ETHICS: “THE SHERLOCK HOLMES” OF THE ACCOUNTING AND

BUSINESS FRATERNITY

BY

NAVPREET SINGH

Graduation Project Submitted to the Department of Business Studies,

HELP University College, in Partial Fulfillment of the Requirements for
the Degree of Bachelor of Business (Accounting) Hons

FEBRUARY 2010
DECLARATION

I hereby declare that the graduation project is based on my original work except for
quotations and citations which have been duly acknowledged. I also declare that it has
not been previously or concurrently submitted for any other course/degree at HELP
University College or other institutions. The word count is 13,093 words.

NAVPREET SINGH
Date:
ACKNOWLEDGEMENT

I would like to express my gratitude to Miss Chitra, Miss Sumathi, Mr. Harbintar
Singh and to all who were directly and indirectly involved in guiding and assisting me to
successfully complete this research paper.
ABSTRACT

ETHICS: “THE SHERLOCK HOLMES” OF THE ACCOUNTING AND

BUSINESS FRATERNITY

BY

NAVPREET SINGH

February 2010

Supervisor: Miss Chithra Latha Ramalingan

This research paper intends to further cement the importance of ethical behavior

in the corporate world. The practice of ethics should be seen to be as a motivator to

enhance businesses rather than to create inconveniences. Many professionals in the

corporate arena have more often than not underestimated the role of ethics and its

importance. Ethics in business is imperative for companies to sustain their profits. The

research paper also analyzed the relationship between ethics and customer service. It is

no secret that sustainable customer-relationship if of utmost in generating long-term

profits. Moreover, attention is also given to the current global financial crisis. Many

professionals have come up with various reasons as to how the crisis unfolded.

However, it would not be an understatement to say that it all boils down to the lack of

ethical behavior that has led to the predicament that the economy is in currently.

Furthermore, major corporate collapses in the US, Australia and Malaysia is also

discussed. Even though these companies were governed by shrewd businessmen, one

common denominator that has led to the “fall from grace” for many of these companies

is the lack of education in ethics.

 TABLE OF CONTENTS
Page

Declaration of Originality and word count ii

Acknowledgement iii
Abstract iv
Table of Content v

Chapter 1 INTRODUCTION 1
1.1 Introduction to Ethics 2
1.2 Introduction to Unethical Behavior
2
1.3 Introduction to Ethics and Social Responsibility
3
1.4 Focus of this research paper
3

Chapter 2 LITERATURE REVIEW 5

2.1 Role of Ethics 6
2.2 Significance of instilling a value-based-system 7
2.2.1 Business and Accounting: Code of ethics 9
2.2.2 Ethics and Customer Service 10
2.3 Ethics in Accounting 12
2.4 Ethics in Business 13
2.5 Global Financial Crisis 2008 14

Chapter 3 METHODOLOGY 17
3.1 Research Objectives 18
3.2 Research Methodology 18
3.3 Data Sources 19
3.3.1 Secondary Data 19
3.3.2 Primary Data 19
3.4 Research Method and Strategy 20
3.5 Research Instruments 20
3.6 Data Collection 21
3.7 Limitation of Research 21

Chapter 4 ANALYSIS 22
4.1 Unethical Corporate Behavior: United Stated 23
4.2 Enron Corporation 23
4.2.1 Regulation in place before the scandal 24
4.2.2 Chronology of events 26
4.2.3 Enron and Arthur Andersen verdict: Guilty, Guilty, Guilty! 29
4.2.4 Enron and Arthur Andersen fall off the cliff 30
4.3 Unethical Corporate Behavior: Australia 31
4.3.1 Misleading statements conveyed to the Australian Stock Exchange 31
4.3.2 Harris Scarfe Holdings Limited 32
4.3.2.1 Growth 33
4.3.2.2 Disaster 33
4.3.2.3 $220m action for audit 'negligence' 34
4.3.2.4 Harris Scarfe in more trouble 36
4.3.2.5 Harris Scarfe back in business 37
4.3.2.6 Present day 37
4.3.3 One.Tel Limited 38
4.3.3.1 One.Tel’s unethical business and accounting dilemma 39
4.3.3.2 The law comes calling 41
4.4 Unethical Corporate Behaviour: Malaysia 41
4.4.1 Transmile Group Bhd 43
4.4.1.2 Transmile’s irregularities surfaced 44
4.4.1.3 CEO of Transmile relinquishes position 44
4.4.1.4 Authorities come knocking and charges are made 45
4.4.2 Bank Bumiputra Malaysia (BMF) scandal 46
4.4.2.1 Auditor murdered 47
4.4.2.2 The demise of BMF 47

Chapter 5 CONCLUSION 49

BIBLIOGRAPHY 52
 Chapter One
Introduction

1. Introduction

1.1 Introduction to Ethics

The hypothesis of this research is about the integral force that

ethics possess and the aftermath that have occurred as a result of the
violation of the code of ethical conduct. When unethical decisions are detected,
ethics are talked about frequently and addressed in the news. Sadly, when others are
engaging in ethical behaviour on a daily basis, people do not hear about ethics.
Businesses are expected to act socially responsible and have good ethical values within
the business context. The conundrum is that the ethics of a business is a blend of
individual sets of ethics. Hence, it is important to have employees who are good law
abiding individuals. The essence of ethics is doing what is right in every decision
that is made rather than just talking about the right thing (Ethics and
Social Responsibility, nd). There is no doubt that ethics has always and
will always play a role in the accounting and business world. The lack
education on ethics or rather the lack of ethical enforcement have led to
many corporate failures such as Enron in the United States, Harris Scarfe
and One.Tel in Australia and Bank Bumiputra Malaysia and Transmile
Group in Malaysia (refer to Chapter 4: Analysis for detailed discussion).

1.2 Introduction to Unethical Behavior

Professionals engage in unethical behaviors because the feel they

wont get caught by the relevant authorities. An employee may resort to
stealing large amounts of cash or committing bigger accounting
irregularities if their initial act of stealing a few dollars out of petty cash
or overstating small amounts of profits were gone unnoticed. A manager
or senior auditor or anyone with authority may feel they can hide their
unscrupulous behaviors by lying to their subordinates. Some people are
unethical because they can justify what they are doing. If an employee sees other people
not being punished for unethical behavior, then they may feel like they should be able to
do it to. Some individuals make a poor choice and instead of coming clean about it feel
the need to make more choices to cover it up. Once bad decisions are made, they tend to
get worse until they are eventually caught. The biggest reason people are unethical is
because they feel that they can gain from it, or that they need to hide something that can
hurt them (Ethics and Social Responsibility, nd).
1.3 Introduction to Ethics and Social Responsibility

Social responsibility can be an example of ethical behaviour. It is enhancing

society in general. However, a business cannot afford to go around doing good deeds if
there is no potential pay off. If the business were to loose too much money, then it would
cease to exist, hurt customers, and leave employees jobless. Some argue that social
responsibility is shown only when companies go beyond what is optional, and really
intend to create a benefit for others besides the company. Additionally, some companies
may not benefit from some forms of social responsibility. These businesses should focus
on what they do best as a business and give back what they can. Examples of socially
responsible behaviour range from projects that raise money for research on diseases,
raising money for the needy, requiring workers to volunteer within the community,
recalling products that may be dangerous, promoting recycling, and offering free
services to the unfortunate (Ethics and Social Responsibility, nd).

1.4 Focus of this research paper

The focal point of this research paper will be based on the following
aspects:
a) Describe the role/importance of ethics in the business and accounting industry
(code of ethics, ethical responsibility etc.).

b) Examine unethical behaviour in accounting (current issues, situations that may

lead to the practice of unethical behaviour, signs of unethical behaviour etc.).

c) Deliberate the consequences of the lack of ethical behaviour (accounting

scandals causes and responses to it).
d) Discuss ethics enforcement and explain the need for strict standards (e.g. code of
conduct) in the practice of professional accounting.
Chapter Two
Literature Review
2. Literature Review

2.1 Role of Ethics

Ethical behaviour starts at the top level of the management hierarchy. Before a
company can expect to be viewed as ethical in the business community, ethical
behaviour within its own walls-to and by employees-is a must, and top management
dictates the mood (Ethics in Business, 2000). Ethical behaviour by the leaders of an
organization will inevitably set the tone for the rest of the company-values will remain
consistent. Further, a well-communicated commitment to ethics sends a powerful
message that ethical behaviour is considered to be a business imperative (Ethics in
Business, 2000).

Companies, led by top management, are increasingly adopting ethical codes of

conduct. Modern ethics codes are not just some simple platitudes set in a break-room
plaque (Ethics in Business, 2000). Companies now commit considerable time and
money to illustrate their reliance on ethical behaviour. Companies now bring in
consulting firms (including KPMG's own Business Ethics Services Practice), to
construct a document with concrete rules and real meaning. A modern ethics code will
consider the main ethical dilemmas of a company's employees, and determine the most
vulnerable ethical areas for the company (Ethics in Business, 2000). The execution of a
company's ethics program depends on identifying these vulnerabilities. All future
messages, from the code, to materials, to training, will focus on these major ethical
dilemmas. Companies are also interested in determining whether ethical behaviour can
be measured, just as efficiency and productivity are. KPMG's Business Ethics Institute is
taking the lead on research in this area. Often companies must innovate ways to measure
ethical behaviour, which in turn motivates ethical behaviour (Ethics in Business, 2000).

