Steel accounting: The Genealogy of Fraud in State-owned Business

Amal Hayati Ahmad Khair

University of Essex
Mohammad Hudaib
University of Nottingham

Abstract
The purpose of this paper is to explore how local and global capitalist powers manage frauds.
Utilising Foucault disciplinary power using Perwaja as a case study, we demonstrate how the
ruling party led by a dominant leader and his capitalist cronies managed frauds through
normalising the behaviours of individuals in organisations as well as inflict punishment on
those who oppose such conducts.

Key words: fraud, accounting scandals, corruptions, Foucault, crony capitalism, Malaysia

Steel accounting: The Genealogy of Fraud in State-owned Business

1.0 Introduction
Fraudulent activities within organisations and societies are increasingly becoming a modern
day business phenomenon. In fact, a number of empirical studies stated that over fifty
percent of all respondents surveyed believed that fraud is a major business problem (Cain,
1999; KPMG, 2002) needing serious attention. Fraudulent activities do not only occur during
strong economic conditions but would also exacerbate during economic downturns. A recent
online poll reported that nearly two-thirds of respondents expected accounting fraud to
increase during the next two years (Deloitte, 2009). Besides financial debacles, management
misdemeanours and misstatements by corporate officials being the main contributors for
frauds, other contributory factors during economic downturn include smaller paychecks,
reductions in employee headcounts and internal controls, as well as diminished morale
(Francis, 2009).1 The size and scope of frauds have also increased over recent years, the
latest being the case involving the chairman of a leading Indian outsourcing company,
Satyam Computer Service2 who was found to have systematically falsified the accounts to the
extent that more than ninety percent of the companys listed assets (50.4 out of 53.6 billion
rupees) was non-existent during the last quarter of the fraud disclosure, and the revenue was
also found to be inflated by 20 percent (Bloomberg, 2009), despite being audited by one of
the largest accountancy firms in the world, PricewaterhouseCoopers.
Although numerous actions have been undertaken by various parties to reduce or
eliminate accounting fraud from occurring, their attempts were being frustrated by auditors
choice to agree and collude with the management in committing frauds during the periods

Kerry L. Francis is the chairman and national leader of Deloitte Financial Advisory Services LLPs Corporate
investigations practice.
2
The company was listed on the New York Stock Exchange since 2001 and on Euronext since January 2008 .

before the business collapses (Gavious, 2007; McMillan, 2004), especially among the big
four international accounting firms. High profile cases like Enron, WorldCom, Quest and
Global Crossing, all pointed to the use of accounting techniques to deceive and mislead the
market and users. The U.S. Treasury Secretary, Henry Morgenthau Jr., also blamed the
ingenious lawyers and accountants as the culprits who created methods for clients to avoid
taxes (Block and Griffin, 1999). However, accounting practitioners argue that even if they
did not collude with management, accounting frauds may still occur because the role to detect
all frauds and errors is beyond their responsibility. The expectation gaps3 has been smartly
managed in a way that would not reduce the auditors credibility and the publics trust and
confidence in financial reporting (Sikka et al.,1998).
There has been an upsurge interest in studying fraud following the major scandals and
crises that rocked the economy and affected societal well-being. However, the majority of
these studies mainly focused on the issue of fraud in developed countries such as the USA,
the UK, Canada, and Australia (Bayou and Reinstein, 2001; Cullinan and Sutton, 2002;
Lehman and Okcabol, 2005; Stalebrink and Sacco, 2007; Reinstein and McMillan, 2004;
OConnell, 2001; Baker, 2002; Lee, 2006; Gavious, 2007; Rezaee, 2005; Cullinan, 2004;
O'Connell, 2004) and very limited in the case of developing countries (Adeyemi, 2004;
Bakre, 2006, 2007). Although fraud issues in both developed and developing countries may
look the same, the differences in the environmental circumstances affect the nature of fraud.
For instance, the nature of fraud in state-owned businesses may not be the same as familyowned or public-owned businesses and the political and socio-economic environment that
exist in the country may act as catalyst for the occurrence of fraud.
Hence, in this paper, we attempt to provide answers as to what makes fraudulent
practices to exist and reinforce in Malaysia based on the context of a state-owned business,
3

