Contents1.0 Introduction........................................................................................1

2.0 Objectives of the study.......................................................................2

3.0 Literature Review...............................................................................2

3.1 What is cooking the book?..............................................................2

3.2 Who involve in cooking the book?.................................................3

3.3 Why cooking the book?...................................................................4

3.4 Consequence of cooking the book..................................................5

4.0Methodology.........................................................................................5

5.0 Analysis and discussion......................................................................6

5.1 Corporate Kitchen (Background)..................................................6

5.2 Recipe...............................................................................................8

5.3 Finished Dish.................................................................................11

5.3.1 Six Straight Years of Losses...................................................11

5.3.3 Resignation by Three Defendants..........................................12

5.3.4 Legal Penalty were only a Small Part of the Total Losses Experienced by the Business and its Shareholders.......................12

5.3.5XLB is Not Delisting from the Exchange...............................13

5.3.6 Investor loss of confidence towards XLB..............................14

6.0 Discussion..........................................................................................14

7.0 Conclusion.........................................................................................15

8.0 Reference for literature review.......................................................16

Cooking the Books: Xian Leng Holdings Berhad

Abstract

Cooking the books refer to the fraudulent accounting activities undertaken by a

business to falsify its financial statements. (Fathilatul, Rohami, Zaleha, Wan Nordin,

Faudziah, 2013) The objectives of this study are to determine the definition of

financial statement fraud, to identify who will commit to the activities in financial

statement fraud and to identify how they manipulate the financial statement. The

company used in this study is Xian Leng Holdings Berhad which is listed in the Bursa

Malaysia since 2001 and receiving numerous awards over years. The result of the

study shows how the top management of the company used their positions in the

fraudulent activities and how their hide the information from the auditors and also

other board members, and what method are they using in fraudulent of financial

reports.

1.0 IntroductionFinancial statement fraud refer to intentionally misstatement, misrepresentation and

omission of financial statement data to misleading the readers of the financial

statement in order to create a false but good impressions of an organization’s financial

position. The reasons for the businesses to commit in financial statement fraud

sometimes are merely for the benefits for the organization itself such as to secure

investor interest, to obtain approval of financing from the banks, and to meet the

shareholders’ expectations. However, that is not always the case, since the financial

statements are created at the management level, financial statement fraud usually

happen due to top managements intended to secure their own benefits. Some example

of financial statement fraud activities are manipulating of expenses, improper

disclosure by making false financial statements, overstating of assets and improper

revenue recognition.

In this study, we will analyze the financial statement fraud that commit by Xian Leng

Holdings Berhad (XLB) in term of who responsible for the financial statement fraud

committed, why they commit to the fraud activities and what is the consequences of

the financial statement fraud towards the company and lastly our views on the

financial statement frauds in Malaysia nowadays.

1

We organize the case study in a few sections which the next section is the list of

objectives in our case study. Section 3 is the literature reviews on cooking the books

in term of what, why and who commit to cooking the books and also the impacts of

cooking the books towards the company. Section 4 is the method and sources we used

in this case study to collect the information of the company. Section 5 is the analysis

of the case company which is XLB in term of its background, who committed to the

fraudulent activities and what method that they employed in cooking the books,

impacts on the company and also the discussion. Conclusion will be presented in the

last section in this paper.

2.0 Objectives of the study1. To determine what is financial statement fraud.

2. To determine who will commit to financial statement fraud

3. To identify the manipulation activities involved in the financial statement

fraud

3.0 Literature Review3.1 What is cooking the book?

Financial statement fraud or cooking the book start to receive attention from

the public following the demise of high profile companies such as Worldcom, Enron,

Tyco and etc. Their top executives have been convicted of committing financial

statement fraud (Rezaee, 2005). We will firstly look into what is meant by cooking

the book or financial statement fraud.