Once training, measurement and a new ethical code have been developed,
companies are also hiring full-time ethical compliance officers, and starting ethics
hotlines to report possible policy violations. Hiring a full-time ethics officer is another
signal to employees that ethical violations will be taken very seriously (Ethics in
Business, 2000).However, this person is not just a defender against illegal conduct-in
fact, they will take a proactive approach to identifying possible violations before they
develop. An ethics violation hotline is another essential step to ensure ethical
compliance (Ethics in Business, 2000). Employees can call the hotline 24 hours per day,
7 days per week, to report violations or even to discuss potentially dangerous ethical
situations. As ethical behaviour comes to the forefront, more and more companies will
be taking these steps to ensure that the ethics of their company and its employees are
unassailable (Ethics in Business, 2000).

Many may have taken a business ethics class, where they learned theories of
ethics and analyzed case studies of famous ethical dilemmas. This is important
preparation-but in the business world, there will not be time to fulminate and analyze
(Ethics in Business, 2000). Split-second ethical decisions are made every day-and if one
follows the main professional ethics principles, making the correct decision should not
be difficult (Ethics in Business, 2000).

2.2 Significance of instilling a value-based-system

The world has seen successful businesses fail and have witnessed profitably
running businesses suffered from a downfall and even some seemingly effective
corporate receive a great fall in their profits and popularity. One of the main reasons
behind these surprising failures was the lack of business ethics. A true understanding of
the right and the wrong and the ability to distinguish between them is ethics. Ethics is an
important part of life and running a successful business is no exception to this (Ethics
Important in Business, 2008). To become successful, a business needs to be driven by
strong ethical values. The mindset of a businessperson creates a mindset for his/her
company, which in turn sets the work culture of the business organization. For a
business to prosper and maintain its wealth, it ought to be founded on certain ethical
principles. A business that is based on ethics can run successfully for long years.
Money-makers who do not heed to ethical values can only earn a short-lived success. To
last long in the market, business ethics is essential (Ethics Important in Business, 2008).

Ethics is important not only in business but in all aspects of life because it is the
vital part and the foundation on which the society is build. A business/society that lacks
ethical principles is bound to fail eventually. According to the International Ethical
Business Registry, "there has been a dramatic increase in the ethical expectation of
businesses and professionals over the past 10 years. Increasingly, customers, clients and
employees are deliberately seeking out those who define the basic ground, rules of their
operations on a day today basis" (Importance of Ethics in Business, 2010). Ethics refers
to a code of conduct that guides an individual in dealing with others. Business Ethics is a
form of the art of applied ethics that examines ethical principles and moral or ethical
problems that can arise in business environment. It deals with issues regarding the moral
and ethical rights, duties and corporate governance between a company and its
shareholders, employees, customers, media, government, suppliers and dealers
(Importance of Ethics in Business, 2010). Henry Ford once said, "Business that makes
noting but money is a poor kind of business". The ethical issues in business have
become more complicated because of the global and diversified nature of many large
corporation and because of the complexity of economic, social, global, natural, political,
legal and government regulations and environment, hence the company must decide
whether to adhere to constant ethical principles or to adjust to domestic standards and
culture (Importance of Ethics in Business, 2010).
 Managers have to remember that leading by example is the first step in fostering
a culture of ethical behavior in the companies. If ethics are poor at the top, that behavior
is copied down through the organization (Importance of Ethics in Business, 2010).
However, other methods may include creating a common interest by favorable corporate
culture, setting high standards, norms, framing attitudes for acceptable behavior, making
written code of ethics implacable at all levels from top to bottom. As Warren Buffet
once said relating ethics to value-"Price is what you pay. Value is what you get"
(Importance of Ethics in Business, 2010).

2.2.1 Business and Accounting: Code of ethics

Principles deal with the expected behaviour and accountability of the accounting
profession. In other words, the kind of behaviour other people expect from accountants.
In most situations, the average citizen is not familiar with all the codes and regulations
imposed by the government; at the same time, say for example, if they reside in the
United States, they are held subject to all those codes and regulations (Code of Ethics for
Accountants, Accounting Ethics, Business Code, Finance, 2009). At this point, in the
United States, many individuals and businesses turn to an accountant for help in dealing
with the tax and legal requirements of living and working in the United States. There is
an issue of trust that enters the relationship, since the individual does not know or
understand all the codes, regulations, and laws about finance. If the accountant is to
remain as a trusted advisor, he or she cannot lie to their customer, the public, or the
government (Code of Ethics for Accountants, Accounting Ethics, Business Code,
Finance, 2009).

Unfortunately, this position, like so many others is being abused and neglected
when it comes to morals and ethics. Today, society is forced to legislate morals and
ethics into the accounting profession, and many others. Although this does not normally
work, the lawmakers have needed a response to the public reaction of these corporate
scandals, and legislation of ethics has been the chosen response (Code of Ethics for
Accountants, Accounting Ethics, Business Code, Finance, 2009). Other than the
courtroom, the accounting profession has its own board of peers that oversees the
discipline of members that do not behave in the moral and ethical way members are
expected of. Suspension of their license, termination of their right to practice, and eve
payments of investigation, fines, and penalties associated with their behaviour are very
common (Code of Ethics for Accountants, Accounting Ethics, Business Code, Finance,
2009).

2.2.2 Ethics and Customer Service

For a business to achieve long-term profits, customer relationship is of utmost

importance. To gain a long-term relationship with customers and achieve customer
return for the business, the business needs to be based on ethics (Ethics Important in
Business, 2008). The trustworthiness of a business, its customer service, its customer
care, its way of dealing with customers and its urge to retain their old customers, is a
part of the business ethics. Business ethics leave a long-lasting impression on the
customers and the impression on their minds builds trust, fetching a business more
customers while retaining the older ones (Ethics Important in Business, 2008). Is bad
customer service an ethics issue? Of course it is. There are at least three ways that
customer service can be unethical (with regards to customer complains from Dell
Computer’s customer service): front-line customer service folks can be unethical; they
can do unethical things like lie or "misplace" customer’s order (MacDonald, 2006). The
reason this may occur is because these front-line staff are much more likely to be
undertrained, or stuck with implementing bad policies, than they are to be unethical
themselves; head office can under-staff their customer service phone lines, or under-
train the folks who staff those lines, which basically guarantees that customers won't be
treated appropriately; head office can have unethical policies (e.g., policies that make it
difficult or impossible for customers to get repairs done under warranty; policies that
limit the amount of time a rep can spend dealing with a single customer; failure to have a
policy stipulating that customers who have -- for whatever reason -- been treated badly
ought to receive special treatment until the problem is rectified) (MacDonald, 2006).
Accepting bribes, pleasing the so-called 'important' clients, favouring a part of the
customers while being unfair towards the others is against business ethics. The primary
aim of business is not just to maximize profits. It is rather to cater to the needs of society
and work towards benefiting the masses (Ethics Important in Business, 2008).

Business ethics, like customer service, are most definitely a profit centre. It’s
only that most people don’t make the connection between the words of "morality" and
"ethics" with commonplace terms like customer support, customer relations, and
customer service (Business Ethics = Customer Service, 2006). What matters is whether
one thinks morality and ethics are just another cost---some problem and bill to deal with.
Business ethics not only are the same as customer service policies and procedures, but
also are fundamental to the bottom line and profitability of ones business. Without a plan
for customer service, the likelihood is either that one will have a perfect product never in
need of any kind of support, or the business is missing a superb profit opportunity
(Business Ethics = Customer Service, 2006).

Quality versus cost-savings; honour versus legally within bounds: These are
moral decisions, with ethical results. Why is the business world seeing such an increase
in lawsuits these days? This is because fewer people can connect the complicated terms
of morality and ethics to the real-world consequences of customer service (Business
Ethics = Customer Service, 2006).

2.3 Ethics in Accounting

Ethics in accounting is of utmost importance to accounting professionals and

those who rely on their services. Certified Public Accountants (CPAs) and other
accounting professionals know that people who use their services, especially decision
makers using financial statements, expect them to be highly competent, reliable, and
objective (Ethics in Accounting: Encyclopedia of Business and Finance, 2010). Those
who work in the field of accounting must not only be well qualified but must also
possess a high degree of professional integrity. A professional's good reputation is one
of his or her most important possessions (Ethics in Accounting: Encyclopedia of
Business and Finance, 2010).

The general ethical standards of society apply to people in professions such as

medicine and accounting just as much as to anyone else. However, society places even
higher expectations on professionals. People need to have confidence in the quality of
the complex services provided by professionals (Ethics in Accounting: Encyclopedia of
Business and Finance, 2010). Because of these high expectations, professions have
adopted codes of ethics, also known as codes of professional conduct. These ethical
codes call for their members to maintain a level of self-discipline that goes beyond the
requirements of laws and regulations (Ethics in Accounting: Encyclopedia of Business
and Finance, 2010).

