PERWAJA STEEL SDN BHD

COMPANY BACKGROUND
Perwaja Steel started in 1982 as a joint venture between the Terengganu State
Government, government-owned Heavy Industries Corporation (HICOM), and Japanese
company Nippon Steel Corporation as Malaysian experienced a shortage of steel in 1970s. This
company manufacture and sells iron and steel products in Malaysia for local and international
distribution. They previously named as Perwaja Terengganu Sdn Bhd and change to Perwaja
Steel Sdn Bhd in 1989 and the office is based in Kuala Lumpur. It has two major plants in
Kemamam, Terengganu and Gurun , Kedah. This was supposed to be a showcase project in a
push for industrialization, which took place during the ruling of our fourth prime minister Tun
Dato' Seri Dr Mahathir bin Mohamad Father Of Modernization. However, Perwaja failed to
make profit, and was associated with great losses, and multiple scandals. Most of these are
politically related.
NATURE OF THE FRAUD
The company started with a paid capital of 250 million. Ministry Of Finance provided guarantee
for the company to take a huge loan from a Japanese Bank , Japanese Export Bank, amounting
Yen 81.5 million ( equivalent to RM 850 million ).
However, in 1987, Nippon Steel pulled out of the project. As the company was facing huge
losses, the CEO stepped down, and replaced by Mr Eric Chia ; a close friend of the prime
minister at that time. He was brought in to do whatever necessary, and given full authority. There
was additional funding by government amounting nearly 2 billion. Bank Bumiputra given out
RM 860 million, and EPF funding RM 130 million. Eric Chia seems to be performing well, in
turning Perwaja into a money making firm. But that was not the case seen after he resigned in
1995. The debt increased from RM 1 billion to RM 2.49 billion.
Soon after its operation started, Perwaja was said to be facing production problems, and faced
huge debts.

There were many auditing and review done on Perwaja accounting and transactions. Most of
them were kept confidential, as many politicians were involved. Some that we could detect were:

1) Fraud Accounting
- Perwaja was blamed to be creating a beautiful accounts just to keep their share
-

prices high.
Perwaja was caught to be performing doubtful transactions. They were making
payments to non existing companies. There were numerous inaccurate records
and they are purchasing of parts not used by the company and of questionable

quality.
Absent external auditors from 1992 to 1995, in regards to Perwaja losses.
Investigation revealed that there was an alarming lack of an internal control

system within Perwaja .

Doubtful Contracts amounting nearly RM 292 million ( RM 200,000 per month

for gardening ,cleaning and maintenance of vehicles ).

Payment of US$27.1 million to a mysterious company in Hong Kong.

2) Misconduct in Directorship
- The director was caught to be paying an amount of RM 74.6 million to Japans
NKK Corporation. It was found that this payment was made via a Hong Kong
based company. This transaction was made without prior approval from Board of
-

Directors or tender committee.

Conflict Of Interest happened when Eric Chia awarding contracts to companies
related to himself. Award of RM957 million contract to companies of a long time
associate of Eric Chia. There was no open tender, and price bidding.

3) Corruption in Tender and Rewarding Contract

- Mah Sun was rewarded a tender worth RM 967 billion worth of contracts, and
there were no documents regarding authorization from board of directors. They
were awarded another tender worth RM 103 million, and similarly no documents
-

traced, and board of directors doesnt seem to know.

RM529 million construction contract awarded to Man Shoon Group of
companies, controlled by a long-time associate of Eric Chia without asking for

competitive bids or referring the deals to Perwajas tender committee.

Payment to a Japanese firm named as Tomen as a commission which is higher
than market price at that time ; the market rate for commission per metric tonne of

ore purchased was US$0.75, however Perwaja paid US$3 per metric tonne. They
lost nearly RM 74.6 million due to this transaction.
4) Misappropriation of Funds and Loans
- Misuse of loan amounting $USD 196 million. Loan was in Yen, as it was
borrowed from Japanese bank. Interest rates were climbing high since Yen was
-

appreciating fast at that point of time.

Purchasing of parts which are not required by the company, and certain products

of low quality.
Perwaja direct reduced products were marketed via a Singaporean commodity
trading firm at US$ 38 per tonne below market price . ( Steel direct reducd
products : International price ; US$ 150 per tonne, marketed US$ 112 per tonne. )

5) Repeated Huge Funding By Government, Government Bodies And Public Fundings.

- Perwaja faced near bankruptcy many times, whereby at all this times
government decided to inject huge fundings. The result of it, more and more
money were lost, not even small amount regained.

