Financial crises and scandals have existed for as long as it can probably be recorded, as long at least as a system of money and rudimentary banking can be traced.1 Events such as the Tulip Mania inmid-1630s2 and the South Sea Bubble in 17203 awakened very early concerns about the dangers and oscillations of finance, at a time when the success of geographical and industrial enterprises were deemed worth the exploration of innovative commercial models.

From those early days finance has developed into an increasingly complex “science”, one which over the last three decades has come to represent a very substantial slice of the economic system, particularly in certain countries where legal reforms and economic theories have contributed to the flourishing of financial economies as opposed to industrial ones.4

Tesco initially said the shortfall in its first-half profits was £250m and that part of this may simply be "timing". However, Britain's biggest retailer has now written off £263m in profits following an investigation in the scandal. The accounting scandal has been going on for longer than the last six months. Sir Richard Broadbent will stand down as chairman. Shareholders are furious at what they see as a failure of governance at Tesco, and Sir Richard has paid the price. He insisted that had not been "pushed" and that he was choosing to leave because it was the "right thing to" and demonstrated "accountability".

The company has confirmed is withholding pay-outs worth millions of pounds to former boss Philip Clarke and former chief financial officer Laurie McIlwee while the investigations into the accounting scandal continues. Mr Clarke left as Tesco boss at the end of August, meaning he was in charge for the period under scrutiny. Tesco is really struggling in the UK. Tesco like-for-like sales fell by 4.6pc in the six months to the end of August, including 5.5pc in the second quarter.5

Tesco boss Dave Lewis faced the City for the first time today when he unveiled the retailer’s interims and conclusion into the accounting scandal. While the numbers for the first half don’t tell a pretty story – and the accounting black hole stands at £263m – Lewis was confident he can restore the retailer to its former glory. Lewis said he will not be unveiling a big strategy as he does not want to give away competitive advantage, but he will deliver an investment case to the City. That said, Lewis was clear on his priorities for the UK, and said: “We were the best supermarket

1 N. Ferguson “The Ascent of Money”, Allen Lane 2008, ch.1.2 S. Kuper “Petal Power”, Financial Times, 12 May 2007.3 M. Balen “A Very English Deceit: The Secret History of the South Sea Bubble and the First Great Financial Scandal”, Fourth Estate 2002.4 L.E. Mitchell “Financialism. A (Very) Brief History” 2010, available at http://ssrn.com/abstract=1655739.Even though this economic model has become virtually global, it can be said to refer predominantly to Anglo-American economies where financial markets have become the beacon of a new economic5 Graham Ruddick, Retail Editor , “Tesco crisis: everything you need to know” http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/11181686/Tesco-crisis-what-you-need-to-know.html

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for customers, and will be again.” Lewis outlined three priorities: rediscovering competitiveness in core UK business; protecting and strengthening the balance sheet; and rebuilding trust and transparency.6

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was cited as the biggest audit failure.7

When Jeffrey Skilling was hired, he developed a staff of executives that, by the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.

On December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the next year.8

Many executives at Enron were indicted for a variety of charges and some were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in of illegally destroying documents relevant to the SEC investigation which voided its license to audit public companies, effectively closing the business. By the time the ruling was overturned at the U.S. Supreme Court, the company had lost the majority of its customers and had ceased operating. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices.

As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies.9 One piece of legislation, the Sarbanes-Oxley Act, increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.10 The act also increased the accountability of auditing firms to remain 6 Jennifer Creevy “Tesco chief Dave Lewis: 'My three priorities for rebuilding” Tesco'http://www.retail-week.com/sectors/food/tesco-chief-dave-lewis-my-three-priorities-for-rebuilding-tesco/5065494.article 23 October, 20147 Bratton, William W. (May 2002). "Does Corporate Law Protect the Interests of Shareholders and Other Stakeholders?: Enron and the Dark Side of Shareholder Value" (PDF). Tulane Law Review (New Orleans: Tulane University Law School) (1275): 61.8 Benston, George J. (November 6, 2003). "The Quality of Corporate Financial Statements and Their Auditors Before and After Enron" (PDF). Policy Analysis (Washington D.C.: Cato Institute) (497): 12.9 Ayala, Astrid; Giancarlo Ibárgüen, Snr. (March 2006). "A Market Proposal for Auditing the Financial Statements of Public Companies" (PDF). Journal of Management of Value (Universidad Francisco Marroquín): 1. Archived from the original on 2010-10-17. Retrieved 2010-10-17.10 Cohen, Daniel A.; Dey Aiyesha and Thomas Z. Lys (February 2005). "Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods". Evanston, Illinois:

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unbiased and independent of their clients.11

In 18 March 2005, Former WorldCom CEO Bernard Ebbers was convicted on nine counts of conspiracy, securities fraud and filing false documents with the Securities and Exchange Commission. The jury in the Manhattan trial held Ebbers responsible for fraudulent practices that culminated in the biggest bankruptcy in US corporate history. WorldCom filed for bankruptcy in July 2002, the collapse was nearly twice the size of the previous largest bankruptcy, the 2001 failure of Enron. A second report in 2003 found that during the last two years of Ebbers’ tenure as CEO, the company had over-reported earnings and understated expenses by an astonishing $74.5 billion and billion in losses for investor.

Tyco Incorporated was founded in 1960 by Arthur J. Rosenberg, situated in Waltham, Massachusetts. It is a blue-chip Swiss security system company. Leo Dennis Kozlowski, CEO of the company and former CFO Mark Swartz involved in stealing $150 million and inflated company income by $5oo million. They siphoned money through unapproved loans and fraudulent stock sales. Money was smuggled out of the company disguised as executive bonuses or benefits. Later, the SEC and Manhattan D.A investigation uncovered questionable accounting practices, including large loans made to Kozlowski that were the forgiven.

The Satyam Computer Services scandal was a corporate scandal that occurred in India in 2009 where Chairman Ramalinga Raju confessed that the company's accounts had been falsified. PricewaterhouseCoopers was the statutory auditor of Satyam Computer Services when the report of scandal in the account books of Satyam Computer Services broke.. The Indian arm of PwC was fined $6 million by the SEC (US Securities and Exchange Commission) for not following the code of conduct and auditing standards in the performance of its duties related to the auditing of the accounts of Satyam Computer Services.12

Japan's Olympus Corp and its UK subsidiary Gyrus Group been prosecuted by the Serious Fraud Office over allegations of false accounting in the latest development of a scandal that has engulfed the camera and medical equipment firms for almost two years.

Olympus and Gyrus face prosecution under Section 501 of the UK Companies Act 2006 for allegedly making "misleading, false or deceptive" representations to auditors of their accounts in the fiscal years 2009 and 2010.

In Transmile Group Bhd, a company was involved in accounting irregularities and fraud discovered in the company. The company has overstated its accounts to show it

Kellogg School of Management. p. 5. Retrieved 2010-10-13.11 Ibid 912 "SEC Charges India-Based Affiliates of PWC for Role in Satyam Accounting Fraud". Securities and Exchange Commission. 5 April 2011. Retrieved 27 April 2013.

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has made profits. In actual fact the company was at a net loss.13 The auditors Deloitte & Touche declined to approve the accounts when the company failed to furnish them proof to substantiate certain trade receivables. However, the loss was detected through a special audit by Moores Rowland. A financial discrepancy was uncovered. In the final report on special audit revealed the overstating of revenues for several years.

Other than that, in Megan Media Holdings Berhad the optical disk maker was suspected to be involved in fictitious trading of more than RM500 million. It is submitted that in GP Ocean Food Bhd, was involved in the submission of misleading information.

It’s appearing that the roots of the cause of financial scandal are the ineffective governance. Basically, the current problem faced by problematic companies all over the world is the “missing directors”. The “missing directors” is the inability of the directors to perform their jobs efficiently. These famous corporate scandals show that directors nowadays are involved in many unethical practices such as assets misappropriations, misused company’s assets for personal benefits, financial statement fraud, recording fictitious revenue, concealing liability, inflating reporting assets, corruption and bribery. According to section 172 Company Act 2006 stated that director must act in the way he consider in good faith would be most likely to promote the success of the company for the benefit of the company as a whole.

Essentially, one of the ways to counter financial scandals is to improve the quality of auditing services. Furthermore, whilst corporate governance may have improved but the auditors’ duties and responsibilities are shrouded in mystery and mystique as ever (Leek, 1996). There is a lacunae in the current legal framework as the duties and obligations reposed on auditors under common law, ‘the Companies Act’, BAFIA and the CMSA are inadequate in countering the financial scandals.14

Corporate Governance Code of others jurisdiction

The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is legislation passed by the U.S. Congress to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures. The U.S. Securities and Exchange Commission (SEC) administers the act, which sets deadlines for compliance and publishes rules on requirements.