For professionals in the accounting profession, however, ethics is at the

cornerstone of what these professionals do. Clients look to accountants and
businesspersons to provide impartial information about their company and industry
(Ethics in Business, 2000). The business community depends on accountants to perform
their jobs with the highest degree of accuracy and ethical standards. The stability of a
free-market system depends, in large part, on unimpeachably exact audits and
statements. As more traditional accounting firms become involved in consulting, which
to some slightly grays the line of impartiality, it is more important than ever that the
accounting profession operate according to the highest ethical standards (Ethics in
Business, 2000).

2.4 Ethics in Business

The international media have recently begun to lament the loss of ethics in
today's business world. According to a recent survey cited in The Wall Street Journal,
79% of young Americans believe that there are no absolute standards in ethics. Honesty
in business dealings does not seem to be at the forefront of people's minds (Ethics in
Business, 2000).

Most ethical lapses are so small as to seem insignificant. However, they add up
over time, and can snowball into a serious situation. Poor ethical standards are most
damaging in the long-term. The biggest victim of ethical lapse is trust. A small breach of
ethics is often known only between a few people (Ethics in Business, 2000).
Nevertheless, this knowledge can destroy trust between fellow employees, and from
there make its way up the ladder, destroying trust between employee and supervisor, and
between divisions of companies. When ethical lapses become rampant, employee
productivity declines, loyalty follows, soon major breaches such as employee theft begin
to appear. Eventually, and worst of all, the most important advantage a firm has, the trust
between a firm and its clients, erodes (Ethics in Business, 2000).

Why has such an important topic as business ethics gone unnoticed, even
actively ignored? The biggest reason is that ethics is largely misunderstood. Ethical
behaviour - which is behaviour conducted with honesty and integrity, has become
muddled up with moral or political questions. In the past generation, the business
community for the first time was asked to consider political and moral consequences
when making business decisions-whether to do business with South Africa during
apartheid, for instance (Ethics in Business, 2000). The public's new interest has changed
the way many companies do business. However, as political and moral concerns have
taken centre stage, ethical concerns have been forgotten. Ethics has very little to do with
political beliefs, or public opinion. Ethical behaviour is a very personal matter, which
requires that a person be honest and truthful in all business dealings (Ethics in Business,
2000).

2.5 Global Financial Crisis 2008

It has been impossible to avoid the implications of the unethical behaviour that
underlies the current global financial crisis triggered by the collapse of the sub-prime
market in the US. It is useful to analyze this situation in terms of governance, risk and
ethical issues, and it is important to focus on the lessons that it has created for all
managers (Chartered Secretaries Malaysia (MAICSA), 2009).

At a national governance level, the strong encouragement of the US government

for the banking sector to lend freely to expand home ownership levels in the US – in a
business environment of deregulation – was not accompanied by policies or practices
that emphasized the risk or ethical aspects of these government level policies. The
subsequent collapse of leading global and US banks, and the recent US government
approved US$700 billion taxpayer-funded bailout, shows that unethical behaviour based
on short-term greed – accompanied by poor or nonexistent corporate and government
agency risk management policies – can and has had both global and long-term
consequences (Chartered Secretaries Malaysia (MAICSA), 2009).

These consequences go well beyond the original organizational context and the
specific behaviour that initiated them, and are now strongly affecting those who had no
involvement in the original unethical practices. At the heart of this now global problem
were the US-based practices of; writing sub-prime loans which were legal but unethical
in that they were offered to persons who clearly could not afford them, and ‘bundling
up’ these loans and selling them off as ‘gilt- edged’, triple A securities, which then
became investments for financial institutions which did not undertake ethically based
risk assessments (or ignored them if they did) (Chartered Secretaries Malaysia
(MAICSA), 2009).

These practices illustrate the impact of personal, institutional and sector based
practices which were probably legal but were largely unethical, and were not
accompanied by effective risk analyses and effective governance procedures. In
addition, other unethical behaviour was permitted or tolerated at government levels at
stock exchanges around the world, for example by regulators permitting dubious and
unethical stock market trading (such as certain types of short selling), which in essence
promoted profit making by rewarding or creating failure in the form of lower share
values (Chartered Secretaries Malaysia (MAICSA), 2009).

These practices have also shown clearly that even in ‘sophisticated’ and
regulated economies, some systems, organizations and their staff will behave legally but
not ethically if allowed, or not regulated closely enough, unless they work in a culture
that blocks them. While there will undoubtedly be another wave of apparently tougher
legislation and regulation that will be aimed at enforcing more ethical and appropriate
behaviour, the root causes include unethical behaviour and practices that extend beyond
regulatory controls (Chartered Secretaries Malaysia (MAICSA), 2009).

Moreover, as politicians and officials develop their plans, it is hoped that they
bear in mind one simple fact. The root cause of the global financial crisis is not a failure
of regulation but of ethics (Longstaff, 2008). Yes, regulation was more lax than it should
have been in the USA, where the financial contagion began its spread. However, in
ordinary life, the absence of a police officer on every corner would never lead
professionals to expect (or excuse) an outbreak of theft or violence. Yes, markets have
been powerful engines driving increased prosperity for millions around the world.
However, there is a world of difference between genuinely free markets and their
counterfeit form – the laissez faire jungle in which self-interest mutates into the
degraded forms of greed and selfishness (Longstaff, 2008). No market can ever be truly
free without a strong ethical base. To lie, to cheat, to use power oppressively – all of
these things distort a free market and all of them are the product of a failure of ethics
(Longstaff, 2008).

At its core, ethics is about making conscious choices in line with an explicit
framework of values and principles. It is this reflective engagement with the world that
stops individuals, organizations and institutions from stumbling, blindly, into ethical
‘death traps’ (Longstaff, 2008). Indeed, it will now be some time before anyone asks
again, “Do ethics really matter in business? Do they have any practical use?” There is no
longer a need to offer even a marginally sophisticated answer. All that one has to do is
point to the billions of dollars of wealth destroyed, at the millions of lives adversely
affected by loss of homes, opportunities, savings and the list goes on (Longstaff, 2008).
Yet again, it will be the poor of the world who will pay the highest price. Having
privatized the upside of economic irresponsibility, professionals must now socialize the
downside – all a result of a failure of ethics (Longstaff, 2008).

Chapter Three
Methodology
3. Methodology

This chapter of the research involves the usage of secondary data with the electronic
based sources (online database and Internet) being its main function. The type of
secondary data used include the documentary style that consists internet sources, website
reports and online journals. In addition, primary data is also used.

3.1 Research Objectives

The purpose of this research paper is to gauge the influence that ethics has and observe
the repercussions that have occurred in the corporate world because of the manipulation
of the lack of ethics. The research highlights the importance of having leaders or rather
individuals who in power to abide by the business and accounting code of conduct and
to prevent these professionals from abusing their authority to their advantage. The
research shows how easily huge companies can collapse with the lack of a valued
system that consist stringent code of conducts.

3.2 Research Methodology

Research Research Method and Source of Data
Methodology Strategy
Exploratory research Interview Secondary and Primary
data

3.3 Data Sources

Data sources used in the research paper are secondary data and primary data. The
primary data that was used was an interview. Secondary data used consists of online
websites, journals, and reports. Secondary data was the major data source in this
research paper primarily due to the fact that it was easy to conduct the findings of the
research.

3.3.1 Secondary Data

For little or no cost to acquire, the use of secondary data has allowed researchers
access to valuable information. Compared to carrying out the research themselves, this
source of information is much less expensive. In addition to it being used prior to
primary research to assist in clarifying the research points, secondary data also helps the
researcher to simplify questions related to the research (advantages and disadvantages of
secondary research, 2008). Furthermore, secondary data is advantageous in that if the
researcher is looking for a small size effect, it may be impossible to collect primary data
on a sufficient number of cases. Secondary data also allows the accessible population of
a larger representative of the target population. The source has assisted in the research in
understanding the relationship between ethics and the corporate world as well as relating
it to real life issues (Romano, nd).

3.3.2 Primary Data

 Primary data is the data collected by the researcher specifically for the purpose of
answering the research aims and objectives. Primary data is useful in that the researcher
gathers exactly the data requirements needed for the research. Primary data also allows
the control of the data collection process to not only assess the reliability of the
researchers instruments but also minimizes error and ensures data quality. Moreover,
since irrelevant exclusion criteria are not a concern, primary data is practical in that it
allows for the selection of a sample that is specifically planned to help the progress of
the research paper (Romano, nd). Primary data – interview- helped in this research paper
because it allowed the researcher to gain an insight of the practice of unethical behaviour
of Malaysian companies.

3.4 Research Method and Strategy

The research strategy and method employed was based largely on secondary data
with primary data being used sparingly. Primary data was used by constructing
structured questions to conduct an interview with the chairperson of a small sized
accounting firm in Kuala Lumpur. Emphasis was given to the ethical conduct in
Malaysia. This interview helped the researcher gain more knowledge about the practices
of the corporate arena in the country as well as what to expect in the business fraternity
for years to come.

3.5 Research Instruments

Secondary data was used largely because it would have been hard to use primary
data to collect information from the United States and Australia. Secondary data such as
online reports and journals helped in gathering information of the past. It also helped in
gathering important data with regards to the case studies that otherwise would have been
impossible to collect. Primary data was conducted by interviewing a Malaysian
accountant.