6) Ignorance of Corporate Crime

-

It was announced in the parliament once that Perwaja Steel was insolvent. There
was no legal action taken to any of the directors, until a police report made in

1999, and thereafter the man ( Mr Eric Chia ) was arrested in 2004.
Despite the arrest, no much actions were taken.
Today, Perwaja is still running its operation, being said have already been
transformed.

HOW WAS IT DISCOVERED?

By the end of 1995 audited by Price Water House reported accumulated loss of RM 2.985 bilion
& total liabilities of RM 6.9 billion. In August 1995 Eric Chia was retired and succeeded by Wan
Abdul Ghani bin Wan Ahmad. The government arrange borrowing from local banks, foreign
banks & government funds amounting RM 464 million.

Internal companies report in 1997 mention management irregularities during era Eric
Chia. Example Mah Sun Company were awarded RM967 million without proper authorization
from BOD.RM 107 million also awarded to the same company but without trace of documents.
Other doubtfull trading with non-existing company Frilsham Enterprise. Datuk Seri
Anwar Ibrahim(Minister of Finance) informed that Perwaja was insolvent. In July 1999, the exminister then Datuk Seri Anwar make police report alleging the Prime Minister involvement in
the Perwaja Scandal.
March Year 2001, Datuk Ahmad Zaki Husin director of ACA announced that finding
transfer of RM 76.4 million to a Swiss Bank Account registered in the British Virgin Islands.
However no legal actions taken against Perwaja until March 2004 when Eric Chia was arrested.
The company still continues nowadays but with the help of the government.

ACTION TAKEN AGAINST THE COMPANY

A Government probe order was then issued on 10 April 1996 and the Malaysian AntiCorruption Commission (MACC formerly known as Anti-Corruption Agency (ACA)) started
investigating the companys audited report for possible malpractices and fraud which
contributed to the loss. On 16 June 1997, a 51% stake of Perwaja was taken over by Maju
Holdings Sdn. Bhd. and continued operating under Vertical Winners Sdn. Bhd.
Eric was alleged to have dishonestly authorised payment of RM76.4million to the
account of Frilsham Enterprise Incorporated (Frilsham) with the American Express Bank Ltd. in
Hong Kong for technical assistance agreement (TAA) provided by Japans NKK Corporation
(NKK) for Perwaja plant in Gurun, when in fact no such payment was due to these companies.
He had also approved payment of the same amount without the approval of the board of directors
(BOD) or tendering committee (TC) of the Perwaja Rolling Mill and Development Sdn. Bhd
(PRMDSB). The offence was allegedly committed in his capacity as the Managing Director
(MD) of Perwaja between 4 November 1993 and 22 February 1994. The case became worse
when NKK was later found to be non-existent.

But in 2007, Eric was released/acquitted by the judge, Akhtar Tahir who said the
prosecution had failed to establish a prima facie case against Eric. Fault of the prosecution:
1. failure to call 2 material witnesses (i.e. former secretary R.R. Durai Rajasingam & the 5
Japanese witnesses including the director of NKK Corporation N. Otani).
2. The conflict in tendering documents prosecutions contention that the TAA was free but
when tendering its document at the trial, they stated the agreements would be effective
upon receiving first payment & NKK Corporations document which stated the amount
and the manner it should be paid i.e. in lump sum.

ACTION TO PREVENT AND DETECT SUCH FRAUD

1) Find a new responsible management to handle the company with transparency
The business management should work together with government officials to establish
regulatory practices that will reduce administrative discretion and will promote transparency
that give efficient outcome. Responsible management will recognize that an effective
business is based on every activity and decision of an organization. This management should
establish stronger auditing and assurance standards. The code of professional ethic should be
continually updated and practiced. The audit committee should be review the performance of
management and must be consist from independent directors .A strong ethical environment
also can be easily created by hiring more ethical and high standard of moral employee
including management staffs. Human capital with good value required to create sincere
governance in order to have mechanism of accountability. A revised code of ethics conduct
should be introduced that will outline for the proper practices for an individual or
organization. The ethical code should include the integrity and performance of duties with
the compliance of the rule of law. The rules should be include prohibiting the acceptance of
kickbacks and improper gifts and also the misappropriation of corporate information and
assets.