The differences between what the public expects from an audit and what the auditing profession views the
audit objectives to be (Chandler and Edward, 1996).

using Perwaja Steel as the case study. Using Foucault theoretical framework on techniques
of control (discipline) viz. hierarchical observation, normalising judgement and examination,
the paper explores how the genealogy of global and local capitalist power and knowledge
assists corporations to commit fraud. In this paper we argue that fraud practices in Malaysia
are not only influenced by the power historically established by the capital imperialists in the
country but also due to the existence of weak governance structure within organisation,
powerful state politics, passive social cultures and traditions, and struggle for economic
dominance by politicians.
The remainder of the paper is organised as follows. The next section discusses
Foucaults theoretical argument and outlines the framework for analysing the fraud case.
Section three presents the analysis, followed by the conclusion in section four.

2. The Theoretical Framework

2.1 Foucault theory of knowledge and power
Foucaults genealogy of power and knowledge may provide useful insights in understanding
how accounting techniques and institutions are developed to serve specific purposes.
According to Foucault, knowledge is interrelated with power; the former enables the
exercising of the latter and the latter creates system which produces the former.

The

complementary nature of the two approaches in terms of power and knowledge is conceded
by Smart (1985, p. 64):
Knowledge is inextricably entwined with relations of power and advances in
knowledge are associated with advances and developments in the exercise of
power. Thus for Foucault there is no disinterested knowledge; knowledge and
power are mutually and inextricably interdependent. A site where power is
exercised is also a place at which knowledge is produced. We need to be clear
about this formulation. It does not represent a reformulation of the idea that
knowledge is relative to its socio-historical context, or that the concealed presence
of ideology is contaminating a potentially pure form of knowledge, but at its
simplest that knowledge and power are inextricably and necessarily linked.
4

Foucault championed two approaches, i.e. archaeology and genealogy,4 in looking at

the relationships between power and knowledge. Archaeology, according to Foucault, is a
methodological framework while genealogy is both the reason and target of analysing the
discourses to show how events have shaped our knowledge, practice, type of rationality,
relationships to ourselves and others (1984 cited in Mahon, 1992, p. 105). In other words,
unlike archaeological method that enables the studying of history of a particular form of
knowledge as discourse through discursive formations, the genealogical approach explores
the multiple forces of power relations and aims on who to use the discourse and for what ends
(McNay, 1994; Windshuttle, 1994).
In short, the genealogical approach has a wider scope than archaeology, with its
central area of focus being the mutual relations between the system of truth and modalities of
power and the way in which there is a political regime facilitating the production of truth
(Davidson, 1986). According to Dreyfus and Rabinow (1982, p. 105), The genealogist is a
diagnostician who concentrates on the relations of power, knowledge and the body in modern
society. Hence, genealogy emphasises a re-conceptualisation of the current order, rejecting
what is tacitly accepted but known to be flawed, and problematising it in terms of its
historical production (Kearins and Hooper, 2002, p. 735).
Dean (1992, p. 216) asserts that genealogy includes the methodological
problematisation of the given, of the taken for granted and that it stands against claims to a
veridical history.

Hence, an analytical approach focusing on local, discontinuous

knowledges can be used to analyse specific events. Smart (1983, p.135) argues that these
disqualified knowledges would produce critical discourses:
The function of such discourses is to interrupt the smooth passage of regimes
of truth, to disrupt those forms of knowledge which have assumed a self4

The term genealogy used by Foucault is derived from Nietzsches genealogy of morals.

evident quality, and to engender a state of uncertainty in those responsible for

servicing the network of power-knowledge relations, for example, the judges
of normality. Therefore, at the very heart of genealogical analysis is the
activity of the critique, rather than, for example, the provision of programmes,
prophecies, or policies.