3.6 Data Collection

 The primary data which consist of the interview was conducted on the 5th of
January 2010 at the office of the interviewer which is located at Menara Mutiara
Bangsar, Kuala Lumpur.

3.7 Limitation of Research

Problems with the research occurred with regards to the secondary data. This
happened as there were a few important websites that needed special authorization or a
hefty registration fee. Moreover, there were not many books available regarding the
unethical behaviour of companies in Malaysia. Unlike the United States and Australia,
information of corporate collapses in Malaysia was rather scarce.
 Chapter Four
Analysis

4. Analysis

4.1 Unethical Corporate Behaviour: United Stated

Insider trading, fraudulent billing practices and overdraft scandals are just a few
of the outcries heard from stockholders and news media in corporate America. In
response to this, companies and professional societies are publishing codes of conduct as
employee guidelines to discourage unethical behavior (Harrington, 1991). However, the
introduction of codes of conduct are not going to eliminate unethical behavior, and even
respected companies, like Arthur Andersen, which have codes of conduct have
experienced major scandals. Nevertheless, ethics training should be integrated in
corporate culture to foster ethical decision-making in solving conflicts and to also
prevent greed from taking over (Harrington, 1991).
4.2 Enron Corporation

Arthur Andersen and Enron - two names that will forever live in infamy because
of the events leading up to and including the debacle of December 2001, when Enron
filled for bankruptcy. These two giants in the utility and accounting industries, and
known throughout the world, took advantage of not only investors, but also the
government and public as a whole, just so that those individuals involved could illegally
and unethically increase their personal wealth (Arthur Andersen and Enron, 2004). How
could the backlash from the actions of the management of these two organizations have
a positive influence in the accounting industry as a whole? The fallout from Enron’s
bankruptcy and the SEC investigation that followed resulted in many changes to the
industry to make standards tougher, penalties harder, and the accounting industry more
reliable. At first glance, these “improvements” just seem like they are making more
work for the many honest accountants in the industry, who are already doing the right
things (Arthur Andersen and Enron, 2004).

In just 15 years, Enron grew from nowhere to be America's seventh largest

company, employing 21,000 staff in more than 40 countries. However, the firm's success
turned out to have involved an elaborate fraud. Enron lied about its profits and stands
accused of a range of shady dealings, including concealing debts so they did not show
up in the company's accounts. As the depth of the deception unfolded, investors and
creditors retreated, forcing the firm into Chapter 11 bankruptcy in December 2001 (BBC
NEWS, Business, Enron scandal at-a-glance, 2002).

4.2.1 Regulation in place before the scandal

Before the collapse of Enron and their accountants, Arthur Andersen, there were
many different types of safety measures in place to help protect the investors and the
public as a whole. These safety measures included Generally Accepted Accounting
Principles (GAAP), Generally Accepted Auditing Standards (GAAS), Statements on
Auditing Standards (SAS), and all professional ethics (Arthur Andersen and Enron,
2004). The use of GAAP by accountants is standard protocol. An accountant follows
these principles as a matter of daily routine. According to Several accounting texts,
GAAP is identified as a “dynamic set of both broad and specific guidelines that
companies should follow when measuring and reporting the information in their
financial statements” (Arthur Andersen and Enron, 2004).

During yearly audits performed by external, independent auditors, checks are

performed to make sure that a business is following GAAP consistently. If they are not,
then the business must show why they are not, and present rationale to demonstrate that
what they are doing is both ethical and appropriate in their specific situation (Arthur
Andersen and Enron, 2004). This leaves the field open to interpretations of what is
appropriate for different situations. Since interpretations are quite subjective, the
American Institute of Certified Public Accountants (AICPA) added the stipulation that
the treatment must also be applied consistently over time. These rules are in place to
make financial statements as accurate and reliable as possible. Enron took these rules
and circumvented them to allow certain individuals within the company to make money
from the increased investments from stockholders. They did this by bolstering their
balance sheet with inflated asset values, and dispersing their liabilities to subsidiaries
that they just did not consolidate (Arthur Andersen and Enron, 2004). This meant that
Enron did not include these companies in their financial statement accounts at the end of
their fiscal years, causing massive misstatements. Since these partnerships were, in most
cases, wholly owned subsidiaries or partnerships, they should have been shown on the
consolidated financial statements with Enron. When Enron declared bankruptcy, they
had $13.1 billion in debt on Enron’s books, $18.1 billion on their subsidiaries’ books,
and an estimated $20 billion more off the balance sheets (Arthur Andersen and Enron,
2004).

While GAAP guidelines relate to how financial statements are presented, GAAS,
on the other hand, are standards set down specifically for the audit cycle of a company.
It tells auditors what tests they should do, to what extent this testing is to be done, and
what level is acceptable in the audit. Arthur Andersen had a responsibility to the
investors and to the public interest under GAAS. Auditors, according to GAAS, are to
remain independent in both fact and appearance (Arthur Andersen and Enron, 2004).
Meaning that even if an auditor appears to have a connection with their client, even
though they may not have, they should drop the audit immediately. Anderson took a
very active role in Enron’s business through both auditing and consulting. This should
have been enough to make anyone question Anderson’s independence. They did not
execute their duties independently because of the amount of revenue that Enron was
providing them, not only in audit fees, but also in consulting fees. In 2000, Enron paid
Andersen $52 million, including $27 million for consulting services. This amount was
enough to make Enron Andersen’s second largest account in 2000 (Arthur Andersen and
Enron, 2004).

SAS constitute the third important safety measure. These statements on auditing
standards are produced to address current issues in the business of auditing. The
American Institute of Certified Public Accountants (AICPA) sets down these rules. The
one that played a predominant role in this incident is SAS 82. SAS 82 was issued in
1997, and it requires auditors to ascertain management’s understanding of the risk of
fraud (Arthur Andersen and Enron, 2004). This statement also included the duty to find
out if any of the management knew of any fraud being committed against the company,
and added new fraud terminology to the representation letter produced by management.
This SAS was the first to clearly state that auditors had any responsibility to look for
fraud. Up until 1997 it was expected that an auditor would report fraud if they happened
upon it, but they had no responsibility to actively look for it. This one SAS along with
all the others were supposed to protect the public interest (Arthur Andersen and Enron,
2004). However, in lieu of the lucrative fees being collected by Andersen from Enron
these were also overlooked. In spite of all of these safety measures, the wrongdoings at
Enron went undetected for a long period of time. The major problem was that of
collusion. GAAP and GAAS cannot prevent fraud when people work in collusion to
perpetrate that fraud. Therefore, when events like these transpire, changes are required
in an attempt to prevent similar occurrences (Arthur Andersen and Enron, 2004).
4.2.2 Chronology of events

The events that led up to the bankruptcy filing in December of 2001, started long
before anyone began to suspect fraud at Enron. Andersen’s role in the Enron debacle
should have been anticipated. Andersen had two major audit failures just a few years
apart and just a short time before Enron filed bankruptcy. In 1996, Waste
Management’s audit reports from Andersen were materially false and misleading,
resulting in an inflation of income by over $1 billion dollars between 1992 and 1996
(Arthur Andersen and Enron, 2004). This information came out in an SEC
investigation, and led to Waste Management selling out to another company. In 1997,
Sunbeam was found by the SEC to be using accounting tricks to create false sales and
profits, Andersen signed off on these financial statements even after a partner flagged
them. Sunbeam would later file for bankruptcy (Arthur Andersen and Enron, 2004).
These two major audit failures should have put Andersen on their guard against
another client failure, however the worst was yet to come. Internal memos at Andersen
showed that there were conflicts between the auditors and the audit committee of Enron.
Also included in these memos are several e-mails expressing concerns: about accounting
practices used by Enron. However, the leading partner on the audit, David B. Duncan,
overturned these concerns. In addition, there is proof that Duncan’s team wrote memos
fraudulently stating that the professional standards group approved of the accounting
practices of Enron that hid debts and pumped up earnings (Arthur Andersen and Enron,
2004). However, because of the relationship between audit and non-audit fees,
Andersen’s independence was probably flawed. During the fallout of Enron’s
bankruptcy and Andersen’s role in it, Andersen began to run an ad that Andersen would
do what was right. In doing this, Arthur Andersen was trying to rebuild the consumer
confidence in their accounting firm. While Andersen was attempting to pick up the
pieces of their business, Paul Volcker, former Federal Reserve Chairman, presented a
plan for a restructuring of Andersen so that they would have a chance of surviving this
incident (Arthur Andersen and Enron, 2004). Andersen did eventually agree to the
restructuring, but it was too late to save the firm as a whole. Anderson still exists as a
company, although their only reason for doing so is to complete all the litigation against
the firm. They are no longer auditing or consulting. Anderson was the major
accounting influence in this incident, however they were not the main player (Arthur
Andersen and Enron, 2004).

