PART III – CREATIVE ACCOUNTING

3.1 Creative Accounting and Techniques

Creative accounting is a technique which is aimed to make or interpret accounting
policies wrongly by misusing the accounting techniques and standards that set by the accounting
bodies. The idea of practicing creative accounting is to generate profits by not reporting the
accurate figures to benefit a specific group of individuals. There are many approaches of creative
accounting such as wrong estimation of inventory in stores, failures to make proper contingent
liabilities, booking less expense, manipulating depreciation figures, lowering liabilities of the
company, and manipulating revenue and sales figures
Window Dressing
Window dressing refers to measures used to make a company's financial statements appear better
(Accounting Tools, 2022). Window dressing is particularly popular when a firm has a big
number of shareholders because it allows management to present investors—who most likely do
not have much daily touch with the business—with the impression of a well-run corporation. It
might also be employed by a business to win over a lender so that it might get a loan. There is no
motivation for anyone to add window dressing to the financial statements since the owners of a
closely held company are typically more knowledgeable about the business performance (Ali,
2020).
Through window-dressing technique, Lehman has removed roughly $50 billion from its balance
sheet before declaring bankruptcy and it reduces its debt. It was said that Lehman 6 has a
negative cash flow before it is declared to be bankrupt which has caused Lehman unable to meet
the current obligations. According to (Azadinamin, 2013), Lehman could not maintain
confidence because of various of its business has shown heavy concentration of illiquid assets
with declining values.
Manipulating of Sales
Earnings management is the practise of manipulating the financial accounts to show the highest
possible net profit for the business. The term "earnings management" can mean several things
depending on the tools of manipulation, the intent behind the action, and the circumstances
around it. Although the term "enterprise management" has been defined in a number of different
ways, the literature on the subject generally agrees that the involvement of managers in EM
activities aims to manipulate the financial statements in a way that deceives the financial users. A
better compensation package, job security, career advancement, a decrease in regulatory costs,
the prevention of loan contract violations, and the enhancement of any foreseen benefits in
relation to the business and management can all be stated as explicit motivations for EM (Mohd
Taufik Mohd Suffiana*, 2015).
The second revenue-increasing strategy is known as "channel stuffing." At the conclusion of the
quarter, a manufacturer sends a sizable cargo to a distributor and reports the shipment as sales.
However, the distributor is permitted to take back any unsold goods. The manufacturer should
maintain the products categorised as a form of inventory until the distributor has sold the product
because they can be returned and are not guaranteed as a sale.
Inventory Manipulation
The value of manufactured but unsold commodities is represented by inventory. The value of
these items is added to the income statement as cost of goods sold when they are sold. Therefore,
if actual inventory and sales levels are held equal, overstating inventory value will result in an
understating of cost of goods sold and, as a result, an artificially greater net income.
Failure to make contingent liabilities
Liabilities that depend on future occurrences to prove their existence, value, payee, or due date
are referred to as contingent liabilities. Contingent liabilities could include, for instance,
warranty commitments or projected lawsuit losses. By underestimating its materiality, companies
can creatively account for these obligations. Companies understate their liabilities and overstate
their net income or shareholders' equity when they fail to register a contingent liability that is
likely to be incurred and amenable to reasonable assessment. By carefully reading the footnotes
of a corporation, which contain information regarding these commitments, investors can avoid
these issues.
Manipulation of off balance sheet
A business can establish distinct subsidiaries that could include obligations or accrue costs that
the parent company does not wish to reveal. These subsidiaries can be kept a secret from
investors if they are set up as independent legal companies that are not owned entirely by the
parent business and do not appear on the parent's financial statements.
A corporation didn't have to record particular assets and obligations in its balance sheet while
using off-balance sheet accounting because they were "off-sheet" and weren't included in its
financial statements., but it is frequently employed to make a corporation appear to have
significantly less debts than what it actually does. Off-balance-sheet accounting techniques
include moving debt to a newly formed business made just for that purpose, like Enron did.
These are also referred to as variable interest entities and are referred to as special purpose
entities (SPEs) (VIEs) (Obringer, 2020).
Off-balance-sheet organisations may be established for a number of factors, including when a
corporation seeks to fund a business initiative but is hesitant to assume the risk or when the
company carries too much debt to qualify for a loan. They can get a financing thru the new
organisation by beginning a new SPE (Obringer, 2020). Starting a SPE can make sense in some
situations. An SPE will prevent the risk from impacting your company's main balance sheet and
profits if you decide to expand outside of your core business. Before 2003, a business may own a
maximum of 97 percent of a SPE without being required to disclose the SPE's liabilities on its
balance sheet.
Manipulation of receivables write-offs
A huge bath is a significant one-time write-off that a business takes. In order to allow charges
made in the future to be mitigated against the reserve, this write-off is set up as a reserve
(Accounting Tools, 2022). The purpose of using a huge bath is to drastically reduce earnings
inside the current cycle in order to make future periods appear more successful. Although this
strategy has a history for being overused to alter the amount of net income, it can still be useful.
When a company has a history of consistently taking a big bath, accompanied by extraordinarily
robust profitability in succeeding times, a shareholder should be especially wary.
The most typical time to take a huge bath is when a company is already reporting subpar results
for the year, with the idea that investors won't be overly bothered by a bigger loss. When a
management group seeks to write off assets with inflated or false valuations, they risk taking a
large bath. For instance, management might have made fictitious sales, which necessitate
recording equivalent accounts receivable as well. These receivables can be written off using a
large bath.

