August 2021

REVIEW OF CORPORATE FRAUDS INVOLVING SCANDAL, BRIBERY

AND CORRUPTION IN 1MALAYSIA DEVELOPMENT BERHAD

MASTERS IN BUSINESS ADMINISTRATION

INTERNATIONAL UNIVERSITY OF MALAYA-WALES
SUBJECT: BUSINESS ETHICS AND CORPORATE RESPONSIBILITY
MODULE CODE: MBOE7183

ASSIGNMENT 1
SUBMITED BY: PUSHPAN MURUGIAH
UNIVERSITY STUDENT ID: 21020095
Number of words. Minus Cover page, Table of Content, Table of figures, footnotes and Reference list is 5558
words and 30 pages.
Table of Contents

List of Figures and Tables.................................................................................................2

List of Abbreviation...........................................................................................................2
Abstract.............................................................................................................................3
Section 1. Introduction......................................................................................................3
1.1 Research Framework.....................................................................................................3
1.1 Company Details............................................................................................................4
1.2 Scope of study.................................................................................................................4
1.3 Limitations and Disclaimers...........................................................................................5
1.4 Methodology...................................................................................................................5
Section 2 Facts of the case.................................................................................................5
2.1. 1MDB objectives, business deals and funding....................................................................5
2.2. Cases of Ethical and corporate responsibility failure.........................................................6
(i) Corruption (Embezzlement)..................................................................................................................6
(ii) Bribery.............................................................................................................................................7
(iii) Conflict of Interest...........................................................................................................................8
(iv) Money Laundering...........................................................................................................................8
(v) False declaration...................................................................................................................................8

Section 3 Correlation between each ethical and corporate responsibility failure................9

Section 4 Literary review.................................................................................................10
4.1 Corporate governance (Internal governance).....................................................................10
a) Malaysian Standard Review...............................................................................................................10
b) Corporate Governance in Malaysia....................................................................................................10
c) Malaysian Code of Corporate Governance (MCCG).........................................................................11
4.2 Review of compliance of 1MDB with the MCCG...............................................................12
a) Principle A..........................................................................................................................................12
b) Principle B..........................................................................................................................................16
c) Principle C..........................................................................................................................................19
4.2 External governance............................................................................................................20
a) Auditing standards..............................................................................................................................20
b) Auditing issues in 1MDB...................................................................................................................21
4.3 Institutional governance...............................................................................................23
a) Bank Negara and Banking Institutions...............................................................................................23
b) Parliamentary Accounts Committee (PAC)........................................................................................24
4.4 Summary of ethical and corporate responsibility failures...........................................24
a) Failure within 1MDB (Internal)..........................................................................................................24
b) Institutional failure (External)............................................................................................................24

Section 5 Recommendations............................................................................................25
5.1 Internal governance recommendations...............................................................................25
5.2 External governance recommendations..............................................................................26
6. Conclusion...................................................................................................................26

1
Reference.........................................................................................................................28

List of Figures and Tables

Figure Name Page
1.1 Research Framework 3
3 Money flow diagram 9
4.1 (C) Features of MCCG 11
4.1(c)(i) 3 principles of MCCG 12
4.2(ii)a Board of Advisors 15
4.2(ii)b Board of Directors 15

List of Abbreviation
Abbreviation Name
BBMB Bank Bumiputera Malaysia Berhad
1MDB 1 Malaysia Development Berhad
TIA Terengganu Investment Authority
JV Joint Venture
PSI Petro Saudi International
KWAP Retirees Pension Fund
GLIC Government Link Investment Company
GLC Government Link Company
IPIC International Petroleum Investment Company
IFRS International Financial Reporting Standard
IAS International Accounting Standards
MASB Malaysian Accounting Standards Board
MCCG Malaysian Code of Corporate Governance
SCM Securities Commission of Malaysia
CCM Companies Commission of Malaysia
MIA Malaysian Institute of Accountants
MICG Malaysian Institute of corporate Governance
E&Y Ernest & Young
MFRS Malaysian Financial Reporting standard
PAC Public Accounts Committee
MACC Malaysian Anti-Corruption Commission
BOD Board of Directors
BOA Board of Advisors