Under the genealogical approach, the explicit focus is on the enactment of power.
Power is theorised by Foucault as something positive: not as repression or suppression, but
as a set of practices which could be specified and which positively produced ways of
behaving and predispositions in human subjects: indeed the most pervasive power is that
which makes its subject cooperate and connive in their subjection to it (Hoskin and Macve,
1986, p. 106). The development of a phenomenon is looked upon as a fight of forces among
each other (Roth, 1981; McNay, 1994). Therefore, the core analysis of the genealogical
approach stresses on how power is exercised and sustained through the use of disciplinary
discourses and through associated administrative routines of surveillance, individualisation,
exclusion, and ultimately through normalisation (Kearins and Hooper, 2002, p. 736).
Foucault identified three main techniques in controlling or disciplining the society:
hierarchical observation, normalising judgement and examination. Hierarchical surveillance
through the power of writing, recording and other technological means create control
(power) over individuals who are hierarchically constructed within a society. The second
technique of disciplining the society is through imposing the disciplinary regimes and
procedures to ensure the conformity of individuals to norms (normalising judgement).
Those who did not confirm are labelled bad or abnormal individuals who deserve
punishment5 to correct their deviant behaviours until they live by societys designated
standards and norms. Combined with hierarchical observation, normalisation allows the
documentation of non-conformance individuals to be observed, for their identifications to be
5

Normalising judgment in society is unlike the older judicial system of punishment that merely judges each
action as allowed or not allowed by the law and does not enforce the normality of the action i.e. it permits
more freedom of actions.

revealed and for the system to analyse and govern them. Thus, under such disciplinary
society, the impact of being monitored allows instruments (e.g. laws, procedures & cameras
etc) of surveillance to be internalised.
The third technique involves examining the detailed information documented of the
individuals.

Combining hierarchical observation and normalising judgement with the

technique of examination, allow the control of individual behaviours through making them
visible within the social web, transcribing their attributes and variations into codes that enable
complete documentation and consolidating the controlling process. According to Foucault,
this technique incorporated the whole deployment of force and the establishment of truth
(1977, p. 184). It not only generates the truth (reality) about those who go through the
examination (e.g. the state of their being or knowledge) but also controls their behaviour (e.g.
directing them to a certain discourse).
Examining the history of the development of a fraudulent case by focusing on the
power and knowledge rather than on the tacit account often non-critically portrayed, may
enhance our understanding on how interrelated factors in the past contributed to the making
of the fraud. Thus, Foucaults genealogical approach termed as a history of the present
(Dean, 1994) helps in exploring how the collective effect of history results in the present
system of fraud.

In other words, it presents ...a critique of our time, based upon

retrospective analysis (Lotringer, 1989, p. 64).

The genealogy of fraud therefore involves looking at how it is practiced within a
specific discourse and under the rules of specific information (knowledge) of that discourse
as well as within the matrix of power relations including the disciplinary powers at a given
time and in a given society. Since the power in a particular society is also influenced and
reinforced by other supra socio-economic powers, there is a need to consider such powers
when examining a particular phenomenon in society.

2.2 Capitalism and Global Capitalist Power

According to Wallerstein (1974), capitalism is the first form of society that integrates all
other types into a single social formation which consequently led to the modern world
system.

This is confirmed by Bell (1979, p. 14) where he defines capitalism as an

economic-cultural system, organised economically around the institution of property and the
production of commodities and based culturally in the fact of the exchange relations, that of
buying and selling. In order for capitalism to survive, constant access to new sources of
cheap labour, land, raw materials (crops and minerals), and market are required. Since
capitalism is a system based on the endless accumulation of capital, this translates into
ceaselessly hunting for channels of breeding money.
The expansionary nature of this modern world system is evident from the expansion
of Western influence on most of the developing countries in the world (Robinson, 2004).
This expansionary is signalled by a period of colonialism and imperialism6 by European
powers, led by the Great Britain and the United States on other nations which include,
amongst others, the Latin America (between 1492 to 1530s), Africa (1500s), Asia (1500s to
1900s) and the Middle East (1700s to 1900s) (Robinson, 2004).
Through expansion, capitalism has restructured societies according to the capitalist
aims. As highlighted by Parenti (1995, p. 4):
The expansionists destroy whole societies. Self-sufficient peoples are forcibly
transformed into disfranchised wage workers. Indigenous communities and folk
cultures are replaced by mass-market, mass-media, consumer societies. Cooperative
lands are supplanted by agribusiness factory farms, villages by desolate shanty towns,
autonomous regions by centralised autocracies.