The Sarbanes-Oxley Act was enacted in response to a series of high-profile financial scandals that occurred in the early 2000s at companies including Enron, WorldCom and Tyco that rattled investor confidence. The act, drafted by U.S. 13 New Straits Times. (2007, August 23). Transmile may pick kpmg to be auditor. p.39.

14 Ibid 154

Congressmen Paul Sarbanes and Michael Oxley, was aimed at improving corporate governance and accountability. Now, all public companies must comply with SOX. While some of the provision will require further resolution and rule making, others have gone into effect ranging anywhere from one month to one year from the date of their enactment.

It is appearing that unlike in USA where the duties of directors and auditors are codified in a single legislation, in Malaysia the duties of directors and auditors are legislated in various laws including the Companies Act 1965 (REVISED - 1973) under (PART V – Management and Administration - DIVISION 2 – Directors and Officers)15, Financial Services Act 2013 (Part V Prudential Requirements)16, Islamic Financial Services Act 2013 (PART VI Prudential matters )17 and to a lesser extent, Malaysian Code on Corporate Governance 2012 (MCCG)( Principle 1 to 3)18.

The principles of MCCG 2012 encapsulate broad concepts underpinning good corporate governance that companies should apply when implementing the recommendations. The recommendations are standards that companies are expected to adopt as part of their governance structure and processes. Listed companies should explain in their annual reports how they have complied with the recommendations. As there is no ‘one size fits all’ approach to corporate governance, companies are allowed to determine the best approach to adopting the principles. Where there is non-observance of a recommendation, companies should explain the reasons.19

Bursa Malaysia Securities Berhad had imposed the listing requirements on public listed companies to ensure the creditability of a company. It is appearing that this is to protect investors from being fraud or involve in a bad investment.20

The UK Corporate Governance Code is a set of principles of good corporate governance aimed at companies listed on the London Stock Exchange. It is overseen by the Financial Reporting Council and its importance derives from the Financial Conduct Authority's Listing Rules. The Listing Rules themselves are given statutory authority under the Financial Services and Markets Act 2000 and require that public listed companies disclose how they have complied with the code, and explain where they have not applied the code - in what the code refers to as 'comply or explain'.

The Code is essentially a consolidation and refinement of a number of different

15 Companies Act 196516 Financial Services Act 201317 Islamic Financial Services Act 201318 Malaysian Code on Corporate Governance 2012 19 Malaysian Institute of Accountants “Malaysia Code of Corporate Governance 2012” http://www.mia.org.my/new/downloads/circularsandresources/circulars/2012/21/MCCG_2012.pdf20 Bursa Malaysia “Main Market Listing Requirement” http://www.bursamalaysia.com/market/regulation/rules/listing-requirements/main-market/listing-requirements

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reports and codes concerning opinions on good corporate governance. The first step on the road to the initial iteration of the code was the publication of the Cadbury Report in 1992. Produced by a committee chaired by Sir Adrian Cadbury, the Report was a response to major corporate scandals associated with governance failures in the UK.

The “comply or explain” approach is the trademark of corporate governance in the UK. It has been in operation since the Code’s beginnings and is the foundation of its flexibility. It is strongly supported by both companies and shareholders and has been widely admired and imitated internationally. The Code is not a rigid set of rules.

Recommendation For Malaysia to Improve its Corporate Governance

Since there are already adequate laws in Malaysia to regulate the governance for directors and auditors, perhaps there issue is not about having more laws or enacting new laws. The effectiveness of such laws can only be achieved with greater enforcement by the relevant enforcement agencies and regulatory authorities.

Nevertheless, one of the proposals worth considering for implementation in Malaysia would be establishing a national database for assessing the directors and auditors’ creditability (based on “fit and proper” person tests) and their past and current performance as directors. Only those who are fit and proper as well as those performances above acceptable ranking could be considered for directorship in any company, in particular, public listed companies.

In the case of auditors, it is crucial to ensure that partners in audit firms are rotated and they can only be appointed as auditors for a firm for limited period of time. Laws are made to prevent financial scandal to happen but not to solve the problem after it has happened.