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Abstract

Section 1. Introduction

M
alaysia, a country with abundance of natural resources has seen its wealth
destroyed by the constant high profile scandals that plague this country. For a
nation of 32 million it is surprising that a small nation like Malaysia could
possibly be world famous for wrong reasons. In the 1980s, Malaysia was involved in the
largest banking scandal at that time with the Bank Bumiputra Malaysia Berhad (BMBB) saga
in 1983 and more recently, which left the longest ruling party to lose its election in 2018 is
the 1 Malaysia Development Berhad (1MDB) scandal. 1MDB is special for the
reason that it attracted the attention of countries across the world with some countries
opening investigations in to the operations of the company (Ali, 2015). This report looks at
the ethical failure and deficiencies in the corporate governance of this company that led to the
largest corruption scandal to hit the nation.
1.1 Research Framework

Due to the complexities

and intricacies of this case
study, this research paper
will follow the framework
flow as listed here. The
purpose is to provide a
logical and systematic
approach to
understanding the issues
Figure 1.1 Diagram: Authors
involved.
3
1.1 Company Details

1 Malaysia Development Berhad or better known worldwide “1MDB is Government-owned and

supported but driven by private
as 1MDB, originally was called as Terengganu Investment sector thinking and practices. It
strives to fulfil the aspiration of the
Authority (TIA) which was set up as a vehicle to promote the Government with the agility of the
private sector. Bonds raised are part
economics interest of the state (Khairi, 2015). In September of capital for the strategic initiatives
it undertakes.” 1MDB press release
2009, TIA became 1MDB which become a wholly owned in April 2013 (Gunasegaram, 2013,
April 24)
subsidiary of the Ministry of Finance. The fact that it is a
government owned company is understood, however the objective of the company can still be
debated as to whether it can be called a sovereign wealth fund similar to those funded in
Qatar, when Malaysian national coffers are at a deficit instead of surplus. Sovereign wealth
funds are government link companies that manage national wealth surplus for investment and
revenue generating entities for the country. (Tun Mahathir)1

Its corporate governance structure consists of three-tiered governance structure comprising of

a Senior Leadership Team, Board of Directors (BOD) and the Board of Advisors (BOA).
Arul Kanda is the president and group executive director, Tan Sri Dato’ Seri Lodin Wok
Kamaruddin, the Chairman of the board and the former Prime Minster, Dato Sri Mohammad
Najib Tun Razak was the chairman of the BOAs. There were nine members on the BOAs and
six members on the BODs. Although the inclusion of the advisory boards provides an
additional layer of governance, the true extend of its role and authority is unclear. This is
important to understand on the context of ethics, in the form of providing a false sense of
having a strong corporate governance to attract investors.

1.2 Scope of study

The scope of this study is limited to the understanding and explanation of the concepts and
issues of corporate governance and ethical issues that surrounds the 1MDB scandal. The
purpose is to look at the reasons of corporate governance failure and provide rational
recommendations.

1
Tun Mahathir in one of his blogs, questioned the term sovereignty wealth fund because the country was
running on deficit unlike other sovereign wealth funds which had surplus of wealth which was used to invest.
Example Qatar sovereign wealth fund. (Adam, 2014, Sept 10)

4
1.3 Limitations and Disclaimers

No proprietary information was used in this study. No political narrative was advance and if
any was mentioned, is purely incidental to address the issues of corporate governance. The
purpose of this report is not to indict, pass judgments, promote any political party or parties
or agenda, nor does it intend to criminalize any person, persons, institutions or professional
bodies. Inference of political pressure or influences on governance process or rationalization
of any interferences by political persons or persons are acknowledged but are omitted from
the analysis.

1.4 Methodology

Information was based on evidence from secondary sources, such as court findings, academic
journals, books and narratives as well as social media commentaries written on the scandal. A
list of ethical and corporate governance failure was then identified and discussed in section
two and three. In section four, the reasons for this failure will be discussed and appropriate
recommendations will be laid out in section five.

Section 2 Facts of the case

2.1. 1MDB objectives, business deals and funding.

Objectives and Business operations

In order to generate interest and business operations, 1MDB established multiple joint
ventures (JV) with foreign companies, mainly with Petro Saudi International (PSI) and Aabar
Investments PJSC. Other important subsidiaries include SRC International Sdn Bhd, this
company in significant because of its activities that include borrowing from the pension fund
(Kumpulan Wang Persaraan, KWAP) and was later separated and placed directly under the
Ministry of Finance.