Fraud is a knowingly misrepresentation of the truth or concealment of a

material fact to cause another to act to his or her detriment (Garner, 2009). In the

Statement on Auditing Standard 99 (SAS 99) Consideration of Fraud in a Financial

Statement Audit, define fraud as a material misstatement in financial statements that

will be audited. Two types of fraud are identified in SAS99. The first type are

misstatements arising from fraudulent financial reporting such as falsify accounting

records or omit purposely certain events, transactions or other material information

from the financial statements. The second type are misstatements as a result of asset

misappropriation, for instance, theft of assets, or causing an entity to pay for goods or

services that are never received (AICPA, 2002)

2

Cooking the books is similar to financial statement fraud. Their activities

include revenue recognition, overstated assets, understated liabilities or expenses,

misappropriation of assets and other techniques (Zack, 2012). Cooking-the-books

activities are also defined as fraudulent accounting activities performed by companies

to falsify their financial statements (Lomax, 2003). More specifically, cooking the

book may involve the following schemes (Razaee, 2005):

1) Falsification of material financial records

2) Intentional misstatements, omission or misrepresentations of events or

transactions

3) Deliberate violate the accounting standards, principles, policies and

methods

4) Inadequate disclosure of financial information

5) Use aggressive accounting technique for earning management

6) Manipulation of accounting practices under the rule-based standards which

contain loopholes

3.2 Who involve in cooking the book?Financial statement fraud involves deception by a clever team of

knowledgeable perpetrators, for examples, top executives or auditors) with a set of

well-planned schemes and a considerable gamesmanship (Rezaee, 2005).The master

chef who cook the books is normally among the top management or managers, such

as the Chairman, Chief Executive Officer (CEO), or Chief Financial Officer (CFO).

They are the agents appointed by the principals, or shareholders to manage the

business’s financial and operational activities (Feng et al., 2011). Other individuals

typically involved with financial statement fraud are controllers, Chief Operation

Officers (COO), directors, other senior vice presidents, internal and external auditors.

Their involvement usually are caused by encouragement, approval, and knowledge of

top management teams including CEO, CFO, presidents, treasurers, and financial

controllers (Rezaee, 2005).

Financial statement fraud can be perpetrated by persons in any level whenever

they have the opportunity. The two main groups are senior management and mid- or

lower-level managers (Nguyen, 2008). Mid- or lower-level employees involve in

cooking the book indirectly to conceal their bad performance or to achieve bonus by

increase the performance.

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3.3 Why cooking the book?Economic incentives such as bonus and to meet analyst’s expectation of stock

price has become the common motivation for cooking the book. Others type of

motivations include psychotic, egocentric and ideological motives (Rezaee, 2005).

Psychotic or habitual criminal is more rarely seen. Those who cook the book under

egocentric aim to enhance personal prestige or high authority while managers who

eagerly looking for improving the company’s market position are categorized as

ideological motives (Rezaee, 2005).

Securities and Exchange Commission (SEC) discussed about the reasons for

financial statement fraud to occur in Accounting and Auditing Enforcement Releases

(AAERs) (COSO Report, 2010). The reasons include:

1) To meet expectations of analysts on earnings

2) To achieve internally set financial targets or to make the company look better

3) To conceal the company’s deteriorating financial state

4) To shift the stock price upwards

5) To enhance the financial position for pending equity or debt financing

6) To increase management compensation and bonuses through enhanced stock

appreciation

7) To cover up assets misappropriated for personal gain.

In addition, the extent of cooking the book is associated with the managerial

ownership and the debt limit. When managerial ownership in the company is between

5 to 25%, opportunistic behavior of managers can be expected and they are more

likely to engage in financial statement fraud (Carter & Stover, 1991). Financial

difficulties such as weakening financial conditions and weaker financial performance

encourage financial statement fraud too (Carcello & Palmrose, 1994). Another

simpler statement state that financial statement fraud is committed to make a company

look healthier, more profitable, in order to mislead investors, bankers (maximize

borrowing capacity), investment managers, regulators and insurance companies. It is

also used to hide an asset misappropriation (Zack, 2012). The motivation for fraud

can be explained through fraud triangle which consists of three key elements:

pressure, opportunity, and rationalization. (Cressey, 1953). However, we do not look

into more details as it is taken from traditional fraud theory,

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3.4 Consequence of cooking the bookDespite the causes of financial statement fraud, whether it was done on behalf

of the company or against the company, it has cost stakeholders billions of dollars. It

was estimated that U.S. businesses lose about 7% of their annual revenues to fraud,

which results in a trillion dollars in losses in the economy. The ethical failures of the

last decade also have resulted in strengthened investor scrutiny and government

regulation besides corporate ethics standards (ACFE, 2008). The consequences of

financial statement fraud can be very serious. Therefore there must be strong

motivations for the “master chef” to participate in cooking the book (Beasley et al.,