Expansion of capitalism cannot be seen in isolation from globalisation as the latter indicates
6

Said (1993, p. 58) defines imperialism as the practice, the theory, and the attitudes of a dominating
metropolitan centre ruling a distant territory. This domination could be through direct political control known
as colonialism or through economic dependence which is termed economic imperialism.

the near culmination of the centuries-long process of the formers extensive enlargement that
brings about a new form of connection between all human beings around the world
(Robinson, 2004). It is argued that the final stage of this extensive enlargement began with
the wave of colonisation in the late nineteenth and twentieth centuries in Africa and Asia and
concluded with the (re)incorporation of the former Soviet-bloc and Third World
revolutionary states in the early 1990s (Robinson, 2004). Hence, the world capitalism system
experienced a dramatic expansion under globalisation which paved the way for the total
commodification or marketisation, of social life worldwide.
Thus, global capitalist power tries to promote stability, growth, and prosperity for an
increasing number of people around the world. According to Sklair (1995, p. 98) the
ultimate strength of capitalist global hegemony is that it continually works, and works very
hard, to persuade people that the system is natural, fair and fundamentally better than any
realistic alternative.

This situation has influenced all nations, especially developing

countries, to believe that the prosperity of the countrys economy depends highly on the
adoption of capitalist rules.

This notion has, either directly or indirectly, made the

developing countries to believe in their own inferior socio-political and economic setting as
compared to advanced nations. This inferiority complex results in developing countries
embracing the structures and values of their western counterparts.

2.3 Crony Capitalism

This refers to close relationships between businessmen and the state in a capitalist society.
Such close relationships are deemed essential for businesses to succeed and these are mainly
achieved based on favoritism shown by the ruling government in the form of tax breaks,
government grants and other incentives rather than through a free market and the rule of law.
Under the system of crony capitalism, significant parts of the economy are controlled

by the government. Under such system, dominant political leaders will use the power of the
state to make decisions in the best interests of a particular set of well-connected businesses,
rather than in the best interest of the market as a whole (Girling, 1997; Chang, 1998;
Krugman, 1998; Wade, 1998; Haber, 2002). In the extreme case, crony capitalism can
degenerate into corruption. This is because the contracts and appointments are awarded to
families and friends rather than by tender or merit. Hence under this condition, bribes to
political elites and tax evasion are not uncommon and they are labelled as plutocracy (rule by
wealth) (Phillips, 2004) or kleptocracy (rule by theft) (Bush, 2006). Phillip (2004) during
one of the interviews about plutocracy remarked:
Well, the plutocracy ... and I think we have one now and we didn't 12 years
ago when I wrote THE POLITICS OF RICH AND POORit is when money
has ceased just entertaining itself with leveraged buyouts and all the stuff they
did in the '80s, and really takes over politics, and takes it over on both sides
when money not only talks, money screams. When you start developing
philosophies in which giving a check is a First Amendment right. It has
produced the fusion of money and government. And that is plutocracy.

On the other hand, the ex-President of America, Bush (2006) defined kleptocracy as:
High-level corruption by senior government officials, or kleptocracy, is a

grave and corrosive abuse of power and represents the most invidious type of
public corruption. It threatens our national interest and violates our values. It
impedes our efforts to promote freedom and democracy, end poverty, and
combat international crime and terrorism. Kleptocracy is an obstacle to
democratic progress, undermines faith in government institutions, and steals
prosperity from the people. Promoting transparent, accountable governance is
a critical component of our freedom agenda.

