The consequences of fraud on our capital market

OVER the past few months, financial statement questions involving a large publicly listed company in Bursa Malaysia appeared to have raised serious doubts in the minds of investors, local and foreign, about the integrity of our capital market.

These investor doubts must be addressed if financial stability and economic prosperity are to be maintained in the capital market and if the current regulatory framework remains sound and serves to protect the integrity of our capital market, restore the confidence of investors and fight against financial fraud, despite significant changes in the market.

As things stand, market players are constantly changing and innovating and testing the limits of legality and caution.

The Securities Commission and Bursa are still a few steps behind, trying to adapt rules and supervisory procedures to the latest capital market developments. Both bodies, not only here but everywhere, even in developed markets in general, do not have the resources to be able to anticipate and sufficiently outperform the financial engineers.

Indeed, any announcement of fraud leads investors to question the competence and vigilance of financial market regulators, even auditors, financial analysts, boards of directors, rating agencies, all these actors have their share of responsibility. .

The economic losses associated with the violation of these principles affect investors, creditors and others who could lose confidence both in the management of the company, the reliability of its financial statements, the debt markets, the employee retirement assets and employment.

When a company’s fraud is exposed, shareholders and lenders may suspect that other companies are engaged in similar activities, or they may revise their expectations about the future prospects of the industry. Therefore, corporate fraud can affect share prices or loan terms of peer companies.

The fraudulent behavior of one company can encourage another to follow suit. When a business has knowledge of corporate fraud committed by another business, it may be involved in similar practices if it finds that either the fraud is not disclosed or the profit from committing fraud is greater than its cost, it may decide to engage in fraudulent practices.

A precedent has now been set whereby violators can be aggravated without any criminal charges, issuers will be “potentially” encouraged to “pressure” their existing auditors or even replace them with a “compliant” audit oversight board to audit their accounts.

Casting no doubt on overall integrity or on individual audit firms, some “black sheep” among them would gladly accept appointment as replacement auditors for high fees. Issuers facing financial difficulties may be tempted to financially “engineer” their financial statements to make them viable and sustainable in order to attract the interests of outside investor groups. They know there will always be a possibility that their act, if caught, will only earn them a compound by the authorities instead of facing criminal charges.

Corrupt politicians or criminal networks could also start using listed issuers to move money from illegal operations into legal activities – money laundering – disguised as revenue in the issuer’s business. Compliant auditors will audit and certify that the accounts are true and fair. Furthermore, auditors do not have the capacity or the technical skills to verify the veracity of these activities when the income comes from foreign sources.

International institutional investors, who are gradually withdrawing or refocusing their investments elsewhere, will continue to be reluctant to invest in the capital market here for the foreseeable future.

Just like the Employees Provident Fund, Lembaga Tabung Haji, Pension Fund, Khazanah Nasional or Pemodalan Nasional Bhd, which generally only invest in developed markets, these foreign investors invest in countries whose governance structures and l rule of law are comparable to the best in the world.

Although security, income and capital gains are the three main investment objectives of any institutional investor, the continued presence of a large group of institutional investors in a financial market indicates their confidence in the integrity of the systems country’s financial reporting system and a legislative framework based on the rule of law.

International institutional investors have great influence and impact on the capital market and the companies in which they invest. They are known to improve price discovery, increase allocative efficiency, and promote management accountability. They aggregate the capital businesses need to grow and provide liquidity to trading markets – the cornerstone of our capital market.

If they leave or refrain from investing in the country and their views and concerns on governance issues are not heard or met by our government and regulator, the underlying message is clear. .

Going forward, would the regulator continue to show the same zeal and intensity in investigating and enforcing lawbreakers, knowing that the fight is so unequal that it does not exist at all ?

They might give various justifiable excuses to delay or not bring offenders to court. Clearly, the regulator will vehemently deny this and reaffirm its continued commitment to upholding the rule and the law in carrying out its responsibilities. But actions speak louder than words and we’ll see if this claim and continued representation holds true in the months or years to come?

Is the country about to witness the start of representative actions – akin to a class action lawsuit in the United States – against these corporations and their directors, given the steady and uncontrolled increase in corporate malfeasance in recent years? weather ?

Individual and individual shareholders have suffered in silence in this country due to the judicial attitude towards group litigation on such cases in the country. And in every bankruptcy or corporate malfeasance, individual and private shareholders are always left with the end of the stick with no recourse available to seek restitutions or reparations for their losses.

There would also be a potential increase in personal bankruptcies, as at the height of its operations, dozens of people invested in the company with borrowed funds secured by their personal assets and the stock.

As the shares are now trading well below the price at which these individuals invested, the lenders would presumably have been forced to sell their shares and assets and sue these individuals for recovery of lost profits, which, if not was not satisfied, would result in bankruptcy proceedings. enforced against such persons by the lenders. – May 17, 2022.

*FLK reads The Malaysian Insight.

* This is the opinion of the author or publication and does not necessarily represent the views of The Malaysian Insight.

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