1999). From the context of companies, adverse consequences include filing for

bankruptcy, changing owners, delisted from stock exchange, and substantial drop of

share price. While for the master chef, they have to face the music such as losing the

value of their stock options, being forced to resign or being fired, being barred from

serving as officers of another public listed company and being fined or jailed.

External auditors who knowingly participates in financial statement fraud often cause

discredit to their professional (Beasley et al., 1999). The cost of capital increases

significantly in the market as a result of financial statements fraud as lenders would

like to have more secure when lending money to those companies (Dechow, 1996).

Given the severe consequences associated with financial statement fraud and even

unsuccessful fraudulent financial reporting activities, the decision by corporations to

engage in such activities must be justified by strong motives. (Feroz, 1991).

Furthermore, financial statement fraud not only bring to failure of businesses,

but also cause the economy to decline. Such fraudulent behavior affect other

stakeholders too. For example, customers lose their supplies of goods or services,

suppliers and creditors go unpaid for their services while employees lose their jobs

and pension fund (Carland, Carland and Carland, 2001). It is clear that understanding

the factors and consequences is important to prevent financial statement fraud.

4.0MethodologyThis case study is based on secondary sources. Secondary sources refers to documents

written after an event has occurred, providing secondhand accounts of that event,

person or topic (University Library, University of Illinois At Urbana-Champaign).

Examples of secondary sources are journals, magazine, articles, news reports,

encyclopedias, textbooks and books. Secondary sources provide the researchers with

5

background information and offer analysis of the event. Secondary sources look

beyond the event and can broaden the researchers' perspective towards the case. Not

only that, secondary sources also provide historical perspective based on other similar

events that have been taken since the original event work.

In our case, the researchers gathered journals, articles, press releases and annual

reports of Xian Leng Bhd. All the secondary sources were fully analyzed by the

researchers and gave clues to the researchers on the financial statement fraud engaged

by certain board members of Xian Leng Bhd. Besides that, the researchers are using

document study to complete this project. Document study is an indirect method uses

on secondary data collected. Document study is a way of using ability to read a

document closely and then using the art of writing to produce an essay on the relevant

topic (Jane Mary, 2002). The researchers are studying all the secondary sources

gathered and use their own words to come out with this report.

5.0 Analysis and discussion5.1 Corporate Kitchen (Background)We begin this study by entering the corporate kitchen first to examine the background

of the company. Our subject of study, XLB, is a Malaysia-based investment holding

company. XLB is Asia ‘s leader and pioneer in the field of commercial captive

breeding of Asian Arowana, the King of Aquarium Fish, and other ornamental fishes.

It has been listed on Bursa Malaysia in 2001 and has been promoted to the Main

Board of the Bursa Malaysia since 2003. Xian Leng has been recognized as one of the

top companies in Malaysia, winning numerous awards over the years.

The Company, through its subsidiaries, is engaged in breeding and trading of

ornamental fishes. Its subsidiaries including:

Xian Leng Trading Sdn. Bhd. - which is engaged in commercial captive breeding of

the Asian Arowana and other ornamental fishes and property holding

Xian Leng Aquatic Merchant Sdn. Bhd. - which is engaged in the trading of

ornamental fishes and aquarium accessories, including property holding

Xian Leng Aquatic (Shah Alam) Sdn. Bhd.- which is engaged in the trading of

ornamental fishes and aquarium accessories, targeting customers in the Central and

Northern territories of Peninsular Malaysia,

6

Xian Leng Aquatic (Kluang) Sdn. Bhd. - which is engaged in the breeding and

rearing of fishes and trading of aquaculture products.

