discussed what accountants and other financial staff could do if ever they faced pressure from their bosses to manipulate the accounts or to put in false entries. The article was never published.

Anyway, this is a piece I wrote a couple of days ago for Asia Times Online – before the preliminary findings of the special audit on Transmile were reported. You will see that Transmile is not the only firm to practise “fancy accounting”:

PENANG, Malaysia – Dodgy accounting at a handful of prominent listed companies has put the spotlight back on Malaysia’s financial reporting and corporate governance. Not only has it taken the shine off the stock market’s recent good performance, which is only now emerging from the doldrums of the 1997-98 Asian financial crisis, but it has cast a shadow over recent upbeat investor sentiment. Full article: Cooking the books in Malaysia