For long term sustainability, directors must discharge their duties effectively. Although ethics and integrity are important values, these values cannot ensure sustainability of the business in the long run. There are a number of best practices that foster business sustainability, and help organisations move along the path from laggards to leaders. These practices include:

• Stakeholder engagement: Organisations can learn from customers,

employees and their surrounding community. Engagement is not only about pushing out messages, but understanding opposition, finding common ground and involving stakeholders in joint decision-making;

• Environmental management systems: These systems provide the

structures and processes that help embed environmental efficiency into a firm’s culture and mitigate risks. The most widely recognized standard

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worldwide is ISO 14001, but numerous other industry-specific and country-specific standards exist;

• Reporting and disclosure: Measurement and control are at the heart of

instituting sustainable practices. Not only can organisations collect and collate the information, they can also be entirely transparent with outsiders. The Global Reporting Initiative is one of many examples of well-recognised reporting standards;

• Life cycle analysis: Those organisations wanting to take a large leap

forward should systematically analyse the environmental and social impact of the products they use and produce through life cycle analysis, which measure more accurately impacts.

Firms that are sustainable have been shown to attract and retain employees more easily and experience less financial and reputation risk. These firms are also more innovative and adaptive to their environments.21

Bibliography

21 “Definition of Business Sustainability” http://lexicon.ft.com/Term?term=business-sustainability7

Books

N. Ferguson “The Ascent of Money”, Allen Lane 2008, ch.1.

S. Kuper “Petal Power”, Financial Times, 12 May 2007.

M. Balen “A Very English Deceit: The Secret History of the South Sea Bubble and the First Great Financial Scandal”, Fourth Estate 2002.

Article

Loganathan Krishnan, “LEGAL ISSUES ON THE SCANDALS INVOLVING AUDITORS” 2nd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2nd ICBER 2011) PROCEEDING

Electronic Resources

Patrick Martin, “Ebbers found guilty in WorldCom fraud: a case study of US corporate criminality” at http://www.wsws.org/en/articles/2005/03/ebb-m18.html accessed 11 December 2014

L.E. Mitchell “Financialism. A (Very) Brief History” 2010, available at http://ssrn.com/abstract=1655739. accessed 11 December 2014

Graham Ruddick, Retail Editor, “Tesco crisis: everything you need to know” http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/11181686/Tesco-crisis-what-you-need-to-know.html accessed 11 December 2014

Jennifer Creevy “Tesco chief Dave Lewis: 'My three priorities for rebuilding” Tesco'http://www.retail-week.com/sectors/food/tesco-chief-dave-lewis-my-three-priorities-for-rebuilding-tesco/5065494.article 23 October, 2014

Bratton, William W. (May 2002). "Does Corporate Law Protect the Interests of Shareholders and Other Stakeholders?: Enron and the Dark Side of Shareholder Value" (PDF). Tulane Law Review (New Orleans: Tulane University Law School) (1275): 61. accessed 11 December 2014

"Enron shareholders look to SEC for support in court" (WEB). New York Times (New York Times). May 2007. accessed 11 December 2014

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Benston, George J. (November 6, 2003). "The Quality of Corporate Financial Statements and Their Auditors Before and After Enron" (PDF). Policy Analysis (Washington D.C.: Cato Institute) (497): 12. accessed 11 December 2014

Bursa Malaysia “Main Market Listing Requirement” http://www.bursamalaysia.com/market/regulation/rules/listing-requirements/main-market/listing-requirements accessed 15 December 2014

“A Practical Guide To Listing on Bursa Malaysia” http://www.mia.org.my/new/downloads/professional/regulatory/sc_bursa/knowledge/2012/Practical_Guide_to_Listing_SMEs.pdf 15 December 2014

Malaysian Institute of Accountants “Malaysia Code of Corporate Governance 2012” http://www.mia.org.my/new/downloads/circularsandresources/circulars/2012/21/MCCG_2012.pdf 15 December 2014

Financial Reporting Council, “UK Corporate Governance Code” https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx 15 December 2014

“Definition of Business Sustainability” http://lexicon.ft.com/Term?term=business-sustainability 15 December 2014

Table of Statue

Companies Act 1965 Financial Services Act 2013 Islamic Financial Services Act 2013 Malaysian Code on Corporate Governance 2012 Sarbanes-Oxley Act of 2002

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