Enron’s role started when they emerged as a competing force within their
industry. Enron became more and more arrogant as time passed. They had a banner in
the lobby of their headquarters, which read, “The world’s leading company.” Many
believe that it was this arrogance on the part of the management that led to the escalation
of the unethical fraud that followed (Arthur Andersen and Enron, 2004). Enron’s
strategy was to have a balance sheet with many intellectual assets, like patents and
trademarks, and that actual assets were bad and should be immaterial when compared to
the intangibles. Most of the debts and tangible assets of the company were on the
balance sheets of partnerships that were run by high-ranking officials within the
corporation. With this kind of strategy for business, the company quickly began to falter
(Arthur Andersen and Enron, 2004). Knowing that Enron needed help, a competitor,
Dynergy, offered to buy them out for $10 billion. Then, on October 16, 2001, Kenneth
Lay, ex-CEO of Enron, told the public that Enron would have to decrease shareholders
equity by $1.2 billion. This announcement, along with the November 19, 2001
announcement of a $700 million charge to buy out a note payable, caused Dynergy to
bail out of the deal to buy Enron on November 28, 2001 (Arthur Andersen and Enron,
2004). This proved to be the defining moment for Enron -- that would cause Enron’s
management to realize that Enron had no hope of survival. Finally, on December 2,
2001 Enron filed for bankruptcy. In the end Enron fared no better than other companies
that perpetrate this kind of unethical activity. This description is what really happened,
but how these events were displayed to the public is a different story (Arthur Andersen
and Enron, 2004).

In early 2001 Jim Chanos, the person who runs Kynikos Associates, was the first
to say what everyone can now see -- Enron had absolutely no way to earn money the
ethical way. The parent company had become nothing but a hedging entity for all of its
subsidiaries and affiliates. The operating margin for Enron was way down in 2001, at
2%, from its level in 2000, of 5% (Arthur Andersen and Enron, 2004). This kind of a
decrease in one year is unheard of in the utilities industry. Chanos went on to point out
how Enron was still aggressively selling stock, even though management understood
that there was very little to back up the shares that they were selling. Chanos was also
the first person to take notice of and publicly identify the partnerships where Enron was
hiding some of its debt (Arthur Andersen and Enron, 2004). Enron’s CFO Andrew
Fastow ran these partnerships, which would later become known as the LJM
partnerships. These partnerships were recorded as related parties, but were never
consolidated so that the debt never showed up on Enron’s financial statements, as it
would have if statements were prepared according to GAAP. Thanks to Jim Chanos, the
public was made aware of what was going on, and actions have been taken to implement
changes to prevent a similar instance in the future (Arthur Andersen and Enron, 2004).

4.2.3 Enron and Arthur Andersen verdict: Guilty, Guilty, Guilty!

In June 2002, the United States jury found accountancy firm Arthur Andersen
guilty of obstructing justice by shredding documents relating to the failed energy giant
Enron. The verdict turned out to be the death knell for the 89-year old company, once
one of the world’s top five accountants. Andersen had already lost much of its business,
and two-thirds of its once 28,000 strong US workforce (BBC News, Business, Andersen
guilty in Enron case, 2002). Following the conviction, multi-million dollar lawsuits
brought by Enron investors and shareholders demanding compensation followed.
Andersen, which audited Enron's accounts, went on trial in Houston, Texas, after
allegations that employees had illegally destroyed thousands of documents and computer
records relating to its scandal-hit client, which was based there (BBC News, Business,
Andersen guilty in Enron case, 2002).

The firm's lawyers had argued that the shredding of documents had been routine
housekeeping, but the jury decided it was an attempt to thwart federal regulators
investigating Enron. The trial heard how one Andersen executive said on a training
video that if documents were shredded and then the investigators arrived, that would be
good. However, Andersen's defence lawyer, Rusty Hardin, had argued that a number of
important documents had survived the shredding, suggesting there was no conspiracy to
cover up Andersen's work on Enron's books (BBC News, Business, Andersen guilty in
Enron case, 2002). The prosecution's star witness was former Andersen partner David
Duncan, who was in charge of the Enron audit team. Duncan admitted obstructing
justice in April and told jurors that he had signed an agreement with Andersen to present
a united front, claiming that neither had done anything wrong. Duncan said that he had
reneged on the agreement after much "soul searching" (BBC News, Business, Andersen
guilty in Enron case, 2002).

4.2.4 Enron and Arthur Andersen fall off the cliff

Executives at Arthur Andersen and Enron did not set out to have a positive
impact on the accounting industry or any industry. They set out to make as much money
for themselves as quickly as possible. They were willing to do whatever it took to make
that money. These thoughtless unethical acts and greed led both companies to an
eventual downfall in bankruptcy (Arthur Andersen and Enron, 2004). However, the
accounting industry reacted by introducing changes that would, in the long run, improve
itself and the economy in which it exists. The changes that are a response to the
Andersen/Enron debacle may be ending. The profession is probably seeing the last
laws, pronouncements, and statements that are a direct result of these actions (Arthur
Andersen and Enron, 2004). Still, the changes that have occurred leave the accounting
industry and the economy stronger. Will the industry ever be perfect? Probably not, but
accountants and the world must continue to strive to make it as functional as it can be.
Only by this continued striving, can the industry be good enough to function effectively
and even thrive (Arthur Andersen and Enron, 2004).
4.3 Unethical Corporate Behaviour: Australia

Unethical financial fraud does not seem to occur on a large scale in Australia. It
certainly happens, but not to the same extent as appears to have occurred in overseas
jurisdictions like the United States. This may be due to the fact that Australia has less
extreme forms of performance-related remuneration structures in its public companies
(Cooper, 2005). While the country does pay attention on short-term results, it does so
perhaps less than in the United States and therefore the temptation; to “cook the
numbers” is lower. In addition, Australia has perhaps slightly less affection for
“presidential” style CEOs who are able to override the checks and balances already in
place (Cooper, 2005). The issues in Australia probably relate more to corporate “spin” in
issuing misleading announcements to the ASX; ranging from covering over or failing to
disclose bad news, to the issue of information that is outright misleading (Cooper, 2005).

4.3.1 Misleading statements conveyed to the Australian Stock Exchange

Section 1309 of the Corporations Act makes it an offence to give false

information to the ASX where the director or officer involved either knew it was false or
misleading, or failed to take reasonable steps to ensure that it was not (Cooper, 2005).
This is the regulatory tool that is often used against executives who are seeking to
disseminate misleading financial information about their company to the market. One
important feature of s 1309 is that it does not require dishonesty or fraud in order for
there to be a successful prosecution (Cooper, 2005). In a case where ASIC alleged a
serious breach of a listed company's continuous disclosure obligations, it would consider
using s 1309 against the directors and officers involved. ASIC is able to seek a fine of up
to $22,000 per offence, plus a maximum of 5 years imprisonment, or both (Cooper,
2005). For less serious breaches of a company's disclosure obligations, ASIC has its
'infringement notice' power under which it can issue what are effectively optional fines
against only the company itself. The fines range from $33,000 for a company with a
market capitalization of $100m or less, to $100,000 for a company with a market
capitalization of $1bn or over (Cooper, 2005). If the company pays the fine, ASIC
cannot take the matter further. If the company does not pay the fine, ASIC would have
considered taking alternative enforcement action or letting the matter rest. ASIC has not
used this power yet, although there are several matters under consideration (Cooper,
2005).

4.3.2 Harris Scarfe Holdings Limited

In early 2000, the future of 160-year-old retailer Harris Scarfe was up in the air.
Amid revelations of financial irregularities over the previous six years, the company was
placed in the hands of voluntary administrators KPMG in 2001. In September 2003, the
former Harris Scarfe chairman Adam Trescowthick appeared in court charged with 37
offences related to the company’s 2001 collapse (Makeover for Harris Scarfe, 2003). In
their report to creditors, the administrators highlighted that the systematic overstatement
of profits had been funded by increased debt, both to the bank and the creditors. After
investigations by ASIC and official examinations by the company’s receivers and
managers, ASIC alleged the chief financial officer, who has since been jailed, had
altered Harris Scarfe’s accounts to inflate the company’s profits and had created a false
picture that Harris Scarfe was in good financial health, permitting it to trade when it was
virtually insolvent. The ANZ Bank, seeking recovery of at least $70 million and alleging
the auditors had been negligent because they failed to uncover the accounting
discrepancies and irregular entries in the accounts, has filed a suit against Harris Scarfe’s
auditors. In addition, the former chairperson of Harris Scarfe has been charged with a
number of offences relating to failure to act honestly, dissemination of false information,
and intentional failure to notify the board of falsely inflated profits (Cooper, nd).

4.3.2.1 Growth

In the 1990's Harris Scarfe began an era of unprecedented growth, both within
South Australia, and interstate. The growth within South Australia was fuelled by an
aggressive store expansion plan, which was assisted by the demise of the Venture chain
of stores. With the absorption of John Martins by its parent company David Jones,
Harris Scarfe purchased two of John Martins suburban stores (Arndale and Elizabeth),
which were deemed unsuitable to be re-branded as David Jones. Harris Scarfe also
acquired a three level store in the Colonnades Shopping Centre, as the result of a Myer
store closure. At Harris Scarfe's peak, the company operated 11 South Australian stores
(Harris Scarfe at AllExperts, nd).