Both plutocracy and kleptocracy are inseparable from crony capitalism system. Although
they seem to favour the politicians, the close relationships that the state has with the
businesses have indirectly benefits the businessmen. Businessmen in this case include not
only the corporations but also accounting firms. In getting business and clients under this
system, the accounting firms cannot escape from being involved in plutocracy and
kleptocracy. Although the accounting profession has its professional institution to govern its
10

members attitudes in fighting against unprofessionalism, to survive and compete in a

competitive market have indirectly driven the accounting firms to inevitably perpetrate such
actions.

3.0 Analysis of fraud practices in Malaysia

The analysis under this section starts by discussing the genealogy of crony capitalism and the
role of accounting in the practice of fraud.

3.1 Genealogy of crony capitalism power in Malaysia

In Malaysia, the formulation and implementation of key economic policies and regulation of
the markets are decided by the ruling political elites. The political powers would formulate
and implement key economic policies in a way that would favour a particular political
patronage. Gomez and Jomo (1999) argue that during Prime Minister Mahathir Mohamads
(Mahathir) administration (from 16 July 1981 to 31 October 2003), key economic policies are
known to assist in wealth accumulation and concentration through political patronage.
However, this problem would not have happened without the intervention of British
imperialism at two levels: the first is by ethnic manipulation, and the second, by selecting and
installing individuals who could ensure the British interest upon their physical departure for
Malaysia. With regards to the first level of intervention, the problem in ethnic integration
among Malays with the immigrants was ignored mainly because the Chinese and the Indians
was perceived as temporary residents who will return to their homelands in China and India
after accumulating enough wealth. With regards to the second level of intervention, power
struggle on who should govern the country and economic imbalance led at the beginning to a
class-based war and later on to ethnic riot. The class-based war was fought between the
Malaysian Communist Party (MCP) (mainly Chinese based) backed by China and the British

11

colonialists and their multi-ethnic bourgeois coalition.7 British ill treatment of the Malays,
such as neglecting them in the development programmes and tackling high unemployment
rate (Hooker in Hooker and Othman, 2003, p. 19), created resentment. Furthermore, the
Malays frustration was coupled with violation of Islamic principles in terms of the social and
political polices. Therefore, to defeat MCP8 and the Islamists9 as well as to guard its colonial
interests, the British had chosen to negotiate with UMNO despite the existence of other
political parties. UMNO, a secular conservative and elitist Malay nationalism party was
recognised by the British as the main vehicle for political reform (Hilley, 2001).

In

protecting its interest in the economy after independence, the British had agreed with the
formation of a substitute Chinese political party, the MCA, comprising of leading Chinese
businessmen whose interests were similar to the British. Established in 1949 and led by the
anti-communist Guomindang and some of the wealthiest businessmen in the country, MCA
was mainly formed to protect the Chinese economic interests through political involvement
(Heng, 1988, p. 57). However, the Indian based political party, MIC had been formed in
1946 after the visiting Indian Prime Minister Jawaharlal Nehru had encouraged Indians to
remain in Malaya (Stenson, 1980).
However, the majority of populace support was for PAS and this was shown when
nine out of ten federal seats had been won by PAS during the 1959s general election
(Hooker in Hooker and Othman, 2003).

Due to the continuous dissatisfaction on the

Alliances ability to protect their interests (especially the Chinese), two new political parties
(i.e. the Democratic Action Party (DAP) and the Gerakan, or Malaysian Peoples Movement)

The MCP had initially joined the British to defeat the Japaneses power over Malaya before turning against the
British over who should govern the country once the British relinquish Malaya. The announced reason why
Chin Peng the leader of MCP of that time had to launch an arm conflict against the British was due to the
opposition to the Federation agreement.
8
MCP was beaten before Merdeka (independence) but the Emergency remained until 1960. MCP was banned
under the Constitution which later forced the party to sign the peace deal in 1989 (Hilley, 2001).
9
They operate under a non-Alliance party known as Parti Islam Semalaysia (PAS Pan-Malaysian Islamic
Party).

