Case Study White Collar Crime In Malaysia

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Discovering corporate crime: a case study in Malaysia.


This study analyses the opinion of 200 potential and existing investors in Kuching on the corporate crime discovery. Empirical results indicate that the most three effective methods of detecting the corporate crime are specific investigation by management, internal controls, and external auditor review. This shows that sufficient investigation and internal control are able to detect corporate crime. This might be explained as internal management knows about the system of the particular company well and thus consequently will serve as a more effective discovery method. Furthermore, external auditing is ranked the third useful discovery method because external auditors usually will do detailed auditing than internal auditors, as internal auditors might take for granted and over look certain accounts.

Keywords: Corporate Crime, Internal Control


Internal control (Accounting) (Case studies)
Internal auditing (Case studies)
Corporations (Ethical aspects)
Corporations (Case studies)


Puah, Chin-Hong
Voon, Sze-Ling
Jais, Mohamad
Voon, Mung-Ling


Name: European Journal of Management Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business, international Copyright: COPYRIGHT 2011 International Academy of Business and Economics ISSN: 1555-4015


Date: Winter, 2011 Source Volume: 11 Source Issue: 4


Geographic Scope: Malaysia Geographic Code: 9MALA Malaysia

Accession Number:


Full Text:


Corporate fraud is a worldwide problem which has become increasingly prominent in the eyes of the public and world's regulators. Frauds are committed by individuals across all profession. Based on a recent survey on global economic crime 2005 written by Skalak and Nestler (2005), about 45 percent of companies worldwide have fallen victim to economic crime in the past two years. Rabarts (1978) defines fraud as 'deliberate steps by one or more individuals to deceive or mislead with the objective of misappropriating assets of a business, distorting an organization's apparent financial performance or strength, or otherwise obtaining an unfair advantage'. Fraud can also be defined as an intentional act by one or more individuals among management, employees, or third parties, which results in misrepresentation of financial statements [Malaysia Approved Standards on Auditing (2001), AI No.240].

Fraud is not a new issue that confronts the Malaysian corporate sector. Indeed, it represents a serious corporate problem for Malaysian businesses as number of fraud cases documented has increased considerably over the recent years. It is believed that this trend is likely to continue. According to the Commercial Angles' Newsletter (2001), most frauds involved an employee or manager of the victims' organization. Serious corporate crime has not only caused most organizations to suffer from loss of assets and monetary figures, it also caused an organization a loss of reputation, decreased staff motivation and impaired business and industrial relations. Consequently, existing and potential investors will lose their confidence and trust in the organization. The corporate crime not only affects the individual victims and organizations, but it further generates a ripple effect on a nation's financial standing. Woon (2009) reports that in Malaysia, white collar crimes accounted for RM788 million of loses in year 2008. This sum has increased dramatically as compared to RM393 million during 1999-2002 (Clarence, 2005). The growth in fraud cases indicates that there is a strong need for research that aims to identify effective methods for detecting potential frauds. Indeed, McNeil (1992) argues that fraud, in whatever nature and guise, has to be detected first, since detection is an important prerequisite of rooting out any sort of fraud.

The purpose of this study is to identify the methods for detecting corporate crime activities in public listed companies in Malaysia. The remainder of this paper is organized according to the following sections: literature review, research method, empirical result and conclusion.


Weirich and Reinstein (2000) describe fraud as intentional deception, cheating, or stealing and can be committed against users such as investors, creditors, customers or government entities. On the other hand, Albrecht et al. (1995) categorize fraud into employee embezzlement, management fraud investment scams, vendor fraud, customer fraud, and miscellaneous fraud. In addition, they also identify the factors that caused individuals to commit fraud, namely situational pressures, perceived opportunities and rationalization. Situational pressures arise from underpaid and overworked staff, excessive debt and lifestyle whereas perceived opportunities allow fraud to happen due to poor internal controls or negligence (Alleyne and Howard, 2005). Moyes and Hasan (1996) define rationalization as the process where an individual justifies the behaviour as being acceptable with seemingly plausible but false reason.

Detecting fraud is a difficult task for auditors especially those who never experienced it in their career (Pany and Whittington, 2001; Montgomery et al., 2002). Besides, the development of modern technology has led to the widespread use of computers and this has caused the auditor to be unable to trace the fraud in which the fraudster uses the computer as the main tool of the crime. Fraud detection is an examination of the facts to identify the indicators of fraud to sufficiently warrant recommending an investigation (Seetharaman et al., 2004). Nevertheless, only a handful of research has looked exclusively at detecting fraud (see for example, Loebbecke et al., 1989; Blocher, 1992; Calderon and Green, 1994; Persons, 1995).