3.2 Serba Dinamik’s Financial Reporting Issues

Serba Dinamik Holdings Berhad has been compounded RM16 Million for falsifying
accounts which was imposed by the Securities Commision Malaysia (SC). The compound is
related to the false statement of RM 6.014 billion in revenue in its Consolidated Report for the
Quarter and Year ended 31 December 2020. In accordance with section 368(1)(b)(i) of the
CMSA, Muhammad Hafiz was additionally given a second compound of RM1 million, for
manipulating the accounting records of the company's subsidiary Serba Dinamik Sdn Bhd (Vasu,
2022).

This is due to the issue raised by the authorized auditor, KPMG on May 2021 that there
are audit concerns about sales, trade payables, and material on-site balances involving 11 parties
in their financial reporting. These transactions totaled RM2.32 billion in sales transactions,
RM652 million in trade receivables, and RM569 million in material on-site balances. As a result,
the management must provide evidence that KPMG violated its obligations in addition based on
alleged professional negligence, breach of contract, and violation of statutory duty for Serba
Dinamik to win in their legal action (Seng, 2021).

Unable to ascertain the legitimacy of the trade receivables balances

According to Serba Dinamik’s unaudited results for the year ended 31 December 2020, there is
RM608.94 million increase in trade receivables but it has become almost equal to RM652
million of receivables has increased that has detected by KPMG (Serba Dinamik, 2021). This is
because KPMG had sent out the confirmations earlier to certify certain transactions on purchases
and trade receivables as well as payables balances on a local supplier. However, it has yet to test
the completeness and is unable to validate either the signature of the confirmation’s signer or the
validity of the detected confirmations’ legitimacy (FSMOne, 2021).

In accrual accounting, a transaction will be recognized as revenue if a service or good is given,

even if payment has not yet been made. Accounts receivable that are growing rapidly are a sign
that the business is experiencing problems obtaining pay for its goods and services. With these,
we must examine the Days Sales Outstanding (DSO) (Appendix 3.21). DSO demonstrates how
long it takes a customer to turn account receivables into cash. The fact that KPMG had trouble
authenticating its clients and sales transactions did indicate the red flags of accounting fraud.

Most of its account receivables came from consumers in the Middle East, and KPMG had
learned that some of these clients lacked registration numbers, which may be an ominous sign of
future financial crimes (Zainul, 2020). The suppliers of Serba Dinamik have registered significant
transactions amounting to RM 481 million despite having the same registered address and low
paid-up capital bases. However, Serba Dinamik informed that the registered address was actually
the company secretary's office, and these companies are actually located in Bahrain. Since most of
the investment and account receivables are from the Middle East, Serba Dinamik has taken the
opportunity to use Covid Pandemic as an excuse that it is difficult for both parties to communicate
and settle the payment from receivables. Due to the pandemic too, KPMG was unable to locate a
customer or supplier in Bahrain, which accounted for total sales transactions of USD 101 million
and trade receivables balance of USD 24 million. Therefore, Serba Dinamik is required to appoint
an independent auditor oversea to verify these balances. In addition to the complicated auditing
process, Serba Dinamik make an excuse that it certainly could not meet the deadline of submitting
the independent review and delayed the finalisation of the aforesaid appointment (Serba Dinamik,
2021).