12

emerged to attract supports from the Alliance supporters. The 1969 general election saw the
new parties securing more than two-thirds urban voters (particularly from the Chinese). This
victory celebration by the parties (mainly the Chinese) was countered by mass UMNO rally
on 13th May which had sparked the racial violence between the two ethnic groups. This led
to a state of Emergency declaration by the government which had seen the suspension of the
parliament under the premiership of Tunku Abdul Rahman and power was entrusted to the
then Deputy Prime Minister (Abdul Razak) and National Operations Council for order
restoration (Hooker in Hooker and Othman, 2003). The administration of Malaysia since
then was in the hands of UMNO under the leadership of Abdul Razak (from 14 may 1969 to
14 January 1976), Hussein Onn (from 14 January 1976 to 16 July 1981), Mahathir Mohamad
(from 16 July 1981 to 31 October 2003), Abdullah Badawi (from 31 October 2003 to 3 April
2009), and Najib Razak (from 3 April 2009 to present).
In short, the British colonial government which created divisions among the ethnic
groups politically as well as economically may be blamed for the 1969 racial riot. The New
Economic Policy (NEP) was implemented to eradicate poverty and diversify the economy.
Although it was a positive discrimination policy to help the Malays overcome economic
inequalities, the policy failed to achieve its main objective. Instead, it created a small group
of Malay super-rich class and widened social inequality among the Malays till present
(Gomez and Jomo, 1999).
The inequitable economic distribution within society may be attributed to the
emergence of crony capitalist power through the co-operation between the Bumiputera
political elites with certain Bumiputera and non-Bumiputera businessmen (especially the
Chinese) through political patronage which intensified during Mahathirs era. Under him, the
ruling partys power had been centralised in only a few executives hands (Gomez in Saw
and Kesavapany, 2006, p. 74). Selective businessmen were protected and supported by the

13

ruling party to ensure Mahathir achieved his goals of making Malaysia a fully-developed
industrial nation and creating enterprising community by 2020 (Gomez and Jomo, 1999).
The close links between the state and businessmen do not only brought mutual benefits to the
two groups but also seen as important for the development of non-Bumiputera business
interest (Gomez and Jomo, 1999). This inter-ethnic elite business co-operation is also seen as
pertinent to safeguard the interests of non-bumiputera capitalists (especially the Chinese)
since there appeared to be diminishing relative control of non-bumiputeras in some key
economic sectors. For example, Vincent Tan and Ananda Krishnan have become major
corporate figures through their elite business links with the government, i.e. through building
on rents they have captured with the governments privatisation of gaming operation (Gomez
and Jomo, 1999). Their links with the top political patronage elites and their involvement in
the companies controlled by the ruling political party have obviously been used for their
economic interests. Although the achievement of business success is not indicated through
these elite business links, the extent of their business independence remains questionable.
During Mahathirs era, the political patronisation on selected corporations by the
ruling party which had been dominated through colonial imperialism, was also obvious. As
asserted by Fraser et al. (2006), the ruling party influence had been imposed on firms through
listing restrictions, direct equity ownership of listed firms, control of the banking sector, and
through government-sponsored institutional investors (Gomez and Jomo, 1997, p. 36).
This link between the ruling party and corporations is well-recorded (see Gomez and Jomo,
1997, 1998; Faccio et al., 2001; Gomez, 2002). For instance, one of the companies which
was controlled by a Malay capitalist nurtured by Mahathir was Renong, which was
previously owned by UMNO but later been undertaken by Halim Saad. This company,
which was bailed-out, managed to secure a number of lucrative privatised projects including
the constructing of the multi-billion ringgit North-South Highway.