The company continued its aggressive expansion interstate, opening stores in

New South Wales, Queensland, Tasmania, Victoria (Australia) and Western Australia.
The company acquired a large amount of its retail space (and its largest stores) as a
result of Australia's two largest department store chains Myer and David Jones
rationalizing their chains. The company's expansion into Tasmania was accelerated by
the purchase of the statewide department store chain Fitzgeralds (Harris Scarfe at
AllExperts, nd).

4.3.2.2 Disaster

In 2001 Harris Scarfe suppliers and customers, and even a large amount of the
company's staff were shocked when the thriving business was suddenly faced with cash-
flow problems. The company made headlines in South Australia when concerned
suppliers, from whom Harris Scarfe had purchased large amounts of stock on credit,
entered the flagship store in Rundle Mall, and began retrieving their stock directly from
the shelves, before shocked staff and customers (Harris Scarfe at AllExperts, nd). The
company soon entered voluntary receivership, and its shares were withdrawn from the
Australian Stock Exchange. Examination of the company's books revealed that assets
had been re-valued well above market value in an effort to conceal its spiraling losses.
This practice had left the company with multimillion-dollar debts (Harris Scarfe at
AllExperts, nd).

4.3.2.3 $220m action for audit 'negligence'

 In 2006, the Supreme Court of South Australia heard that the systematic fraud in
national retail chain Harris Scarfe occurred “under the noses” of the company’s auditors.
Supreme Court Justice David Bleby was told that if the auditors of Harris Scarfe had
"done their job properly"; the company would have been placed into receivership in the
late 1990s by its bank, ANZ (James, 2006). Instead, Harris Scarfe continued trading
until April 2001, when it collapsed with debts of $265 million, prompting receiver Bruce
Carter, of Ferrier Hodgson, to launch litigation against Ernst and Young and Coopers
and Lybrand, now PricewaterhouseCoopers (PwC), for $220 million in damages (James,
2006).

Ernst and Young negotiated a confidential out-of-court-settlement with Mr.

Carter in September 2006, leaving PwC facing a claim for the remaining $180 million in
a very complex Supreme Court trial. Opening the trial, the attorneys claimed that ANZ
would have withdrawn funding for Harris Scarfe in 1998 if PwC had "done its job
properly" and discovered "widespread systematic fraud" (James, 2006). It was being
conducted by the company's former chief financial officer, Alan Hodgson, who was later
jailed for dishonesty offences. Instead, the company operated until 2001 when trading in
its shares was suddenly halted following the discovery of repeated manipulation by
Hodgson of Harris Scarfe's annual profit statements to the Australian Stock Exchange
(James, 2006).

The auditors in this case were grossly negligent and inexcusably incompetent.
They failed to discover widespread and systematic fraud and irregular accounting in the
books and records of Harris Scarfe. Had they conducted their reviews and audits in a
non-negligent way, displaying only ordinary competence, the fraud would have been
detected and disclosed to the board of directors and to Harris Scarfe’s bankers (James,
2006). Simply put, had the fraud and the manipulations of the accounts been revealed,
the receiver would have been appointed to the group under the ANZ Bank's indenture
security and the deterioration in net assets which followed would have been avoided.
Instead, the directors continued to conduct the affairs of the group in reliance on the
accounts which showed that it was trading profitably and in a sound financial position
(James, 2006). PwC (then Coopers and Lybrand) had tendered successfully to replace
Ernst and Young as the auditors of Harris Scarfe in 1998. Despite uncovering
multimillion-dollar discrepancies in Harris Scarfe's accounts in 1998 and 1999, nobody
from PwC made any serious effort “to get to the bottom of what was going on”. PwC
had denied it was negligent, arguing the Harris Scarfe's directors should have been
aware of Hodgson's fraudulent unethical activity (James, 2006). Its defence said that,
even if the financial position and performance were overstated, the company's financial
crisis was caused by its management and directors. PwC alleged they failed to prepare
strategic plans, accepted reports that lacked proper analysis, allowed the company to
expand too quickly, did not have a defined retail property strategy and maintained
insufficient working capital (James, 2006).

4.3.2.4 Harris Scarfe in more trouble

Furthermore, in another case involving Harris Scarfe, a woman who bought more
than $134,000 of shares in Harris Scarfe just before the retailer collapsed in early 2001
had initiated a class action on behalf of other shareholders. It alleged that the company's
directors engaged in false, deceptive and misleading conduct over a five-year period
(Wood, 2002). The suit, filed by Eleanor Guglielman in the Federal Court in South
Australia, was intended to claw back some of the funds lost by thousands of
shareholders. They were unable to sell their stock after directors revealed the retailer's
accounts were out by more than $40 million in early April 2001, when it was put in the
hands of receivers and managers (Wood, 2002). After investigations by the Australian
Securities and Investments Commission and official examinations by the retailer's
receivers and managers, ASIC alleged Mr Hodgson altered Harris Scarfe's accounts to
inflate the group's reported profits (Wood, 2002).
 Ms Guglielman claims she paid a total of $53,010 for 39,000 Harris Scarfe
shares during 2000, and spent a further $134,056 on about 138,000 shares between
February 9 and March 29, 2001, when the stock was suddenly suspended from trading
(Wood, 2002). In a 155-page initial statement of claim, Ms Guglielman alleged the
directors issued false and misleading or deceptive statements, or statements that were
likely to mislead and deceive, and that they should reasonably have known that the
statements or information offered was false or misleading. Ms Guglielman claimed that,
as a result, investors paid more than the "true market value" of the shares and eventually
lost the opportunity to sell their shares (Wood, 2002). She was seeking reimbursement
for the difference between what she paid for her shares and the "true market value", or
the loss she incurred by not being able to sell the shares. Harris Scarfe's market
capitalisation plunged from about $70 million to $48 million during March 2001, before
directors placed it in the hands of voluntary administrators (Wood, 2002).

4.3.2.5 Harris Scarfe back in business

Harris Scarfe was sold to a private consortium, with the shareholders receiving
little or no proceeds of the sale. The consortium set out to firstly stabilize the business,
with possible expansion and a refloat on Australian Stock Exchange in the future. The
consortium began a store rationalization program as a measure to help restore profits
(Harris Scarfe at AllExperts, nd). In the days after the purchase, all stores in Queensland
and New South Wales, where Harris Scarfe was under represented were closed. In its
home state in South Australian, two suburban stores were closed, Munno Para in the
north, and Woodcroft in the south. The same occurred in Victoria and Tasmania, with a
limited number of unprofitable store closures (Harris Scarfe at AllExperts, nd). In the
final stage of rationalization, it was decided the business would also withdraw from the
Western Australia market. The company then started a revitalization program. The
remaining stores were remodeled with new stock, new layouts and a new company logo.
This was then followed by an extensive advertising campaign. As a result, Harris Scarfe
soon began to enjoy record sales (Harris Scarfe at AllExperts, nd).
4.3.2.6 Present day

While the company has yet to begin any expansion it has been hinted by the
management that the company will follow any suitable opportunities that may arise with
ethical management being at the forefront of the business strategy.In 2002, Harris Scarfe
opened its first new store after the revitalization at Werribee in Victoria (Harris Scarfe at
AllExperts, nd). This was seen as a major step forward for the new company and
resulted with much success in the growing Werribee area. Harris Scarfe Werribee is now
the flagship store in the Victorian branch. In 2006, Harris Scarfe reopened their
completely refurbished store at Colonnades SA, as part of the centers refurbishment. The
store reopened with a reduction in floor-space, occupying only the ground floor of its
original 3-floor store (Harris Scarfe at AllExperts, nd).

4.3.3 One.Tel Limited

One.Tel Limited (“One.Tel”) which was established in 1995, operated in the

mobile telephone services sector. Essentially, it acted as a reseller of telephone services
provided by major telecommunications companies. It focused on signing up new
customers on telephone plans for, and on behalf of, the owners of major telephone
networks (Carnegie, nd). As the mobile telephone sector in Australia significantly
expanded, it had a spectacular rise during the mid to late 1990s. It had managed to
negotiate an attractive contract with one of Australia’s major telecommunications
company’s, Optus, to receive a set fee for each new customer it signed. Revenue was
also received from customers’ telephone usage (Carnegie, nd).

In 1995, Jodee Rich and Brad Keeling launched One.Tel. James Packer was
persuaded to invest in the company by a mutual acquaintance, Rodney Adler, director of
the failed HIH Insurance group. Packer in turn brought in Lachlan Murdoch in 1999, at
the height of the telco and hi-tech stock market frenzy taking place internationally
(Cook, 2001). Without the involvement of the following two companies, Packer's
Publishing and Broadcasting Ltd (PBL) and Murdoch's News Corporation, which
invested a total of $955 million into the company, One.Tel would probably not even
have got off the ground. PBL and News Corp's support gave the fledgling company
credibility and a substantial cash-base to fund its rapid expansion both domestically and
overseas (Cook, 2001).

From the mid to late 1990s, One.Tel’s share price rose significantly. The
company became increasingly ambitious. The sons of two high-profile executive,
Lachlan Murdoch and James Packer, invested considerable amounts into One.Tel and
were non-executive directors (Carnegie, nd). Rather than continue to rely on being a re-
seller of telephone services, One.Tel’s management decided that it would develop its
own mobile telephone network. The cost of this major expansion combined with its
inadequate accounting systems, which allegedly “caused One.Tel to cost its product
incorrectly” (Carnegie, nd) and also contributed to debtors’ collection problems as
outlined below, resulted in the company becoming insolvent and being placed into
liquidation in 2001. At the time of its collapse, One.Tel had over 40 subsidiaries in 16
countries (Carnegie, nd).

