OVER the past months, issues on the financial statements involving a large publicly traded company on Bursa Malaysia appeared to have created severe doubts in the minds of investors, local and foreign about the integrity of our capital market.

These investor doubts must be answered if financial stability and economic prosperity are to be maintained in the capital market and that the current regulatory framework remains robust and serves to protect the integrity of our capital market, restore investor confidence and combat financial fraud, notwithstanding significant changes in the marketplace.

As it is, market participants are always changing and innovating and testing the limits of legality and prudence.

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

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

Economic losses associated with violating these principles affect investors, creditors, and others who could lose confidence both in the firm’s management, reliability of its financial statements, debt markets, employees’ retirement assets, and employment.

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

A company’s fraudulent behaviour can seduce another company to follow suit. When a company becomes aware of corporate fraud committed by another company, it may get involved in similar practices if it notices that either the fraud is not revealed or the benefit of committing fraud is higher than its cost, it may decide to engage in fraudulent practices.

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

Not casting doubts on the overall integrity or any individual audit firms, some “black sheep” among would willingly accept appointment as replacement auditor for some high fees. Issuers that are facing financial difficulties might be tempted to do some financial “engineering” on their financial statements to make it look viable and sustainable with the view of attracting interests from outside investors’ groups. They know that there will always be a possibility that their act, if caught, would just earn them a compound by the authorities instead of being subject to criminal prosecution.

Corrupted politicians or criminal networks could also start using listed issuers to transfer money from illegal operations to legal activities – money laundering – disguised as revenue in the issuer’s business. Compliant auditors will audit and certify the accounts as being true and fair. Furthermore, the auditors have no capacity nor technical skills to check for the veracity of such activities when revenue is from sources from overseas.

International institutional investors, who have been gradually withdrawing or refocusing their investments elsewhere, will continue to shy away from investing in the capital market here immediately.

Just like the Employees’ Provident Fund, Lembaga Tabung Haji, Retirement Fund, Khazanah Nasional or Pemodalan Nasional Bhd, which generally invest only in developed markets, these foreign investors invest in countries that have governance setups and rule of law on par with global best.

Even though safety, income, and capital gains are the big three objectives of investing of any institutional investors, the continued presence of a large institutional investors’ group in a capital market indicates their trust and confidence in the integrity of the country’s financial reporting systems and a legislative framework that is based on the rule of law.

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

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

Moving forward, would the regulator continue to demonstrate the same zeal and intensity in investigating and enforcing the law on violators knowing that the fight is so uneven as to not exist at all?

They could give various justifiable excuses in delaying or not bringing any violators to the court. Obviously the regulator will vehemently deny this and reaffirm their continued commitment to uphold the rule and the law in carrying out their responsibilities. But actions speak louder than words and we will see whether this assertion and continued representation will hold true in months or years to come?

Is the country about to witness the start of representative actions – akin to a class action in the US – against such companies and the directors given the unabated and uncontrolled rise in corporate malfeasance of late?

Individual and retail shareholders have been suffering in silence in this country due to the judicial attitude towards group litigation on such cases in the country. And in every corporate failure or malfeasance, the individual and retail shareholders are always left holding the short end of the stick with absolutely no recourse available for them to seek restitutions or remedies for their losses.

There would also be a potential increase in bankruptcies of individuals as during the height of its trading, scores of individuals invested in the company with borrowed monies collaterised against their personal assets and the shares.

As the shares are now trading at way below the price which these individuals invested in, presumably the lenders would have forced to sell their shares and the assets and pursue these individuals for the recovery of the shortfall, which if not met will result in bankruptcy proceedings applied against these individuals by the lenders. – May 17, 2022.

* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.