Transmile verdict a step in the right direction

From The Star of November 2, 2011, an article by MSWG's CEO Rita Benoy Bushon:

http://biz.thestar.com.my/news/story.asp?file=/2011/11/2/business/9816820&sec=business

"On Oct 28, the Securities Commission issued a short but highly significant press release.
It announced that the Sessions Court had found two former independent directors and audit committee members of Transmile Group Bhd, Jimmy Chin Kim Feung and Shukri Sheik Abdul Tawab, guilty under the Securities Industry Act 1983 for authorising the release of misleading financial statements to the stock exchange.

They were each sentenced to one year in prison and a fine of RM300,000. And if either is unable to come up with the money, an additional six months' imprisonment will be added.

The charge was under Section 122B(b)(bb) of the Securities Industry Act, which states that anyone found guilty of knowingly furnishing false or misleading statements can be liable to a fine of as much as RM3mil and imprisoned for up to 10 years.

The sentence meted out in this case was one-tenth the maximum jail sentence and financial penalty.
The Sessions Court's decision came six years after the actual financial period of the act, in 2005.
Transmile initially reported revenue of RM550mil, only to later restate them to RM356mil . In other words, 35% of the reported revenue was fraudulent.

Many observers of corporate Malaysia will view the decision as a step in the right direction.

The Sessions Court judge pointed out that the public interest factor must be given paramount consideration. He stated that the directors were not decorative pieces. He also emphasised that the audit committee had specific duties, functions and responsibilities over the company accounts, and their point of view was heavily relied upon by the investing public.

According to the judge, the case showed blatant disregard of the seriousness of the concerns when the audit committee was told by the auditors that the contra transactions were unusual and lacked commercial justification.

These were sufficient warning bells to raise the concerns at the board which the audit committee members failed to do.

Transmile was a case where many individuals lost a significant amount of capital.

Right now, we know that the case against two other former directors of Transmile (Gan Boon Aun and Khiudin Mohammed), who were executive directors at the time, is currently pending at the Kuala Lumpur Sessions Court. The charges brought by the SC against Gan and Khiudin were similar: reporting misleading statements.

Ultimately our courts are one of the essential gatekeepers of our capital markets and together with the other gatekeepers, they should protect the integrity of the capital market.

If the integrity of our stock market is not protected as sacrosanct, it is entirely conceivable that we will end up with a market light on fundamental stocks and there would be a lack of trust, especially for long-term shareholders.

Obviously, we don't think that this is the way forward.

More of these cases need to be investigated and tried, with the appropriate sentences meted out."


In The Edge of October 30, 2011, a warning was given that these severe punishments might deter people from becoming Independent Director. That is true, but misconduct simply has to be punished. What will happen, in my opinion, is a case of supply and demand. If supply decreases then the director fees have to be increased. And with increased fees, the minority shareholders should expect to get better quality directors who more often speak up, notify shareholders of issues and investigate possible fraud. Eventually, the effect will be clearly positive on the long term returns of shares held by minority investors.

Former Transmile directors sentenced to jail and fined

http://www.sc.com.my/main.asp?pageid=379&linkid=2963&yearno=2011&mod=paper

The Kuala Lumpur Sessions Court today found two former independent directors of Transmile Group Berhad guilty under section 122B(b)(bb) of the Securities Industry Act 1983, for having authorized the furnishing of a misleading statement to Bursa Malaysia in Transmile's 'Quarterly Report on Unaudited Consolidated Results for the Financial Year Ended 31 December 2006'.

The misleading statement was with respect to the unaudited revenue figures which were reported to the stock exchange for both the 4th quarter of 2006 as well as the cumulative period for 2006.

The directors, Jimmy Chin Kim Feung and Shukri Sheikh Abdul Tawab, were at the material time, in February 2007, members of the Audit Committee (AC) of Transmile and members of Transmile's Board of Directors. They were charged in 2007 and claimed trial. The trial commenced in 2010 and the Prosecution called 11 witnesses to prove the charge against both accused. Both accused gave sworn evidence in their defence.

In passing the sentence of one year imprisonment and a fine of RM300,000 (in default six months imprisonment), the Sessions Court Judge, Justice Dato' Jagjit Singh 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 emphasised that the AC has specific duties, functions and responsibilities and that the investing public rely on them very much. He said that in this case the evidence showed a blatant disregard of the seriousness of the concerns on the contra transactions when the AC was told by Deloitte that the contra transactions were very unusual and lacked commercial justification.  These, he said, were sufficient warning bells and as AC members they should have raised these issues to the board but instead failed to do so.

The case against two other former directors of Transmile Group namely Gan Boon Aun and Khiudin bin Mohammed, who were executive directors of Transmile at the material time, is currently pending in the Kuala Lumpur Sessions Court.  The charges brought by the SC against Gan and Khiudin were also with respect to misleading statements made in the same quarterly statement which was submitted by Transmile to Bursa Malaysia in February 2007. Both accused had, on 22 March 2011, been called to enter their defence after the close of the prosecution case.

This appears to be a decent result (jail sentence is the only credible punishment), but what is happening with the auditor, Deloitte & Touche, are they also being held responsible for what happened with Transmile? Although they did notice the fraud during their February 2007 audit of the 2006 accounts, they did sign of on the earlier accounts. A big difference appeared in the accounts for the year 2005.

The original accounts:

The restated accounts:

In other words 35% of the reported revenue of RM 550 million was fraudulent. Another big item (RM 344 million) refers to the Property, plant and equipment. Surely the auditor has to be blamed for missing out on those.