Next, who are the master chefs that involved in cooking the books? Managers, as the

agents appointed by shareholders, the principal, have the power to influence the

business’s financial and operational activities (Feng, et al, 2011). They are made up of

the top management in the company, such as Chief Executive Officer (CEO) or Chief

Financial Officer (CFO) (Feng, et al, 2011). Normally it is the managers’ personal

gains, such as stock options scheme, bonuses, contractual agreements, raising

additional capital, meeting analyst targets, and loopholes in accounting standards that

encourage managers to involve in cooking the books. (Efendi, Srivastava, &

Swanson, 2007; Feng et al., 2011; Firth et al., 2011; Gordon et al., 2007; Lomax,

2003; Richardson et al., 2003; Scott, 2011).

In XLB’s case, the master chefs who involved are directors including the managing

director who are also the shareholders. This is compatible with what mentioned in the

previous literature review, in which other individuals typically involved with financial

statement fraud including directors. Their involvement usually are caused by

encouragement, approval, and knowledge of top management teams including CEO,

CFO, presidents, treasurers, and financial controllers (Rezaee, 2005). Directors are

person who are nominated by shareholders as their agents to manage the company.

However, because of opportunism behavior, some of them choose to benefits

themselves rather than making decision for the interest of company. In the case of

XLB, it is clear that the financial statement fraud activities committed by the top

managements of the company is for their own benefits rather than interest of the

company. The main factors that the fraudulent activities can be conducted without

knowing by others board members until years after that is because of the power of

their position that allow them to conduct such fraudulent activities. Besides that,

another reasons is that they are the main shareholders of the company at that time

which holding total stake of the company amounting to 47.90% which make them the

main parties in making decisions for the company.

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5.2 RecipeThis section discusses about the mechanism and flow of the earning manipulation or

fraudulent activities practiced in Xian Leng. There are 4 red flags in this case, which

are:

1) Questionable authorized payment

2) Related party transactions

3) Huge Capital expenditure

4) Continuous Losses

These red flags are not independent events, however, they are closely related to each

other, and in fact there’s causal relationship among these red flags. In order to see the

big picture of this financial scandal, these red flags have to be integrated and arranged

logically in a chronological order.

The mechanism of this fraud was not complex in terms of technicalities, but it was

complicated by a lot of mysterious or even bogus transactions. First, The Board

approved a huge amount of payment to a net of suppliers for capital expenditure

purpose. These suppliers, few of them were actually related parties of Xian Leng and

they shared the most of the huge payment while the rest of the suppliers, the majority,

and they are also the genuine suppliers, only shared a minor portion of the payment

from Xian Leng. In other words, Xian Leng paid a huge amount to its related parties

in exchange for something that has little value in the name of “development projects”,

which can be induced as a way to steal the monies from Xian Leng through related

parties.

Due to these bogus transaction between Xian Leng and its related parties, the effect

that can be seen from the balance sheet was the unrealistic level of capitalized amount

recorded as PPE after these payments had been authorized & transferred.

There was another issue arose, which was the bogus amount of expenditure

capitalized in Balance sheet was not “real” in nature, and such unrealistic value had to

be brought down to its actual value, where the actual value, in fact, was very low

compared to the amount recorded in Balance sheet. Thus, what had to be done to

bring down the bogus value in PPE, was to release the unrealistic capitalized amount

in balance sheet to income statement as Impairment expenses for following years.

8

Therefore, the subsequent effect was reflected as trend of consecutive net losses for

several years due to the questionable huge impairment cost that charged to the income

statement that drastically driven down its revenue. Furthermore, such accounting

practice was backed by vague reasons provided by the management. To recap, based

on the available information and logical induction, this scandal was about stealing

money from the company through related parties. The transactions among Xian Leng

and its related parties, were intentionally complicated by the management, in order to

fool and confuse the financial statement users so that they will not realize about these

series of fraudulent activities.