2) Take a legal action to settle the problem without no political interference and avoid taking
or receiving bribes.
The detailed investigation should be carried out without interference of any political
influenced party. The investigation should be conducted transparently with the financial
reporting should be done with high integrity .The transparency include the accuracy reporting
of companys financial reporting with an acceptable quality standard. An ethics committees
should be created and developed that monitor employee and company behaviours. Any
violation of ethical guideline should be investigated thoroughly and the rules enforced
without considering their political influences, national position or their past credibility.
3) Whistle Blowers Policy Implementation
This can be done by establishing whistle blower policy where these whistle blowers will be
anonymous and be protected. Whistle-blower will be very helpful in order to prevent and
detect of any corruption practices as corruption is a very secretive activity and only those
engaged or work with them are aware of it .These whistle-blowers should be protected for
their honesty reporting concerns. This whistle blowing procedures should also include
number of easy accessible and clear assist line channels to report any wrong-doings such as
ethics committee, the Ombudsperson, internal hotlines or web based reporting systems. The
whistle blower policy should also clear give the guidance and procedures for internal and
external reporting, provide sufficient feedback to whistle-blowers, create appropriate follow
up mechanism with timeframes and also protects these people from any consequences. The
whistle blowers identity should be protected and only can be disclosed if the person agree to
do so or required by law. This is because to build trust of the whistle-blowers as they facing
numerous risks when reporting the wrongdoings and also allow the company to establish the
fact of the case. Ethics officer or ombudsperson who coordinate ethics policies should
provide counselling on ethical dilemmas and investigate any allegations of unethical
behaviour.
4) Effective Internal Control Systems
A strong internal controls must be implemented by the management. The internal controls
such as authorization of companys procedure and physical control over the companys assets

and records are an important element for strong internal control. The two main type of
internal controls are preventative controls and detective controls .The example of
preventative controls are such as requiring double signatures on cheques and having
password protected file. This control will protect and limit the access to business assets. The
detective control is such as reconciling the bank or inventory counts. This can only be done if
any need to be corrected .Other controls are submitting appropriate documents that
supporting the transactions as the evident of business transaction will increase the
transparency of the companys financial reporting. Major ethical changes can be done by
enlisting the management to demonstrate ethical behaviour and also establishing written set
of ethics policies. This policy should be precisely highlight the consequences when the
procedures are disobeyed in order to give clear picture that the organization does not tolerate
any wrongdoings.
5) Segregations of Duties
Segregations duties in business is able to reduce the risk of inappropriate actions by
employees. Usually segregation duties is helps to prevent any theft or fraud as it need more
than one people to hide the inappropriate transactions and also ensure a review to catch any
mistakes. When the accounting functions separated for examples recordkeeping,
authorization and review functions in the accounting process is done by different person, this
will involve more than one person in the financial statement preparation process. Eventually,
if the fraud to happen, two workers must collude to execute the crime.

6) External Audit Conducted

The annual financial investigation should be conducted by an independent party.
Management tend to commit accounting fraud when they feel pressure to meet the financial
goals in order to receive incentives. An external and independent audit should be conducted
yearly to perform financial statement analysis and review to help prevent the management
participating in overly aggressive adjustment of the financial statements. External auditor
should be someone who free from any conflict of interest any other personal or business

relationships when conducting audit services. A transparent financial auditing should be

conducted by auditor with high accountability.

VALEANT PHARMACEUTICAL INTERNATIONAL INC.

COMPANY BACKGROUND
Valeant Pharmaceutical International Inc. is a multinational specialty pharmaceutical
company that develops and markets prescription and non-prescription pharmaceutical
product.The headquarter of this company at Laval, Quebec, Canada. Valeant develops,
manufactures and markets a broad range of pharmaceutical products primarily in the areas of
dermatology, gastrointestinal disorders, eye health, neurology and branded generics. The
companys grow strategy is to acquire, develop, and commercialize new product through

strategic partnership, and strategically expand its pipeline by adding new compound or
products through product or company acquisition.Valeant owns Bausch & Lomb, one of the
largest manufacturers of contact lenses.Along with its strong and durable businesses, Valeant
is also focused on developing and introducing new treatments. Valeant believes innovation
should be judged by the new products and innovation that a company brings to market.
Valeants R&D outputs make it a leader in the industry. Valeant was described as a platform
company that grows by systematically acquiring other companies. Valeant pharmaceutical
have approximately 22,000 employees worldwide and listed on both the New York Stock and
Toronto Stock Exchange.

NATURE OF FRAUD
The nature of fraud in Valeant Pharmaceutical is from fraudulent scheme by the top
executives to make a deceptive pricing, use a secret pharmacy network, and use a improper
accounting to increase the growth and the profit of company. In the last August 2015, The
Valeant share were as high as $262 plunged another 50% after earning announcement and
continue to fall for the rest of week until $27 because of these frauds.