Misleading objectives
The operations of 1MDB, has been to raise funds rather that manage surplus wealth. Instead
of generating income for the country using national wealth, it generated debt which can be
argued that it was ethically wrong for the company to mislead investors and the public. As
mentioned earlier the operations of 1MDB is not consistent with that of the workings of an
actual sovereign wealth fund. These are duties owed to the Malaysian public due to its
5
association with the Ministry of Finance. Being a government linked investment company
(GLIC) it has an ethical duty to be truthful in its declarations.

Initial Funding
1MDB was set up as an investment arm for Terengganu state government under the Chief
Minister and was later re-instituted as wholly owned sovereign wealth fund owned by the
federal government under the placement of Ministry of Finance. Initial funds for 1MDB was
RM5billion through bond issuance.

Additional Funding
Second funding exercise was conducted by issuing Islamic bonds (Sukuk) in 2009 and 2014
((AGM), 2016). The third exercise was by issuing conventional bonds in 2012 and 2013
which manage to raise US6.5 billion, from both international and local markets. One of the
underwriters was Goldman Sachs, which later paid USD2.8billion payment as settlement in
their case filed by the American authorities (Times, 2021). 1MDB also received loans form
the civil service fund worth RM4billion offered by the Malaysian government. The total
borrowings by 1MDB amounted to RM41.9 billions.

2.2. Cases of Ethical and corporate responsibility failure

The transactions of many of the activities of 1MDB are complicated and intricate. The
movement of money and explanation for moving them and the justification for transferring
them is complicated and requires a degree of accounting According to US
forensics to understand. The magnitude of the activities is prosecutors, more than
US$6.5 billion (RM27.34
also overwhelming and spans a wide cobweb of companies, billion) flowed from 1MDB,
“through a complex web of
institutions and country. For easier understanding, a list of opaque transactions and
activities will be identified and discussed. fraudulent shell companies,
to finance spending sprees
by corrupt officials and their
associates” (Tan, 2018)
(i) Corruption (Embezzlement)

This was perhaps the biggest corporate responsibility failure by the company. Embezzlement
was conducted using funds generated from the sukuk and bonds issues and used for personal
interest of an individual named Jho Low. List of transactions are described below:

6
 a) 2009, a grant of US2.93 billion by 1MDB to a joint venture company with PSI, was
siphoned and transferred to an account of a company called Good Star Ltd, which is
owned by Jho Low. (Gabriel, 2018) (Justice, 2019)
b) In 2011, additional loan of US330 million was given to the JV with PSI, was again
transferred to the same company as a deposit. (L.H, 2018)
c) In 2012, a further US1.4 billion from a total of US3.5 billion, which was raised by the
bond issuance in this year was misappropriated and ended in Jho Low account
( (Gabriel, 2018); (Justice, 2019)
d) In 2013, approximately US1.26 billions of a US 3billion bond issuance was
embezzled for the benefits of Jho Low and his associates including officials from
1MDB (Gabriel, 2018) (Justice, 2019)
e) In 2013, loan from the civil service pension to SRC international were reported to be
embezzled to a person known as Eric Tan Kim Loong and some were diverted to the
local accounts of Najib Razak and Irwan Serigar2 (Ellis-Peterson, 2018)
f) In 2014, US850 million was given to Jho Low under the pretext of syndicated loan to
IPIC, which would act as the guarantor for the loan. ( (Justice, 2019)

Failure of governance: What was the justification for 1MDB to approve grants and loans to
JV companies and approve the funds to be transferred from these companies to companies
owned by Jho Low? How did a three-tiered governance system fail to detect such
transactions? What was the connection between Jho Low and 1MDB? There was also a
failure of due process as well as due diligence.

(ii) Bribery

One of the underwriters was Goldman Sachs, which was accused of offering bribes to 1MDB
officials to appoint them to arrange and underwrite the bond issuance in 2012 and 2013 for a
very high underwriting fee. Goldman Sachs later paid US 2.3 billion as settlement with the
US Department of Justice for their role in this case (Ethics, 2020)3

2
Irwan Serigar, is the former Treasury Secretary-general
3
SCCE stand for Society of Corporate Compliance and Ethics (https://www.jdsupra.com/legalnews/goldman-
sachs-settles-investigation-63759/)

7
Failure of governance. Failure of numerous departments to scrutinize the arrangements and
agreement to appoint Goldman Sachs and to pay very high underwriting fees, which was
against normal standard fee structures.