Hemraj (2004) argues that fraud often occurs due to weaknesses in the internal control which allows an individual to perpetrate fraud. Basically there are two methods to detect fraud, namely detection through chance and detection through risk management controls and systems. McNamee and Selim (1999) introduce risk management as a tool for detecting fraud in operations of organizations. However, Jerry et al. (2003) argue that the concealment, falsification of accounting records or documents made fraud more difficult to detect. According to Seetharaman et al. (2004), internal audit review, specific investigation by management, employee notification and accidental discovery are the most effective methods to detect fraud. They also point out that whistle-blowing can be considered as a method to detect fraud. Whistleblower refers to those who reports unethical and illegal activities in the workplace, and Vinten (1994) argues that whistle-blower needs to be protected by their employers. Moyes and Hasan (1996, p. 46) state that the degree of fraud detection is not dependent on the type of auditors, since both internal and external auditors have equal ability to detect fraud. However, their study found that auditors who were certified as certified public accountants (CPAs) are more likely to detect fraud than auditors who are non-CPA. This may be due to greater level of professional competence among CPAs in fraud detection.

A KPMG survey (2001) shows that majority of fraud incidents was discovered through management investigation (30%), internal controls (27%), employee notification (23%) and internal auditor review (21%). Meanwhile, PricewaterhouseCoopers survey (2005) reveals that some organizations might deliberately choose not to report a fraud to the authority for fear that it may cause impacts such as negative publicity on business relationships or staff morale. These organizations believe that chances of recovering the stolen assets due to fraud are very slim even if they lodge report on fraud. Moreover, fraudsters within senior management were reported not only to have been dismissed less frequently than other grades of staff, but also to have been subject to criminal charges less frequently.


The goal of this study is to identify the methods to detect the corporate crime activities on the public listed companies in Malaysia. In particular, we intend to discern the most effective method of detecting the corporate crime in the organizations by seeking the perceptions from respondents using questionnaire. The respondents in this study were randomly selected from existing and potential investors in Kuching, Sarawak--the largest town in East Malaysia. They were asked to indicate their perception about the effective way to detect corporate crimes in organizations. This is because investors will normally react to any news concerning illegal activities that occurred in organizations (Rao, 1996; Rao, 1997; Voon et al., 2008).

The questionnaire is divided into two major sections. The first section concerns the demographic of the respondents and the second section asks for the respondents' opinion about the methods that are used to detect corporate crimes. The respondents were required to indicate their perception on the degree of agreeable on a five-point Likert-scale, denoted by "1" strongly disagree, "2" disagree, "3" neutral, "4" agree, and "5" strongly agree. Questionnaires were randomly distributed to 285 target respondents and 200 completed questionnaires were returned, representing a 70.18% response rate. Results from data analysis are discussed in the following section.


The respondents consist of 93 males and 107 females. Majority of them are between 20 to 29 years old. There are a total of 108 Chinese respondents, followed by Malay (51), ethnic groups that consist of Iban and Bidayuh (36), and Indian (5). On respondents' marital status, 104 are single while the rest are married. In terms of education attainment, majority of the respondents are degree (114 persons) and diploma (32 persons) holders. 75 percent of the respondents are involved in professional, administration and management works. In terms of monthly income, most of the respondents (51.5%) are earning between RM2,000 to RM3,999 a month. To conserve space, the table of respondents' demographic characteristics is not shown here. It is available upon request from the authors.

Table 1 shows the ranking of methods of corporate crime discovery. All 16 methods of discovery have an average score of above 3.00, with the highest mean score of 4.00. This indicates that most of the respondents agree with the methods of discovery.

Specific investigation by management has a mean score of 4.00. This shows that respondents perceive specific investigation by management as the most common and effective method of detecting fraud. This is followed by internal controls (mean = 3.985), external auditor review (mean = 3.980), and internal auditor review (mean = 3.965). Overall, respondents consider that internal methods of discovery are more effective than external methods such as notification by customer (mean = 3.655) or notification by government agent (mean = 3.595). External and internal auditor reviews are considered by respondents to be effective methods of corporate crime discovery. This may be due to risk management systems (mean = 3.740) and IT system control (mean = 3.690) are not sufficient to discover corporate crime. As a result, auditors need to provide a level of scrutiny that is more effective in bringing corporate crime to light. Discovery of corporate crime through accident (mean = 3.230), whistleblower (mean = 3.135) and anonymous letter (mean = 3.085) are the less agreeable methods perceived by respondents. This may be due to lack of well-defined and protected channel for reporting crime, as well as some personal reasons such as worry the suspect of the crime will take on revenge and so on.

