PERWAJA STEEL ; SCANDALS , FRAUD

ACCOUNTING AND ETHICAL ISSUE

Introduction
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 ; Father Of Modernization. However, Perwaja failed to make profit,
and was associated with great losses, and multiple scandals. Most of these are politically
related.
Company Background
Its first CEO was Mr Chin Guan Pheng, who is an accountant by profession. He is a
member at CPA Australia Ltd, and a Member at Malaysian Institute of Accountants.
Its core business was steel products ; finished and semifinshed steel products.
Perwaja steel was a big player in steel market both in domestic and international. A steel
plant costing RM1 billion was built in Terengganu to supply the domestic needs for steel
products.
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 ).

Share Ownership : Perwaja Steel Sdn Bhd

Terengganu State Government 19%

HICOM
Nippon Steel

HICOM 51%

Terengganu State
Government

Nippon Steel 30%

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 fundings 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. No legal
action was taken until Eric Chia was arrested in March 2004.

Issue and Scandals

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 (Jeyasingam 2004).
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.
Misuse of US $ 196 million loan

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 : Awarding contracts to companies related to CEO 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.

Ethical Issues
1) Accounting Fraud
2) Corporate Governance
Unauthorized contracts between Perwaja and both local and international companies
show failure of corporate governance as internal control process has been failure due to
conflicts of interest that give advantage to certain directos.
Possible Recommendation
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 accounatbility 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 whistleblowers, 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.
Conclusion
The objective of business for profit maximization should be constrained by the
requirement that profits be obtained through legal and ethical ways. The main source of
this scandal is the desire to earn money quickly and the management expectation which
is opposite to the principles of professional ethics. The ethics should be monitored and
educated as the commitment to produce a good ethical organization and restoring the
loss of confidence .A clear communication should be implemented to all the employees
about the expected behaviours in the organization as only ethical methods are the only
way of doing business. The enforcement and monitoring process should be conducted
ethically for enhancing good governance practice with better financial reporting

REFERENCES

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http://titan.apiit.edu.my/uctipagol/projectinfo.asp?txtID=TP030366
http://www.members.tripod.com/terengganukite/perwaja.htm
https://wtfreport.wordpress.com/2011/12/15/the-perwaja-steel-scandal/
http://smallbusiness.chron.com/prevent-financial-statement-fraud-3789.html
http://transparency.ie/sites/default/files/TIWhistleblowing.pdf
https://www.marsdd.com/mars-library/internal-controls-accounting-key-benefits/