(iii) Conflict of Interest

1MDB is unique for the wrong reasons. The company is a GLIC owned by the Ministry of
Finance, whose Minister reports to the top executive, who is the Prime Minister. However, in
this case, both the minister and the Prime Minister are the same person. Further complications
are that the Chairman of the Board of Advisor of 1MDB is also the same person.

Failure of governance: Technically the approval process is flawed as it deemed to have been
approved by the same person at all three layers of approval. There appears to be no check and
balance between approval authorities.

(iv) Money Laundering

This is mostly related to transactions that were conducted by and on behalf of Jho Low and
1MDB including banking institutions that failed in its legal obligation to question and verify
source of funds. This is a violation of Anti-Money Laundering Act specifically meant to
prevent such large transfers and to curb terrorism funding. (The Anti-Money Laundering,
Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001)

Failure of legal obligation: Failure of banking institutions to prevent and investigate

questionable transactions with dubious reasoning and unverified documentation, are a major
failure of legal obligations.

(v) False declaration

Related to the issue of money laundering, officials of 1MDB were reported to give false
declarations to Malaysian banking institutions as well as Bank Negara on the purpose and
recipients of the transfers.

Failure of governance: False reporting as well failure to have internal mechanism to verify
declarations and official documents submission to institutions.

8
Section 3 Correlation between each ethical and corporate responsibility failure

Based on the above list of failures we can describe each section in the following money flow.
Investors are those who bought bonds and sukuks offered by 1MDB. There were also loans
that were offered to 1MDB using the Retirement Pension fund (KWAP) (Jones, 2020) All
monies generally end up with the ultimate beneficiary who is Jho Low (JL). Each governance
failure at each intersection between, internal controls and external controls, facilitated the
entire corruption.

Figure 3 Diagram: Author’s

Legends: This is a simplified snapshot of the

failures of each level of the money
flow. Each case of ethical and
corporate responsibility failures is
boxed according the relevant colors. It
There is a possibility of abuse of power as GLCs is near impossible to argue that each
belongs to the Ministry of Finance who’s minister breakdown is independent of each
is the Chairman of the Board of Advisor. other, instead appears to facilitate each
other.
9
Section 4 Literary review

4.1 Corporate governance (Internal governance)

This report will concern itself predominately on the governance’s process of 1MDB. It will
discuss the expected best standards against those which was applied in 1MDB. It has been
argued that effective corporate governance would significantly improve internal quality
control and risk assessment of a company (Noorul Azwin Md Nasir, 2021). It also
emphasizes the need for quality financial reporting to ensure stakeholders confidence and
potential investors interests.

a) Malaysian Standard Review

One of the earlier standards that was used or adopted was the International Financial
Reporting Standards (IFRS) and International Accounting Standard (IAS), however these
were only persuasive in nature and not compulsory. (Tan, 2000) This led to the formation of
the Malaysian Accounting Standards Board (MASB) under the Financial Reporting Act of
1977, which has adopted the Malaysian Financial Reporting Standard (MFRS) that fully
complies with IFRS framework. (N.M, 2005) This provide a framework that is consistent
with international standards and hopes to promote conformity to international community
expectations and regulations.

Malaysian corporate financial reporting is governed primary by the Malaysian Code of

Corporate Governance (MCCG) and the Companies Act 1965 as well as the requirements of
the Security Commission of Malaysian (SCM), the Companies Commission of Malaysia
(CCM), Bursa Malaysia and the Malaysian Institute of Accountants (MIA). These standards
are in place to provide guidance and regulatory insistence of good governance within
organizations in preventing frauds. (Wahab, 2007)

b) Corporate Governance in Malaysia

IN 1998, the Malaysian Institute of Corporate Governance (MICG) was established with the
primary intention to focus on advocacy programs on corporate governance matters (Noorul
Azwin Md Nasir, 2021). MICG also supports and recognizes the MCCG as part of the
financial reporting standards that companies must adhere.