14

Malaysian Airlines

Systems (MAS) controlled by Tajuddin Ramli who also owned Celcom, the privatised mobile
phone operator, took over the government-controlled telecommunication company, Telekom.
The close relationship between both Halim Saad of Renong and Tajuddin Ramli of MAS (i.e.
Malay businessmen) with Mahathir (i.e. the political elite and head of the ruling party) clearly
shows the power of local crony capitalist cooperation which had been nurtured by the prime
minister Mahathir (i.e. ruling political elite) who often escape punishment by the power of the
prime minister, vice versa. This link between the ruling party and the capitalists also created
the culture which tampered the legal system and policing, i.e. corruption or fraud reached the
core institutions such as the police and the justice system, which undermined the sovereignty
and solidarity of the country.
Under Foucaults genealogy of disciplinary power and knowledge framework, it
becomes obvious that Malaysian society, since independence, was subjected to controlling,
normalising and punishing and this disciplinary power in the hands of the few elites,
intensified during Mahathirs administration (1981 to 2003). This is evidenced when his
deputy prime minister, Anwar Ibrahim, was dismissed from the government in 1998 and
shortly after being expelled from the ruling political party, i.e. UMNO. Anwars termination
was believed to be due to his open criticism on Mahathirs mishandling of the 1997 financial
crisis. A humiliating campaign on his private life had been used to remove him from office.
Mahathirs action of expelling Anwar from the government demonstrates Mahathirs
controlling power in ensuring that his mishandling conducts will not to be investigated as
well as to normalise the actions against him through punishment (i.e. whoever tries to deviate
and go against him, will be punished). These events indicated that the power is undoubtedly

15

in the hand of few individuals who controls everything in the country including the legal and
economic systems.10

3. 2 The role of accounting and crony capitalism power in Perwaja Steel perpetrating
fraud
The majority of fraud cases involving corporations in Malaysia have implicated the direct or
indirect assistance of politicians and the state officials. The huge amount of losses by those
corporations and the financial bailouts especially when the corporations eventually went
insolvent, had huge implications on Malaysians. Fraud cases which include criminal breach
of trust, cheating and misappropriation of funds had tripled in the last ten years in Malaysia
(CCID, Bukit Aman, 1995). The three most common types of fraud practices by businesses
in Malaysia were secret commission or kickbacks, lapping (withholdings cash receipts) and
kiting (mistake in the accounts) or falsifying invoices (The Sun, 15 June 2005).
One of the biggest financial losses in Malaysian history that had burdened the
Malaysian taxpayers was the Perwaja Steels RM9.1 billions (more than $US900million or
600million) liabilities of which RM4.1 billion are in the form of direct loans, RM5.1 billion
in government-guaranteed borrowings and a loan of RM105 million to one private company
(Equal Concept Sdn Bhd) that was formed to take over the running of Perwaja (News Straits
Times, 21 July 2000). The company was reported to suffer losses of more than RM2.9billion
and the 1998 Auditor-Generals report stated that Perwaja had been the biggest loan defaulter
by not paying up federal loans of RM893million (News Straits Times, 21 July 2000).
Originally established as Perwaja Terengganu Sdn Bhd (Perwaja Terengganu) on 22 April
1982 with RM250million paid up capital, the company operates in two plants in Kemaman,

10

Malaysias Corruption Perceptions Index (CPI) ranking and score never been improved from number 36
(2001) down to 56 (2010) (refer to Transparency International, CPI: measures the perceived level of publicsector corruption in 180 countries and territories around the world).

16

Terengganu and Gurun, Kedah. The company was taken over by Perwaja Steel Sdn. Bhd.
(Perwaja) in 1990. While the company was declared insolvent after a long waited report by
Coopers & Lybrand accountancy firm in 1996, the operation of the business continued under
Vertical Winners Sdn. Bhd. It was then changed to Perwaja Holdings Berhad (PHB) and
listed on the Bursa Main Board in 2008.
In 1986, Perwaja Terengganu accumulated losses of RM131million claiming it to be
due to management problem and appreciation of Japanese yen. In 1987, Eric Chia was
appointed by Mahathir to be the managing director (MD) of Perwaja as from 1988. During
1988, more than 10 proposals were received by the Government to turn the RM1.2billion
Perwaja plant into a profitable venture. In 1990, Perwaja Steel Sdn Bhd was incorporated to
take over Perwaja Terengganu Sdn. Bhd. A year after Eric Chias resignation in 1995, the
company reported a substantial pre-tax losses of RM376.54million. The losses were claimed
to be due to the expansion project involving the building of a rolling mill in Gurun, Kedah.
Despite the losses, the company secured a second RM600million loan approved by the
Employee Provident Fund (EPF)11 in 1996.

