The Red Flag

The ‘Red Flag’ / symptoms of the case

In this case, the persons who are responsible for the accounting scandal may include the audit committee, the board of director, the internal auditor, the external auditor and the research analysts. However, in our opinion, we strongly believe that the external auditor is the main culprits who cause the accounting scandal in the company due to few issues against the regulations and accounting standards caused by the external auditor during their audit works.

The 1st symptoms of the case are on 15 February 2007, the board of Transmile approved the unaudited results and released them to Bursa Malaysia which had shown an 80% increase in revenue (revenue for 2006 and 2005 were RM 989.2 million and RM 550.1 million respectively), 87% increase in pre-tax profit (pre-tax profit for 2006 and 2005 were RM 206.7 million and RM 110.4 million respectively) and 243% increase in trade receivables (trade receivables for 2006 and 2005 were reported at RM 381.2 million and RM 111.1 respectively). It caused Transmile Group Berhad failed to submit its audited annual accounts for the financial year ended 31 December 2006 to Bursa Malaysia for public release. The submission should be within a period not exceeding four months from the close of the financial year which was on or before 30 April 2007 as required by the Listing Requirements of the Exchange. In addition, the auditor found that the “revenue for three financial years ending Dec 31, 2004 (FY04), FY05 and FY06 had been overstated by RM622mil, much higher than the RM530mil stated in an interim finding for two fiscal years” ( The Star, 2007).

The 2nd symptoms of fraud is another cash outflow RM 341 million was “purported property plan and equipment” because there was discovered to be little supporting documentation for that transaction. Furthermore, the company was said to have made payments totaling RM 189 million without supporting payment vouchers and found that items on related-party sales transactions in which the subsidiary owed to the business more than RM103 million.

The 3rd symptoms of fraud are Deloitte& Touch and Transmile Group have a very long relationship that is more than a decade. This can be proven or supported by the statement given by ChalyMah Chee Kheong, Chief Executive Officer (CEO) for Asia- Pacific of Deloitte& Touch said “We have been serving them for a number of years, even before their initial public offering”. The long-standing relationship could however to a certain extent pose the familiarity threats.  Familiarity, could negatively affect auditors’ independence of mind and therefore their auditing quality. This can be supported when Deloitte& Touch seemed to be relying on the auditing fees of the Transmile Group where they charge low audit fees (2006 and 2005, the fees were RM150,000 and RM73,000 when revenue were RM655.8 million and RM356.4 million respectively), especially with the intense of competition in the market, and it could be the reason why they have been hesitating to report the overstatement to the authority.

The 4th symptoms of fraud is begin with the question that why large capitalized company like Transmile choose to outsource its internal audit works to a third party such as Moores Rowland Risk Management Sdn Bhd, an independent professional firm. However, the scope of auditing had only been on several specific areas as instructed by the Audit Committee. The internal audit was not expanded to some critical areas such as the sales and finance divisions of the company.  Hence, it did not cover the review of financial statement.