10
 c) Malaysian Code of Corporate Governance (MCCG)

MCCG was introduced in 2000 as a corporate tool for corporate governance reforms
(Malaysia, 2021). The MCCG was reviewed and updated in 2007, 2012, 2017 and was also
updated in the present year of 2021. The key features of MCCG’s guide can be seen below:

Figure 4.1 (c). Source: Page 3, MCCG guidelines

It was designed to encourage and guide the applications of good reporting standards for
companies in Malaysia. It provided clear and easy to follow guidelines for companies to
ensure compliance and adaptability with strong emphasis on reporting. The MCGG provides
three important principles for engagement4;

4
MCCG booklet can be found here: https://www.sc.com.my/api/documentms/download.ashx?id=239e5ea1-a258-4db8-
a9e2-41c215bdb776

11
 There are 3 important principles in
MCCG;
Principle A deals with the
management of the boards,
positions, terms of directorship and
the role of a chairman.
Principle B deals the independence
of an Audit committee and its
function to overseas sound financial
reporting as well as internal control
mechanisms.
Principle C deals with building
trust with stakeholders and having
clear objectives. It also provides
guidance on conducting general
meetings, making informed
decisions and voting best practices.
Figure 4.1(c)(i) Diagram: Author’s

4.2 Review of compliance of 1MDB with the MCCG

These principles will be applied and compared to the workings of 1MDB to identify failures
and process that helped facilitate the corruption. Only relevant sections will be identified for
analyses and discussion.

a) Principle A

(i) Board responsibility

MCCG practice Notes:

12
Guidance’s note:

Analysis of 1MDB practices

The board of 1MDB has clearly been ineffective and failed in its fiduciary duties as agents of
the shareholders, in this case the government and ultimately the people. It appears from the
activities that was conducted through the company, there was a failure of reviewing the
activities of the management. The money transactions clearly shows that the board did not
exercise its obligations to asses managements performance and to ensure that the business of
the company is properly managed.

Although the chairman of the board and the CEO are different individuals, it is important to
note that the same expectation should be extended to the post of Chairman of the advisory
board. The chairman is also the minister responsibility for GLICs and is the head of the
government. The purpose of this demarcation to is to “facilitates the division of
responsibility between them…having the same person gives rise to the risk of self-review
and may impair the objectivity of the chairman and the board” (G1.3 pg 19, (Malaysia,
2021). In the case of 1MDB there was no such distinction when it comes to the post of
Chairman of the advisory board. One cannot argue that this obligation is limited to the BODs
and not extended to additional self-mandated boards, simply because the same aspiration and
expectation of corporate governance has to be applied.

13
The manner in which false declarations were given to banking institutions and the highly
unfair contractual agreement with Goldman Sachs clearly shows that there were weak
internal control and risks mechanisms. No significant action was taken to rectify such failures
and in fact the BODs further agreed to provide bonuses to the CEO, Mr Hazeem in 2014,
who was already earning a salary of RM90,000 per month (Lim, 2021)5 is shocking.

It is also unsure if there was any code of conduct and ethics produced and distributed to every
member of the company. This would have helped employees understand their obligations and
duties and encouraged to act unethically.

(ii) Board composition

Practice Notes:

Guidance notes;

Analysis of 1MDB practices

5
https://www.malaymail.com/news/malaysia/2021/08/17/ex-1mdb-ceo-confirms-jho-low-was-actual-ceo-
claims-pm-najib-put-up-drama-de/1998397

14
Gathering information regarding the composition of 1MDB was tiresome due the legal
position it faces now with the corruption trials in Malaysia, however the following board
composition was gathered from archived 1MDB website (Wayback, n.d.) As mentioned, they
had a three-tiered governance system comprising of senior management, BODs and BOAs.
The composition of the BODs and BOAs based on 2013 team are as follows:

Board of Advisors:

Figure 4.2(ii)a

Board of Directors:

Figure 4.2(ii)b

Based on this composition, apart from some diversity in experience, there appear to be no
gender diversity in both the boards. There is no classification of directorship as we are unable
to distinguished between independent and non-independent directors.

There are some notable names in the Board of advisory such Mr Bernard Arnault 6 and both
the excellencies which brings us to the issue of role and authority of the Boards of Advisors.
Perhaps an assumption can be made that this boards provides a feel-good advertisement for
the company and do not hold any meaningful portfolio. In any event 1MDB does not follow
the guidelines set by the MCCG.

6
Bernard Jean Etienne Arnault is the Chairman and CEO of Louis Vuitton SE

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 b) Principle B

(i) Audit Committee

MCCG Practice notes:

Guidance notes:

Analysis of 1MDB practices

Although an audit committee was mentioned in the National Audit Department report on
1MDB in 2015 (PAC, 2015), an extensive search on 1MDB failed to produce any published
list, that the company had an audit committee. A search on their archived website also
relevels no indication of any committees.