Based on the ranking, the top three useful methods of corporate crime discovery are specific investigation by management, internal controls, followed by external auditor review. This shows that sufficient investigation and internal control are able to detect corporate crime. Comparing the above result with the one obtained by KPMG survey (2005), the most common methods of corporate crime discovery reported in the KPMG survey are through internal controls (43%), investigation by management (37%), internal auditor review (29%), and notification by employee (15%). These are consistent with the findings in this study. Likewise, the survey undertaken by PricewaterhouseCoopers (2003) also found that 47% of the crime is discovered through internal and external audits, followed by accidental discovery (32%) and tipoff (27%). In addition, both the survey carried out by KPMG and PricewaterhouseCoopers highlighted that implementing whistle blowing or tip-off and accidental discovery channel will be an effective method to enable early detection of corporate crime.


According to Bilimoria (1995), the incidence of corporate crime has been the subject of extensive public attention and concern recently. Generally, corporate crime can be referred to as any violation of administrative, civil, or criminal law committed by corporations (Clinard and Yeager, 1980; Clinard, 1983). It is getting more difficult to detect and deter corporate crime as the world now operates in a global economy. The present study has analysed the opinion of 200 potential and existing investors in Kuching on the corporate crime discovery. From the findings, the most three effective methods of detecting the corporate crime are specific investigation by management, internal controls, followed by external auditor review. This shows that sufficient investigation and internal control are able to detect corporate crime. This might be explained as internal management knows about the system of the particular company well and thus consequently will serve as a more effective discovery method. Furthermore, external auditing is ranked the third useful discovery method because external auditors usually will do detailed auditing than internal auditors, as internal auditors might take for granted and over look certain accounts.

Generally, company director or management is the one who should be responsible for detecting fraud and the auditor is playing a role of carrying out the investigation process to detect fraud (Hemraj, 2004). Most of the public have the perception that auditor's role is to detect the fraud and this might due to it always treats as one of the job responsibilities of accountant. Hemraj (2004) also pointed out that management should responsible for instituting the necessary internal control procedure and for the financial statement in order to reduce the fraud happens. The present study may motivate future research to develop effective corporate crime detection methods that take into consideration the actual circumstances of corporate crime in Malaysia.

ACKNOWLEDGEMENT: The authors acknowledge the financial support rendered by Universiti Malaysia Sarawak (UNIMAS) through the Research Grant No. 03(74)554/2005(53).


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Chin-Hong Puah, Universiti Malaysia Sarawak (UNIMAS), Kota Samarahan, Sarawak, Malaysia

Sze-Ling Voon, Universiti Malaysia Sarawak (UNIMAS), Kota Samarahan, Sarawak, Malaysia

Mohamad Jais, Universiti Malaysia Sarawak (UNIMAS), Kota Samarahan, Sarawak, Malaysia

Mung-Ling Voon, Swinburne University of Technology (Sarawak Campus), Kuching, Sarawak, Malaysia

Dr. Chin-Hong Puah earned his PhD in Financial Economics at Universiti Putra Malaysia in 2009. Currently he is a senior lecturer cum assistant managing editor of the International Journal of Business and Society at Faculty of Economics and Business at Universiti Malaysia Sarawak.

Ms. Sze-Ling Voon obtained her Corporate Master in Business Administration from Universiti Malaysia Sarawak.

Dr. Mohamad Jais gained his PhD in Finance from Osaka City University, Japan in 2008. Currently he is a senior lecturer cum deputy dean in Faculty of Economics and Business at Universiti Malaysia Sarawak.

Ms. Mung-Ling Voon acquired her Master of Science at University of Leicester, UK in 2003. Currently she is a lecturer at School of Business and Enterprise at Swinburne University of Technology (Sarawak Campus), Sarawak, Malaysia.Table 1: Ranking of Corporate Crime Discovery Rank Corporate Crime Discovery Mean 1 Specific investigation by management 4.000 2 Internal controls 3.985 3 External auditor review 3.980 4 Internal auditor review 3.965 5 Notification by employee 3.750 6 Specific investigation by third party 3.745 7 Risk management systems 3.740 8 IT system control 3.690 9 Notification by customer 3.655 10 Notification by government agent 3.595 11 By changes in management 3.545 12 Specific investigation by employee 3.480 13 Notification by police 3.460 14 Accident 3.230 15 Whistleblower 3.135 16 Anonymous letter 3.085

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