False statement on Revenue

As discussed earlier, Serba Dinamik has been claimed a false statement on the RM6.01 billion
revenue in the company's ledgers, the company's fourth quarter figures might have been changed
simply by changing the revenue figure in the financial year 2020 (Vasu, 2022). Due to
insufficient data in some information technology contracts, KPMG was unable to calculate the
precise revenue and expenditures related to these contracts.

Additionally, COVID-19 caused havoc in the energy sector last year, where countries reduced
production and oil prices dropped. However, Serba Dinamik had a 26.5% increase in its
segment's gross profits for operations and maintenance ("O&M"). Appendix 3.22 reveals a
reduction in annual revenue for other comparable energy companies listed in Malaysia.
According to reports, Serba Dinamik's income rose by 32.8% in 2020. This shows the red flags
happen that there might be creative accounting happening compared with the abnormal trends
with its competitors such as Dialog and KNMG.

In order to expand their IT solutions business, Serba Dinamik also purchased a 30% stake in
eNOAH iSolution India Pvt Ltd ("eNOAH") in December 2018 for RM15 million. Their portion
of the total comprehensive income from eNOAH in 2019 was RM1.14 million. However, with
this acquisition, its information, communication, and technology ("ICT") segment's 2019 audited
gross profits increased by about ten times to RM21.23 million. The segment's gross profit
thereafter experienced astonishingly rapid growth in 2020, rising by 206.79% to RM65.13
million which indicates a manipulation of accounts happened here (FSMOne, 2021).
Besides, the present working capital of Serba Dinamik is comprised of inventories, receivables,
payables, and net contract assets. This implies that Serba Dinamik is increasing its receivables and
inventories by investing the majority of its operating cash flow. We obtain a credit ratio that is
almost one by comparing the change in working capital to the cash earned from operations prior
to working capital (Appendix 3.23). That clarifies why there hasn't been any free cash flow over
time. They used proceeds from Sukkuk sales, term loans, and private placements to support the
majority of their current cash, prior dividends, and capital expenditures. Although this is not
accounting fraud, it is a red flag for a weak business. A decrease in working capital indicates that
the business is heavily putting money into current assets while lowering its current liabilities. This
difference in numbers implies that the company is making sales without collecting the money, in
this example on receivables and inventories. In a healthy financial statement, growth in a
company's cash flow from operations should mirror its increases in net income. That most likely
clarifies the auditor's worry over its suppliers (FSMOne, 2021). (Appendix 3.24)

Changes in Financial Period

As soon as Serba Dinamik responded to KPMG’s queries, Serba Dinamik immediately stated
that the group's financial statements could not be completed due to the ongoing extension of the
movement control order ("MCO") in Malaysia and lockdowns in other countries. As a result, the
company announced that the financial year end for FY2020 would be changed immediately from
31 December 2020 to 30 June 2021. With these, Serba Dinamik was required to submit the
annual report to Bursa Malaysia within four months from the end of the year. According to them,
the organisation needed extra time to enable better audit planning and resource allocation (Ong,
2022). Separately, we noticed that other businesses that had a difficult business climate did not
alter their financial year reporting periods. For instance, Bumi Armada Berhad, which has similar
profit levels and revenue sources from Africa, Europe, and Asia Pacific, already published its
2020 annual report at the end of April (Bumi Armada, 2020). With these, we can clearly see that
Serba Dinamik might undergoes creative accounting and try to delay the financial reporting
submission in other to have more times to manipulate the accounts since the authority has started
to target every single movement of Serba Dinamik.
In a nutshell, the motive for Serba Dinamik to commit fraud is obvious and shows a lot of
abnormal balances in their financial reporting that have lately been found out by the external
auditors.

References
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Appendix

Appendix 3.21

Source: Company Financial Statement, iFast estimates

Appendix 3.22

Appendix 3.23
Appendix 3.24

Source: Company Financial Statement, iFast estimates