1) Increase the Price of Drug

-

The fraud occur when company aggressively arise the price of two heart drug and
fifty-four other drugs by an average of 66% far more than the rest of drug industry.

Valeant Pharmaceutical also increases the price of drug used by AIDS patient nearly
5500%. The intentional manipulating of price of drugs is called the financial reporting
fraud.

Valeant Pharmaceutical commit this fraud is to increase the stock price, revenue and
profit. By using this fraud, the Valeant Pharmaceutical stock price worth more than
$300 in 2015 but covered with the companys rapid acquisition strategy.

2) Use A Secret Specialty Pharmacy Network

-

The fraud is use a secret specialty pharmacy network with the Philidor Rx Services.

Valeant Pharmaceutical never discloses relationship with the Philidor Rx Services to

its investor. Valeant Pharmaceutical use Philidor Rx Services to increase sale.

Fraud committed by Valeant Pharmaceutical is refilled patients prescription without

their permission to give them more expensive drug in order to boost sales and profit
with the help Philidor Rx Services to receive reimbursement from insurance
company.

The method use is Philidor Rx Services use the mail order pharmacy to helped
Valeant Pharmaceutical to change cheaper generic medical drug to brand name
medical drug for the patient. The refill and prescription of drug is billed through the
patient insurance policy.

HOW WAS IT DISCOVERED?

The increasing price of drug were discovered when Former Democratic Presidential
Candidate, Bernie Sanders and U.S Representative, Elijah Cummings request the
information, why Valeant Pharmaceutical aggressively increase the price of drugs at 14
August 2015. Investigation of Valeants drug price strategy continues until democratic leader
call for a subpoena of the company. Outrage of drug price increases had been stirred
by a New York Times.
The use of a secret pharmacy network with the Philidor Rx Services was discovered by T.
Rowe Group Corporation sued the Valeant Pharmaceutical and its executives from by
information from formal Valeants employees claim that it was victim of fraud. The formal
Valeants employee made disclosure for Valeant Pharmaceutical about how its shielded drug
from generic competition to increase revenue and profit and filled lawsuit to Valeant
Pharmaceutical.

ACTION TAKEN AGAINST THE COMPANY

Gary Tanner and Andrew Davenport, the former CEO of Philidor Rx Services, have been
arrested and charged with fraud. Preet Bharara, United States Attorney for the Southern
District of New York, is accusing Tanner and Davenport of engaging in a multi-million
dollar fraud and kickback scheme against Valeant Pharmaceuticals.
Bhararas charges accuse Tanner, a former Valeant executive, and Davenport of
fraudulently building Philidor, a Pennsylvania-based specialty pharmacy, through its nearexclusive access to Valeant. The complaint alleges Tanner and Davenport colluded to make
Philidor the de facto sales channel for Valeant, while conspiring to evade oversight from
Valeants upper ranks and side-step the companys broader corporate policies.
It further states Tanner, who was fired by Valeant in 2015, concealed his interest in Philidor
from the company and Davenport controlled the business through an entity called End Game
LLC, which connected to his bank account, End Game LP. Ultimately, the conspiracy would
yield Davenport $40 million and Tanner $10 million.

ACTION TO PREVENT AND DETECT SUCH FRAUD

1. There should be a healthy corporate culture in a company. In Valeants case, its corporate
culture played an important role of its collapse. The senior executives believed Valeant
had to be the best at everything it did and the shareholders of the board, who were not
involved in this scandal, were over optimistic about Valeants operating conditions. When
there existed failures and losses in their company performance, what they did was
covering up their losses in order to protect their reputations instead of trying to do
something to make it correct. The to-good-to-be-true should be paid more attention by
directors of board in a company.
2. A more complete system is needed for owners of a company to supervise the executives
and operators and then get the idea of the companys operating situation. There is no

doubt that more governance from the board may keep Valeant from falling to bankruptcy.
The boards of directors should pay closer attention on the behavior of management and
the way of making money. In addition, Valeants fall also had strikingly bad influence on
the whole U.S. economy. Maybe the government also should make better regulations or
rules in the economy.
3. Maybe business ethics is the most thesis point people doing business should focus on. As
a loyal agent of the employer, the manager has a duty to serve the employer in whatever
ways will advance the employer's self-interest. In this case, they violated the principle to
be loyal to the agency of their VALEANT. Especially for accountants, keeping a financial
statement disclosed with true profits and losses information is the basic responsibility that
they should follow.