The triggering events of the financial irregularities is when the minority shareholders

of the company wrote to Bursa Saham on the matter of huge capital expenditure of

about RM 17.36 Million which it is very significant when the group revenue of XLB

is just under RM 20 Million for the past two financial years. Besides this, it is also

due to Xian Leng Holdings Berhad also suffered losses for three straight years and

still make such huge capital expenditure. XLB have faced losses since financial year

2009 until financial year 2011(when the minority shareholders report this issues to

Bursa Saham) which the highest loss of RM 15 million in year 2009 that mainly

caused by RM 10 million in impairment loss recorded on property, plant and

equipment and also RM 7 million in depreciation expenses. In the other two financial

years, losses is mainly due to a very large amount of depreciation amounting to about

RM 7 to 9 million each year when the company revenue only around RM20 million.

As a result from that, board of directors of the company engaged

PriceWaterhouseCoopers (PWC) in October 2011 to conduct investigation on the

alleged financial irregularities for a seven year period start from financial year 2001 to

financial year 2007. Due to the subsidiaries of XLB only keep the financial

information for 7 years (statutory requirement as set out in the CA1965). PWC only

able to review the RM 90.7 million of the capital expenditure on the fish farm

developments from financial year 2005 to 2008 (where the revenue of the company in

these few years are around RM 45million and enjoying a profit of around

RM15million a year). This huge capital expenditure were far beyond what were

authorized by the company on the capital expenditure on fish farm developments

where the forecast capital expenditure are only RM 25 million for financial year 2003

to 2007.

9

Out of this RM 90.7 million capital expenditure, PWC reveals on its investigations

report showing that RM 85.7 million was paid to four contractors which there is lack

of evidence showing that amount was paid to or received by the contractors, and

another RM 5 million paid to 52 other contractors where the name on the cheques and

payment vouchers can matched up. However, the payment of RM 85.7 million was

paid out under questionable circumstances where it was made through cash cheques

(which also violated the “financial manual” of the company) and none of the cheques

were drawn in the contractors’ favor. Besides that, all four contractors do not go

through tender or competitive bids process before appointed on the development

projects and three of the contractors are issuing their invoices to the company after

their business registration had expired make the transaction of the company with these

four contractors become more “questionable”.

Another significant finding in PWC report was RM 37.4 million out of that RM 85.7

million were withdraw by a money changer company namely “Inco Licensed Money

Changer Sdn Bhd” where Chua Choon Seng held an 80% stake and at the same time

were also the executive directors and shareholders of XLB. This amount of monies

paid were not aware by the board of directors (BOD) because it had been amount

under related party transactions which Mr. Chua have not at any responsibility to

disclosed the transaction to the company and thus the amount of money paid do not

included in the audited financial statement due to it is hard for the auditor to identify

and trace the related party transactions when the manager deliberately to keep the

transaction secret or do not disclose it. Although Mr. Chua do not disclose the

transaction to the company, but the financial transaction actually knew by some other

person which is the managing director of the company at that time, Ng Huan Tong

and his wife Lim Wan Hong who is also executive directors of the company because

they are the joint signatory for several of the cheques open to Mr. Chua.

Thus, from the investigation report of PWC, it is clear that the company’s property,

plant and equipment has been overstated by an amount that cannot correctly identified

and the BOD decided to fully impair the whole amount of RM 85.7 million and the

financial impacts will be discussed in the finished dish.

10

5.3 Finished DishIn this part, case study is focusing on the economic impact brought by the action of

cooking the book. From the case of XLB, a relatively small public-listed company

made the headlines with its financial irregularities of the amount below RM100

million being spread around the business arena (Hisyam, K. 2014). Below are some

impacts that arise from cooking the book activities.

5.3.1 Six Straight Years of LossesAs a consequence for the manipulation of financial statement, XLB faced six straight

years of losses. The losses were due to extra provision for impairment loss on

property, plant and equipment that amounting to RM85.7 million and signatories of

questionable huge payment to four contractors (related party transactions) that was

against company's financial manual. This huge amount greatly affected the company

financial status and shocked Bursa Malaysia on this issue. The board of XLB then

announced that there might be some possible financial irregularities pertaining to

capital expenditure stated in company's financial statements. As a result, BOD

appointed an independent party, PricewaterhouseCoopers Advisory Services Sdn Bhd

(PWCAS) to carry out special audit on this issue. This scandal had affected the

reputational of XLB causing the company to decrease many in its revenue and facing

financial loss since year 2009 until current (financial year 2014) as bellow:

Financial year 2009: RM 15.1 million losses

Financial year 2010: RM 3.7 million losses

Financial year 2011: RM 0.7/ 747 Thousand losses

Financial year 2012: RM 56 million losses (recognized fully the impartment loss)

Financial year 2013: RM 12.4 million losses

Financial year 2014: RM 1.9 million losses

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5.3.2 Scratches Image of Company and Credibility of Three Directors

A police report was lodged by XLB after the audit findings (Hisyam, K. 2014). There

was an investigation carried out on the matter against Ng Huan Tong (former

managing director), Lim Wan Hong (spouse of Ng) and Chua Chong Seng (former

executive director, brother to Chua Soi Lek, former MCA president). Three of them

were signatories of cash cheques amounting to RM85.7 million given out under

questionable circumstances to four contractors for the construction of fish ponds and

another RM5 million was paid to 52 other contractors. As a consequence, XLB filed a

statement of claim against three of them, seeking a declaration that they had breached

fiduciary duties as directors of XLB. They were being sued for loss and damages for

breach of fiduciary duties, causing general damages as well as appropriate interest

rates in the sum awarded. This lawsuit indirectly scratched the image of the company

and the directors.

5.3.3 Resignation by Three DefendantsNg and Lim, both of them voluntarily resigned from their position as PwC finalized

its investigation.

Chua Chong Seng resigned in August 2008. He sold millions of his shares just before

he resigned at age 63. Reputation of Chua was scratched due to his incompliance with

section 131(1) in Companies Act 1965 to disclose the interest in contracts, property,

offices and etc. He failed to disclose the cash cheques were made through a licensed

moneychanger company which was 80% owned by him.

5.3.4 Legal Penalty were only a Small Part of the Total Losses Experienced by the Business and its ShareholdersHowever, the suit had not been progressing since then. After two years on 17

December 2014, the court charged the penalties of Ng and Chua paid jointly a sum of

RM500,000 to XLB without admission to any liability whatsoever and not

compensatory in nature. XLB withdraws the suit against the three defendants without

any order as to costs and without liberty to file afresh. Below are some reasons XLB

withdraws from the suit (Hisyam, K. 2014).

The evidence is insufficient to complete the entire picture and present it before

court as a complete course of action.

12

The trial and subsequent appeal processes may take years to complete. By the

time the recovery process is to commence, the defendants could have already

become financial unstable.

There is a risk that at the end of the trial when assessment of damages is

carried out, company may not even be able to recover any significant amount

of money.

Is the penalty towards defendants fair and square for XLB?

Three defendants misused of RM90.7 million and the penalty was paying back

RM500,000 to XLB as settlement to the case. Notably, Chua Chong Seng is brother to

former health minister or president MCA Chua Soi Lek and uncle to current deputy

finance minister Chua Tee Yong (Hisyam, K. 2014). From this result, we notice that

enforcement in Malaysia is rare and slow especially if VIPs are involved whether

directly or indirectly, things often seem to come to a complete stop.

5.3.5XLB is Not Delisting from the ExchangeFrom the cooking the book activity, XLB is not delisted from Bursa Malaysia. The

company is holding on an on-going concern principle and ought to concentrate on

restructuring and rebuilding itself. Since the discovery of financial irregularities in

XLB, more attention has been given in addressing the issue of internal control. XLB

is then establishing certain guidelines in enhancing internal control in the company.

Below are some of the actions taken by XLB.

I. Conduct a comprehensive overall review in Internal Control in the company.

II. Reviewed and made changes on Authorized Signatories for all company

cheques.

III. Monitor and control expenditure by BOD including capital expenditure.

IV. Monitor and control on disposal of the company's assets.

V. BOD has upgraded internal control at the farms including implementing closer

monitoring and control measures in fish production mortality, inventory,

ensuring frequently farm inspections and tightening up the security system in

the farms.

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5.3.6 Investor loss of confidence towards XLBThe casual settlement of this financial statement fraud caused XLB owed its minority

shareholders an explanation. Based on an article, Chin Seak Huat ceased to be a

substantial shareholder in XLB after selling 1.45 million shares or two percent equity

interest in the company (Barrock, J. 2013). This shows the impact of the financial

statement fraud towards investors.