4.3.3.1 One.Tel’s unethical business and accounting dilemma

Jodee Rich was able to negotiate a $1.1 billion deal with Lucent Technologies to
construct One.Tel's mobile network with no interest payments until 2003 and no capital
repayments due until 2005. Heavy advertising, much of it provided by the Murdoch and
Packer media outlets, and aggressive marketing pushed up the company's subscriber
base and share values (Cook, 2001). Like other new telcos, the company sought to gain a
foothold in the deregulated communications market by reselling excess phone capacity
purchased from Telstra and Optus and offering cheaper packages for both mobile phone
connections and other communication services. However, the business strategy left
One.Tel vulnerable as Optus and Telstra determined access rentals and had far lower
operating costs. The provision of mobile phone services, for example, cost Optus an
average $265 per customer as compared to $416 per customer for One.Tel (Cook, 2001).
 One.Tel appeared to have grossly overstated its debtors’ balances. The company
aggressively sold telephone services on street corners, in city shopping centres and in
major regional centres across the country. Few or inadequate credit checks were
undertaken on the customers who signed up for these services. As a result of this
aggressive marketing campaign, people of all ages and circumstances, such as the
unemployed, teenagers and international visitors, seemingly happily signed on as its
customers (Carnegie, nd). The result of this aggressive business development strategy
was that many of its debtors did not pay their accounts for services provided by the
company (Carnegie, nd). Notwithstanding these problems with the collectability of its
receivables, the consolidated financial statements showed a modest or even low
provision for doubtful debts. One.Tel recorded as an asset on its balance sheet of
spectrum licenses it had acquired at a cost amount in excess of $500 million. These
licenses were deemed necessary for the company to realise its aim of developing its own
mobile telephone network (Carnegie, nd). It was later reported that the price paid was
ten times higher than amounts competitors had paid for the same bandwidth access just a
few years earlier. Moreover, a prepaid “advertising” cost of $90 million was treated as
an asset, which showed not to have remained recognized as a future economic benefit on
One.Tel’s demise (Carnegie, nd).

The company's high risk, low yield strategy, with generous incentives for new
customers could not be sustained in the small Australian market which had six mobile
phone providers—the second largest number of any country in the world. The US, with
a population more than 10 times larger than Australia, has seven mobile network
providers. The UK and Germany have only three (Cook, 2001). Moreover, the company
was specifically geared to making money through stockmarket speculation. Recent
reports indicate that the bonuses paid to Rich and Keeling were specifically tied to the
rise of the company's shares rather than to profit or any other indicator of the overall
viability of the company (Cook, 2001). To expand its operations One.Tel undertook
outlays now shown to be way beyond its financial capacity. The company paid $523.1
million to procure mobile phone licenses—a price that even One.Tel admitted was $200
million over budget. The company was also badly hit by changes by European network
providers which, because of their own cash-flow problems, cut credit terms from 120 to
30 days. More generally, however, One.Tel was caught up in the international collapse
of dotcom ventures. The Australian Financial Review noted that the company's “demise
mirrors trends which have seen the US telecom sector default on $US6.2 billion ($A12
billion) in debt in the first quarter of this year alone (Cook, 2001).

4.3.3.2 The law comes calling

Many legal actions were launched by ASIC and others against the former
management of One.Tel, including civil charges for dishonest and misleading acts and fraud.
In particular, the ASIC alleged that former directors, Jodee Rich, Mark Silbermann and Brad
Keeling, deliberately withheld information from the company’s directors and investors.
Keeling admitted guilt on civil charges and settled out of court with the ASIC (Carnegie,
nd).

4.4 Unethical Corporate Behaviour: Malaysia

In Malaysia, white-collar crime cases (investigated by the police) tripled in the

last 10 years, with criminal breach of trust, cheating and misappropriation of funds
forming the bulk of cases. In 2003, about RM 579 million was involved in 11,714 cases,
compared to 4,229 cases (involving RM 153.8 million) in 1994. Fewer cases were
recorded in 2004 (9,899 cases) but the amount of losses went up (RM 836.29 million)
(Shuan, nd).
Year Cases Amount of
Losses (RM mil.)
1992 4,386 153.08
1993 4,929 181.08
1994 4,229 153.84
1995 4,227 180.91
1996 4,809 238.59
1997 7,137 556.93
1998 10,39 4,600.00
0
1999 9,546 1,426.80
2000 9,931 575.46
2001 10,57 797.89
8
2002 10,85 1,125.60
7
2003 11,71 579.80
4
2004 9,899 836.29
Source: CCID, Bukit Aman

Fraud involving companies are also on the rise in Malaysia. The KPMG Fraud
Survey 2004 which surveyed 130 listed companies showed that 83 % of respondents
admitted they had experienced fraud, an increase of 33 % from 2002. The survey cited
secret commission or kickbacks, lapping (involves withholding cash receipts) and kiting
(to mistake account) and false invoicing as the three most common types of fraud
experienced by businesses in Malaysia – The Sun 15/6/2005 (Shuan, nd). According to
Mr.Harbintar Singh, Chairman of Nash Management Services – an accounting firm in
Malaysia, fraud has been on the rise since the late 1990s. Mr. Singh claims that many
new businesses that are just starting which are managed by young managers often give
in to their greed for money and indulge in unethical behavior. However, Mr. Singh is of
the opinion that the Malaysian Institute of Accountants (MIA) are doing a job in
producing accountants that are not only efficient but also dependable and impartial when
it comes to handling be it accounting irregularities or the preparation of financial
statements.
4.4.1 Transmile Group Bhd

Transmile Group Bhd. Transmile Corporation, a global aviation group, came

under fire for overstating its profits in excess of millions of ringgit. A special audit
carried out by Moores Rowland Risk Management Sdn. Bhd, showed that Transmile
made pre-tax losses of RM126 million and RM77 million for 2006 and 2005,
respectively, instead of pre-tax profits of RM207 million and RM120 million as
originally reported – a total of RM530 million in overstatement (RM530 million
Transmile accounting fraud – how Liong Sik is to assume responsibility as Chairman?,
2007). This resulted in Transparency International (TI) Malaysia calling for a full
investigation on Transmile Group Berhad concerning allegations that it may have
committed an unethical act by overstating its consolidated revenues for the past two
years (RM530 million Transmile accounting fraud – how Liong Sik is to assume
responsibility as Chairman?, 2007).

4.4.1.2 Transmile’s irregularities surfaced

Former MCA President and Cabinet Minister, Tun Dr. Ling Liong Sik, who was
Chairman of Transmile Group Bhd was very reserve about the company’s fiasco, which
was then described as described as the biggest accounting and corporate scandal in
recent times in Malaysia, even likened to the unethical accounting fraud of Enron and
Worldcom. In addition, as a domino effect, Pos Malaysia & Services Holdings Bhd
warned that its earnings for the financial year ended December 31 might have been
affected by the reported overstatement of Transmile's sales revenue as the postal group
has a 15.3% ownership of Transmile (Liong Sik must explain Transmile fraud-
Malaysiakini, 2007). Lim Kit Siang, a prominent Malaysian politician, when on record
and said that as a former senior cabinet minister – Liong was transport minister –
Malaysians expect Liong Sik to be “a model of a responsible corporate player.” He said
Liong Sik should be “more forthcoming” and “make a clean breast” of his
responsibilities and remunerations including what he had drawn from Transmile in his
capacity as chairperson. On the 1st of June 2007, Transmile closed 32% lower at RM6
from its RM8.90 pre-suspension level the previous week, causing massive losses to
small-time investors (Liong Sik must explain Transmile fraud-Malaysiakini, 2007).

4.4.1.3 CEO of Transmile relinquishes position

As the fallout from the accounting irregularities led to a police investigation, the
CEO of Transmile Group, Gan Boon Aun, resigned from office. In a statement to Bursa
Malaysia, Transmile said a police report had been lodged over false statements and
documents on revenue, property, plant and equipment and payments to third parties as
reported by Moores Rowland Risk Management Sdn Bhd in a special audit.
Additionally, Transmile intended to put its representative in associate company CEN
Sdn Bhd and nominate a new representative to the board of CEN Worldwide Sdn Bhd, a
wholly owned subsidiary of CEN. Transmile, which had deliberated the findings of
Moores Rowland, also followed up lodging a report with the Securities Commission
over the misstatements in revenue, plant and equipment. The special audit report
revealed that revenues generated from invoices purportedly issued to some 20
companies were recorded as trade receivables. Subsequently, the trade receivables were
reduced primarily with payments for “purported purchase of property, plant and
equipment” and purported cash receipts.The report claimed that there were no
documents to support payments of RM341mil made for the purchase of property, plant
and equipment (The Malaysian Bar-Transmile CEO quits, 2007).

