The Kuala Lumpur Composite Index rose throughout the month of May to reach its highest level since the 1997-1998 Asian financial crisis. With companies reporting strong first quarter results as well as several successful initial public offerings and overall consumer and investor confidence in Malaysia's economy, the stock exchange has been riding high.
The confidence took a heavy blow two weeks ago when it was reported that an interim audit of Transmile, a major Malaysian air cargo company, revealed that the company's sales revenues and profits for the past two years had been significantly overstated. Transmile is the third company that has apparently misreported earnings this year. Investors are now wondering whether these are isolated incidents or a sign of more such disclosures.
The first signs of trouble appeared in early May when Transmile's board of directors said it had concerns about the reliability of unaudited consolidated results announced in February. On May 7, the company's external auditors, Deloitte & Touche, reported they were not able to obtain supporting documents from management.
On May 29, a dedicated management committee led by major shareholders Kuok Group and Pos Malaysia gook over the daily operations from the existing management at Transmile.
On May 30, the interim results of a special audit report were released. Global accounting firm Moores Rowland announced it had found Transmile's sales revenues for 2005 and 2006 may have been overstated by as much as $145m. If correct, the company's 2006 pre-tax profit of $59.7m could be reversed into a loss of $34m.
Meanwhile, Southern Bank Berhad (SBB), a small local bank, revealed that a 2005 pre-tax profit of $34.6m could be restated as a loss of $21m. Additionally, in February, the securities commission charged NasionCom, a broadband internet service provider, for reporting $56.2m of revenue for which $39m was not actually transacted.
What makes the Transmile case so significant is that over the past two years it has been a company that analysts and investors have been very high on. The company also boasts a strong pedigree of shareholders including the Kuok Group (17%), Pos Malaysia (14%) and Capital Group International (9%).
The Kuok Group, owned by Robert Kuok, Malaysia's richest man, is a multinational company with interests ranging from real estate to media. Pos Malaysia is the country's postal service provider, in which the government owns a significant stake. It has financial backing from Khazanah Nasional, the government's investment holding arm tasked with managing the nation's commercial assets. Capital Group International, meanwhile, is one of the world's largest global investment funds.
The Kuok Group and Khazanah Nasional have announced they will be initiating probes into the financial activities of Transmile. Similarly, banking giant CIMB Group, which acquired SBB in September 2006, last month appointed PricewaterhouseCoopers to conduct a review of SBB's financial statements. On May 28, two of NasionCom's directors were charged with submitting false information.
Malaysia boasts a strong regulatory framework and corporate governance system on par with mature markets such as the US, UK and Germany. Naquiyuddin ibni Tuanku Ja'afar, executive chairman of Sino Hua-An International, a Chinese company listed on the Malaysian Bursa, recently told OBG, "The bursa is very good when it comes to transparency and I see no reason why foreign companies will not choose to list in Malaysia in the future."
Most analysts see these cases as isolated incidents that can happen in any market, even those with very strong regulatory systems. They point to Enron and WorldCom in the US as examples of what can happen regardless of the financial controls that are in place.
Gerald Ambrose, managing director of global investment company Aberdeen Asset Management, told OBG, "The fact that these incidents have been unearthed could actually indicate more vigilant auditing and regulation, especially compared to places like Thailand, Indonesia or the Philippines, where the culture of a full audit is not so ingrained."
With a lack of strict and clearly defined penalties for such offences, some industry analysts have said they feel that upper management is tempted, knowing that if caught, the punishment will not be particularly severe. As Ambrose told OBG, "A number of well-known businessmen have been implicated in various fraudulent white-collar crimes, but have agreed to pay a fine and have not been sentenced or imprisoned."
Looking at the composite index's performance since the announcement, it appears that while the Transmile case has shaken the company's investors, it is not hurting the market's overall performance. While the overall market fell by a few percentage points at the end of May when the interim audit of Transmile was reported, a week later the market was back on track.