16
Looking at the key practice and guidance notes, it shows the number of issues that would
have been detected or prevented and ratified if only an audit committee was appointment and
was effective, for example the approval to transfer monies to JV companies for Jho Low.

The composition of the directors is also not distinguished between independent and non-
independent directors which further proves that any committee if appointed would not have
complied with the MCCG guidelines for the inclusion of non-independent directors as audit
committee members.

The failure to have an effective audit committee is telling and a strong indication that no
emphasis was placed on having a good governance framework. This provided the governance
gaps that could be used by individuals to manipulate the company for unethical purposes as
was seen with the company.

(ii) Risk Management and internal control framework

MCCG practice notes;

Guidance notes:

17
Analysis of 1MDB practices
Having identified the activities that was conducted in figure 3, it is clear the BODs failed to
carry out their duties effectively. Between the years of 2009 to 2014, numerous questionable
transactions were conducted through the company, from providing false declarations to
banking institutions, accepting high risk agreements with Goldman Sachs, transferring large
amount of money to Jho Low, demonstrated that’s the internal control mechanism were weak
or non-existence (PAC, 2015).

The fact that it went on for those years also demonstrate that no effective review was
conducted. The boards also did not hold any persons or officers accounted for unethical
behavior nor any officers were reprimanded for providing false and fake information to
authorities which is a failure in compliance.

c) Principle C

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 (i) Engagement with stakeholders

Practice notes:

Guidance notes:

Analysis of 1MDB practices

One of the easier notes to comply, which can be done by providing an annual report. This can
be placed in their website or social medias. Unfortunately, 1MDB could not even fulfill this
obligation. There was no annual report submitted to Bursa Malaysia. A search on Bursa
website reveals no information or submission. Annual reports are one way of engaging with
stakeholders both internal such as shareholders, employees, and corporate partners as well
external parties such as potential investors.

In the case on 1MDB, not only was there no annual report, their annual audited accounts were
also delayed many times. It was reported that 1MDB were late at least five times in their
submission to Companies Commission of Malaysia for the reporting years of 2010-2015.
( (Zamhari, 2015), frequent delays are normally sign of poor management, irregular

19
accounting issues, and board hesitancy in accepting the outcome of an audit. it serves as a
giveaway that something is not right.

(ii) Conduct of general meetings

Practice notes:

Guidance notes:

Analysis of 1MDB practices

Based on parliamentary PAC records, there were general meetings in 2009 and for a few
years in which the boards were seen seeking information regarding transaction as well as
providing directions to the senior management, which was ignored (PAC, 2015). From the
reading of the PAC document, it appears that the meetings were not effective, in the context
of engagement and participation. Providing lip service to the board by the senior management
is a cause of concern which the board did not act or rectify.

4.2 External governance

a) Auditing standards

Accounting standards in Malaysia are issued by the Malaysian Accounting Standards Boards
(MASB) through power conferred to it by the Financial Reporting Act 1977. MASB
introduced the Malaysian Financial Reporting Standards (MFRS) in 2012 which is fully

20
compliant with the International Financial Reporting Standard (IFRS) framework. MASB
provides two types of standards, one for entities other than private entities and for private
entities7

The auditing standards are regulated by the Malaysian Institute of Accountants (MIA), which
provides Malaysian approved standards on auditing that are consistent with the Internationals
Federation of Accountants (IFAC) and the International Auditing Standards Boards (IASB).
One needs to be able to distinguished between standards which are regulated by the MASB
and the auditing standard which primary affects the accountancy profession in Malaysia
which is regulated by the MIA.

b) Auditing issues in 1MDB

1MDB has on numerous occasions delayed their submission of their audited accounts due to
external auditors requesting for information or verification. We will briefly identify the
accounting firms appointed by 1MDB and discuss the issues surrounding their audited
accounts.

It must be noted, that there are companies that change their auditors due to a number of
reasons, some legitimate such as costing issues or Director’s preference to work with new
auditors. These are often done during annual general meetings in which external auditors are
reappointed or terminated, however in the case of 1MDB there are underlying ethical factors
for change of auditors.