Transmile responded to this by saying that it will propose to the board of

directors of CEN Worldwide that PriceWaterhouse-Coopers be appointed to carry out a
special audit on CEN Worldwide. The special audit review covered areas including
transactions between CEN Worldwide and its customers and suppliers, cash flows, sales,
and trade debtors and creditors (The Malaysian Bar-Transmile CEO quits, 2007). The
final report of the special audit on Transmile highlighted that sales to CEN Worldwide
since 2004 totaled RM604mil which failed to make sense as the company was making
losses since 2004 and it owes Transmile RM103mil. The Transmile board said Gan
Boon Aun had voluntarily relinquished all executive functions within the Transmile
group of companies as a result if this (The Malaysian Bar-Transmile CEO quits, 2007).

4.4.1.4 Authorities come knocking and charges are made

Air cargo service provider Transmile Group Bhd's former chief executive officer,
former chief financial officer and former executive director were charged in a sessions
court on the 12th of July 2007 with abetting the company in making a misleading
statement in its quarterly report. Gan Boon Aun, 46, Lo Chok Ping, 38, and Khiudin
Mohamed, 50, claimed trial to committing the offence at Bursa Malaysia Securities Bhd
between Feb 28, 2006 and Feb 15, 2007 (The Malaysian Bar- Transmile trio denies
making misleading report, 2007). According to the charge, the alleged misleading
statement was in the unaudited consolidated results for the fourth quarter of the financial
year ended Dec 31, 2006, and it was likely to induce the purchase of securities of
Transmile Group by other people. The charge under section 86(b), read together with
section 122C(c) of the Securities Industry Act 1983, carries a minimum fine of RM1
million or imprisonment up to 10 years, or both, on conviction (The Malaysian Bar-
Transmile trio denies making misleading report, 2007).

4.4.2 Bank Bumiputra Malaysia (BMF) scandal

The BMF (Bumiputra Malaysia Finance Ltd) scandal is so far one of the biggest
to have rocked corporate Malaysia. It all started during the late seventies when a unit of
Bank Bumiputra Malaysia started making dubious loans to a property group in
Hongkong called Carrian headed by one George Tan (Malaysia’s financial flops, 2002).
A Hong Kong subsidiary of the now defunct Bank Bumiputra Malaysia Bhd (BBMB),
BMF gave loans totaling RM2.5 billion to the Carrian Group. The Carrian Group went
bankrupt in 1983 after property prices collapsed in the then British colony. Billions of
ringgits of unsecured loans made by BMF to the company could not be recovered
(Malaysia’s financial flops, 2002).

Bank Bumiputra was set up in 1965 to specifically provide credit facilities to the
bumiputra community to help increase their participation in the Malaysian economy
(Malaysian Scandals: The Shocking and the Scandalous, 2007). What was even more
dubious was the fact that what were the intentions of the wholly owned Hong Kong
subsidiary, BMF, doing lending money to a Hong Kong property holding company and
in amounts that exceeded the bank’s capital (Malaysian Scandals: The Shocking and the
Scandalous, 2007). For a while, Bank Bumiputra continued to lend more money to
Carrian in an attempt to recover the loans but it turned out to be throwing good money
after the bad. Eventually, amounts totaling to more than RM2 billion was never
recovered (Malaysian Scandals: The Shocking and the Scandalous, 2007).

4.4.2.1 Auditor murdered

In 1983, a Bank Bumiputra Finance assistant manager, Jalil Ibrahim, who

was sent to investigate the deal, was found murdered in the then British Colony and his
body dumped in a banana plantation. Jalil Ibrahim was killed by another Malaysian,
Mak Foon Than, who was eventually sentenced to death by the Hong Kong High Court
(BMF Scandal-50th MERDEKA, 2007). The autopsy report and police investigations
later revealed that Jalil was strangled with a white bathrobe belt. His body was stuffed
into a large suitcase, which a porter at the hotel was told to cart through the Regent
lobby and into a taxi trunk. The case received wide coverage as the names of several
Malaysian politicians were dragged in. The Carrian Group's spectacular collapse the
same year was also to become Hong Kong's largest bankruptcy (BMF Scandal-50th
MERDEKA, 2007). Ten years of investigations revealed clear-cut fraud of an almost
unparalleled scale. The parent company already knew about BMF's reckless lending
more than a year before the incident came to light. Internal auditors and Bank Negara
officials who conducted checks at the Hong Kong unit had found irregularities in the
lending practices and had reported to their superiors. However, no further action was
taken until the body of Jalil Ibrahim was later on identified (Malaysia’s financial flops,
2002).

4.4.2.2 The demise of BMF

Testimony by witnesses in a trial held to gather evidence revealed that loans

were given without proper collateral. In some instances, they were secured only by post-
dated cheques. In addition, almost 70 per cent of lending by the Hong Kong unit was to
the Carrian Group. The evidence gathering also revealed how a plan to save the Carrian
Group and the bad loans was discussed among the management and internal auditors
(Malaysia’s financial flops, 2002). Central figures in the scandal were BMF chairman
Lorraine Esme Osman, alternate director Dr Rais Saniman, Carrian Group chairman
George Tan, and BBMB executive director Datuk Mohamed Hashim Shamsuddin.
Lorrain was arrested in London in December 1985, where he had arrived bearing a
Malaysian passport and a forged Portuguese one. Lorrain was arrested together with
Hashim. Rais was arrested in Paris. Tan was arrested in Hong Kong but managed to post
bail (Malaysia’s financial flops, 2002).

However, the key question was never answered: What was Bank Bumiputra
doing lending money in Hong Kong, and who approved such huge amounts to so few
customers? Where were the controls and the implementation of the code of ethics? As
large as the BMF scandal was, Bank Bumiputra suffered two further losses and needed
to be rescued three times in all, and on each occasion, the losses were some RM2 billion.
In 1999, it was absorbed into what is currently known as the CIMB group (Malaysian
Scandals: The Shocking and the Scandalous, 2007).
 Chapter Five
Conclusion

5. Conclusion
 As recently as a decade ago, many companies viewed business ethics only in terms
of administrative compliance with legal standards and adherence to internal rules
and regulations. Today the situation is different. Attention to business ethics is on
the rise across the world and many companies realize that in order to succeed, they
must earn the respect and confidence of their customers (Business ethics and
corporate social responsibility, 2005). Like never before, corporations are being
asked, encouraged and prodded to improve their business practices to emphasize
legal and ethical behaviour. Companies, professional firms and individuals alike are
being held increasingly accountable for their actions, as demand grows for higher
standards of corporate ethics (Business ethics and corporate social responsibility,
2005).

Companies should learn that layers of company ownership help conceal trouble
and the more transparent a company is the easier it is to discover wrongdoings. Large
companies must avoid major conflicts of interest, such as appointing family and friends
to the board (Hurst, 2004). Not doing so takes away the oversight protections that the
board should provide company shareholders (Hurst, 2004). In addition, companies
should not assume that global accounting firms provide the best quality audits. The more
independent the auditor is from the company the better. The same holds true for lawyers
who manage overseas acquisitions. Executives must be aware of the limited control they
will have on financial transactions if they manage an acquisition from another continent
(Hurst, 2004).

For the most part, people as a whole strive for ethics in every facet of life. After
all, if someone cannot be trusted to be principled, it depreciates the value of any sort of
service rendered. It does not matter if the person in question is your grocer or your
stockbroker, it is imperative that individuals adhere to certain standards within their
professions (Ethics Enforcement in an Accounting World, 2009). Because so many
people rely on the educated decisions and judgments made by professional accountants,
maintaining a proficient level of integrity and objectivity is essential in the business
world. For most people, the concept of integrity is straightforward. It is the application
of personal characteristics of honesty, and comprises, though is not limited to being
straightforward in dealing with others (Ethics Enforcement in an Accounting World,
2009). Whereas integrity is merely the idea of being honest and forthcoming in financial
communication, objectivity is a different branch of the ethics tree. It entails being able
to be independent from a conflict of interests (Ethics Enforcement in an Accounting
World, 2009).

Hence, ethics proves to be an important factor of our everyday lives. However,

in a field such as accounting, where virtually the life of every citizen is affected, it is not
something that can be taken for granted. At the absolute least, most everyone needs to
file a tax return, so we all depend on some form of the accounting world (Ethics
Enforcement in an Accounting World, 2009). For decades, the American Institute of
Certified Public Accountants (AICPA) had a near monopoly on enforcing these codes of
objectivity and integrity, but eventually some form of congressional regulation was
necessary. Now, the fiscal world’s collective mind is set at ease with the existence of
the Financial Accounting Standards Board (FASB) and Public Company Accounting
Oversight Board (PCAOB), which helps to maintain consumer confidence, which is the
essence of any business (Ethics Enforcement in an Accounting World, 2009).

In conclusion, ethics essentially plays a major role in the business and accounting
fraternity. Its importance cannot be overstated. For businesses to thrive there has to be a
code of ethical conducts that is followed by all employees regardless of position and
power. The lack of ethical education and practice may not only lead to the collapse of
the business but also in more extreme cases may lead to the death of anyone caught in
the whole web of deceit and fraud.
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Interview
• Harbintar Singh, Chairman, Nash Management Services, Menara Mutiara
Bangsar, Kuala Lumpur, 5th January 2010 (HP: 0193836520).
The End