6.0 DiscussionIn our first objective which is to identify what is financial statement fraud, it has been

discuss in the introduction sessions which are the activities on intentionally omission,

misstatement or misrepresentation of financial data in the financial statement that

normally used to create a good impressions on the company’s financial position. It has

many different kinds financial statement fraud.

Besides what has been discussed in the introduction section, methods such as income

restatement, related-party transactions and income smoothing also can be used in

fraudulent financial reports. (Fathilatul, Rohami, Zaleha, Wan Nordin, Faudziah,

2013)

In the second objectives which is to identify who will commit to financial statement

fraud. From the study conducted by the team on the company Xian Leng Holdings

Berhad, it shows that the top management is the one who commit to the fraudulent

activities. Mr. Chua Chong Seng, Ng Huan Tong and Lim Wan Hong who all of them

are the executive directors of the company and also shareholders of the company

when they conduct the fraudulent activity.

In the third objectives of this paper, we want to identify the manipulation activities

that involved in the financial statement fraud of Xian Leng Holdings Berhad. This

objectives had been achieved as we discover that the company actually using related

party transaction in fraudulent financial reports. This is due to the large portion of the

capital expenditure which amount to RM 37.4 million are classify as a related-party

transactions which was kept secret by Mr. Chua by do not disclosed it to the company

and in the company’s annual reports and with the help from the managing director as

well.

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7.0 ConclusionFinancial statement fraud continues to be a concern in the business community and

the accounting profession. There have been a lot of companies such as Enron,

WorldCom, Megan Media Bhd and Transmile Group Bhd involved in earnings

manipulation and they had faced the negative consequences such as being delisted,

high penalty or fine being imposed, and lastly lead to bankruptcy. Sadly to say,

market players seldom take this as lesson learnt. Earnings manipulation is still going

on and on. The happening of financial statement fraud threatens market participants'

confidence in financial information. It is an act that is unacceptable, illegitimate and

illegal corporate conduct. The chances for the managers to engage in financial

statement fraud increase indicates that the company's control structure is weak. It

shows that corporate governance in the company becomes less effective and also

failure of audit committee or auditor in detecting the flaws. As a consequence,

company that involves in financial statement fraud will suffer adverse effects in terms

of loss of revenue, delisted from Bursa Malaysia, facing lawsuits from shareholders

and worst is the company might undergo bankruptcy.

Hence, to reduce the chances of occurrence of financial statement fraud in companies,

steps should be taken to improve corporate governance of companies. Malaysia Code

of Corporate Governance should be strengthened and provided detail

recommendations on the way to uphold the principles especially in the members of

board of directors. Accounting standards should be revised to ensure there is no

loophole for unethical entity to manipulate earnings. Besides that, auditors should be

more careful in detecting earnings manipulation and their independence should be

ensured. Auditors need to have a skeptical mindset on the information provided by the

companies and understanding the psychology of each individual in the companies,

especially on those who have the power to manipulate earnings of companies and will

get benefits indirectly from their actions. Not only that, strong enforcement on the

rules and regulations should be established to heavily penalty on the wrongdoers.

As a conclusion, financial statement fraud brings harm and no good to every market

players. All the players should have a sense of responsibilities in their own actions.

The wrongdoer should get the appropriate penalty based on the level of damage he

had done and to ensure that he/she does not engage in the same activities in future.

15

8.0 Reference for literature review1. Faithilatul, Rohami, Zaleha, Wan Nordin, Fauzdiah. (2013). Cooking the

Books: The Case of Malaysian Listed Companies. International Journal of

Business and Social Science, 4(13), 179-185.

2. AICPA, 2002. American Institute of Certified Public Accountants (AICPA).

Statement on auditing standards (SAS) no. 99. Consideration of fraud in a

financial statement audit. New York, NY: AICPA; 2002.

3. Association of Certified Fraud Examiners (ACFE). 2008. “2008 Report to the

Nation on Occupational Fraud and Abuse.” Retrieved 23 May, 2015 from

http://www.acfe.com/documents/2008-rttn.pdf

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