1st Auditors (Messrs. Ernst & Young or commonly known as E&Y)

E&Y was appointed by TIA in 2009 and was terminated in 2010 before 1MDB was due to
submit the 2010 financial statements. (PAC, 2015) 1MDB financial year ends in March. Prior
to termination by the board, E&Y had raised a few questions, namely:
a) Seeking due diligence reports on the ownership of the joint venture’s companies.
b) The ownership status of PSI property
c) Requested a copy of the financial statement of JV companies.

7
The MASB standards are explained in their website: https://www.masb.org.my/pages.php?id=2

21
In April 2010 E&Y further raise their concerns for additional information and demonstrated
that they were not satisfied with information supplied by the management. Their insistence on
proper information is argued for the reason of their termination by the board.

2nd Auditors (Messrs. KPMG)

KPMG was appointed in September 2010 and were terminated in December of 2013 (PAC,
2015) KPMG signed off on the 2010 statements but added an “emphasis of matter” note
regarding the RM4.2 billion worth of notes which was guaranteed by Petro Saudi (PSI)”
(Netto, 2015). This shows that there was still insufficient information supplied by the
management.

Following from that in 2013, prior to their termination, KPMG had requested the following
clarifications:
a) Confirmation on ownership of investments of Bridge Global SPC by BSI bank
b) Due diligence on the legality and status of SPC
c) The net asset value (NAV) in bridge global SPC and their financial statements

KPMG was not satisfied with the information and proceeded to issue a statement of
reprimand. Shareholders decided to terminate the services of KPMG

3rd Auditors (Messrs. Deloitte)

Deloitte was appointed in 2013 after the termination of KPMG. Deloitte proceeded to
validate the financial statement for the year 2013 and 2014 respectively (PAC, 2015)
However, the 2014 financial statements were signed off with lengthy pages titled as critical
accounting judgement and key source of estimation uncertainty. (Netto, 2015) This again
demonstrates that there was insufficient information to make a proper evaluation of the
accounts.

Ethical issues

Accounting firms are subject to the MFRS and auditing standards approved by MIA. There
were importance questions raise by the first auditors E&Y that were not answered
satisfactory but, KPMG has managed to validate the statements. Likewise, the questions

22
raised by KPMG in 2013, also did not get satisfactory explanations but was also validated by
the subsequent auditors. This raises a few questions:

1) Since all audit firm are subject to the same standard, what had changed for the
auditors to accept previously unsatisfied claims?
2) Is looking at superficial evidence while knowing that visible evidence and real
evidence may be different, is sufficient to look the other way?
3) Is profitability the main driving force of audit firms, KPMG were paid close to
RM2million in audit and non-audit fees in 2012, Deloitte were paid RM5.3million of
audit and non-audit fees in 2013 and in 2014 the audit fees alone was RM4.7million.
(Zamhari, 2015)
4) Is it acceptable for an audit firm to avoid liability by merely stating that some
information is unverified information in the accounting notes?

These are issues that must be discussed on a larger context and platform and requires industry
players inputs. There are issues that are raised by looking at 1MDB alone and as such this
paper will limit to only observing those issues and cannot fully attempt to discuss it at length.

4.3 Institutional governance

a) Bank Negara and Banking Institutions

The sorry state of affairs in the entire process is made possible with assistance of Bank
Negara and banking institutions in Malaysia and around the world. Malaysia has the
necessary provisions and acts such as the Money Laundering Act to regulate large
transactions that are similar to other countries (Rahman, 2008) It is difficult to envisage the
lack of seriousness in verifying names and documents as well as source of funds before
allowing transactions. Does the requirement of information merely paper work with no legal
obligation or consequences? One of the main banks was AmBank Berhad which was
sanctioned and fined by the Malaysian authorities for allowing the money transactions.
(Adam, 2021) The amount of money that was transferred out of the country as well as those
in foreign jurisdiction puts the banking structure and institution on notice that there is serious
lack of uniformity and application of banking laws and governance. Many countries since
have taken notice and stated legal proceedings such as United States of America,
Switzerland, Singapore, (BBC, 2016)

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 b) Parliamentary Accounts Committee (PAC)

The PAC is appointed to monitor and examined accounts of public authorities and federation
on public expenditure8. The case of 1MDB attracted the involvement of the PAC due to is
status as a GLIC9. Although members in the PAC raised many important and valid questions,
due to the political nature of the PAC which is made up of the members of the Parliament, no
serious attention was given at that time. The membership is a reflection of the house of
representative which are adversarial in nature. Many important facts were identified but there
was no political will to proceed with stronger recommendations apart from some
restructuring exercise. No action was taken against individuals perhaps due to allegiance to
certain political parties and leadership. There was an ethical duty by the PAC to safeguard the
interest of shareholder, in this case the government and the people of Malaysia.

4.4 Summary of ethical and corporate responsibility failures

Based on the analysis of the case, we can identify and summarize the failures into two
categories:

a) Failure within 1MDB (Internal).

These failures were also identified in the Public Accounts Committee report (PAC, 2015)

1. Weak internal controls (example, approval to transfer money)

2. Weak documentations and due diligence reporting (Providing false information to
banks, failure to conduct due diligence and feasibility studies)
3. Failure of management to follow the directive of the BODs
4. Failure of BODs to act against delinquent management.

b) Institutional failure (External).

8
The PAC website: https://www.parlimen.gov.my/pac/latarbelakang-pac.html?
9
The PAC report on 1MDB can be found here:
https://www.audit.gov.my/images/pdf/2018/1MDB/RINGKASAN%20EXEC_15052018.pdf

24
 1. Weak internal rules and regulations against money laundering within banks (Jones,
2020).
2. Auditing standards (variation standards in which firms approve financial statements)
3. Lack of political will to act against wrong doing (Jones, 2020)
4. Lack of enforcement on suspected frauds and criminal activities.

Section 5 Recommendations.

The recommendations will touch on 1MDB as a company as well as general applicability that
could help in preventing any recurrence of such cases in the future. The recommendations
will look at internal reforms which are related to a company and external reforms in relation
institutions and enforcement agencies.

5.1 Internal governance recommendations.

Compliance to MCCG and other statutory requirements.

The main recommendations are to ensure that the practice notes and directives of the MCCG
is followed strictly. There should be sanctions placed to insist and require compliance. This is
especially necessary if the company deals with public money or wealth.

Mandatory cap on investment limits, clear operations and investment processes

In the case of 1 MDB examples: we should consider placing a mandatory cap on investments
limits and clearer mechanism or process to guide the due diligence process in making
investment decisions. Any failure to comply with such procedure will attract sanctions by the
board. It would be necessary also to have an investment committee or board to provide
guidance for any investments that a company wish to make.

Preventive measures
All companies must not only have measures to detect irregularity but also put in place
preventive measures for example multiple approval levels for high investments or transfers of
large amount of money including written confirmations.

Decisive BODs

25
BODs must make strong and decisive decisions when it comes to delinquent management.
There must be strong mandate from shareholders to support directors’ decision to remove
ineffective offices from the company for the sake of company sustainability. Failure to do,
the directors must be held accountable for failure to protect the company.

5.2 External governance recommendations.

Banking intercontinental protocols.

Stricter interbank and inter-continental transfer protocols and rules needs to be in place to
prevent any further recurrence. Stricter documentation and source of funds verification must
be in place and enforced at all times by all levels of banking officers.

PAC objectives
PAC should be used as a bi-partisan office to investigate cases of national interest and as such
should not be driven by political affiliations but by national interest. As a developing nation
these are the tools that parliamentarians can use to raise the level of maturity in our public
accountability standards.

Enforcement agencies
It is often said that the bark of our enforcement agencies such as MACC or NAD is as loud as
its masters would allow. There is a need for these agencies to be independent from the
executive by either placing them under the direct supervision of parliament or conduct
elections to choose leadership of these agencies to prevent political interference.

Better monitoring of Audit Standards

MIA to have stricter monitoring of standard applications by members to maintain uniformity
of application. The importance of ethical standard over firm profitability should be prioritize.

6. Conclusion

There are many reasons for the failure of governance in 1MDB, which includes political
interference, structural defect, institution weakness, weak directors, unreliable internal
systems, and most importantly, all the above was the result of unethical behavior that led to
criminal activities. 1 MDB is an example in which the failure of governance was observed at

26
every level of company operation, from deceiving the investors, bribery by the underwriters,
failure of governance at the BODs’ levels and operational level, conflict of interest between
the Chairman of the Advisory Board and the relevant ministries, false declarations by officers
and banks failure to conduct source of fund verifications that allowed the entire corruption
scandal to continue. This case provides a good example for ethical and corporate
responsibility students to study and understand the implications and process involve and
ensure that such situation should not arise in the future.

27
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