The huge loss totalling RM2.9billion was

disclosed in the parliament by the former Minister of Finance (MOF) Anwar Ibrahim
following a report by Coopers and Lybrand about the Perwaja Terengganus insolvency
status. A Government probe order was then issued on 10 April 1996 and the Malaysian AntiCorruption Commission (MACC formerly known as Anti-Corruption Agency (ACA))
started investigating the companys audited report for possible malpractices and fraud which
contributed to the loss. On 16 June 1997, a 51% stake of Perwaja was taken over by Maju
Holdings Sdn. Bhd. and continued operating under Vertical Winners Sdn. Bhd.
Eric was alleged to have dishonestly authorised payment of RM76.4million to the
account of Frilsham Enterprise Incorporated (Frilsham) with the American Express Bank Ltd.

11

The first syndicated loan granted by the EPF to the company amounting RM100million was in late 1980s.

17

in Hong Kong for technical assistance agreement (TAA) provided by Japans NKK
Corporation (NKK) for Perwaja plant in Gurun, when in fact no such payment was due to
these companies. He had also approved payment of the same amount without the approval of
the board of directors (BOD) or tendering committee (TC) of the Perwaja Rolling Mill and
Development Sdn. Bhd (PRMDSB). The offence was allegedly committed in his capacity as
the Managing Director (MD) of Perwaja between 4 November 1993 and 22 February 1994.
The case became worse when NKK was later found to be non-existent (The Malay Mail,
10/2/02004).
However, the then former senior group general manager, Ahmad Zaini comments on
the case stated that although the TAA was meant to be free, the payment had actually been
made to Frilsham Enterprise Incorporated account in American Express Bank, Hong Kong
following Eric Chias approval (News Straits Times, 18 September 2004). In his financial
report, Ahmad Zaini went on to state that NKK Corporation (through its general manager
N. Otani) had confirmed in writing that Frilsham was not its associate company, hence no
payment was requested from NKK Corporation (i.e. NKKs Otani did not sign the payment
request letter).

Interestingly, the former group senior operations manager, Akram Che

Ayubs report contradicted Ahmad Zainis. He stated that the TAA was not free and it was
never requested to be paid in one lump sum but rather in staggered payments. However, it
was reported by The Malay Mail (14 August 2004) that there was a letter instructing payment
to be remitted to Frislhams account with the American Express Bank Ltd in Hong Kong
which had been paid in one lump sum through Bank Bumiputera Malaysia on 22 February
1994. Perwajas former corporate director, Lim Chaing Cheah, who instructed the payment,
stated that he was ordered by the MD (i.e. Eric Chia) to proceed with it despite the absence of
any supporting documents to justify the said payment. Lim further pointed out that it was

18

customary in the company that all payments12 made should first be authorised by the MD and
countersigned by him. He said:
For example when a request for payment comes from overseas, we notify the
managing directors people. Once approval is given, we get the finance and
accounting department to process it (The Malay Mail, 3 August 2004).
Interestingly, the report from the companys external auditor, Coopers and Lybrand,
had always been unqualified until the company became bankrupted. The clean audit report
on the companys financial position had been presented to the BOD on 31 March 1994 and
was approved during the annual general meeting (The Malay Mail, 3 August 2004). The
responsibilities of Perwajas corporate director also surpassed four pertinent departments; i.e.
finance and accounting, administrative, corporate banking and management information
system (The Malay Mail, 3 August 2004), hence suggesting weak internal control system.
Although the probe into the RM2.9billion losses started in 1996, no one had been
implicated until 9 October 200413 when Eric Chia was arrested. However, his detention was
not related to the companys huge losses to bring the culprit to justice but rather a political
ploy ahead of the 2004s general election. Despite the charges brought against Eric Chia,14
he chose to implicate himself rather than risking his friendship with Mahathir. In his letter
addressed to Zainal Abidin Sulong (the then Chairman) tabled for the BOD meeting on 30
March 1996, he clearly stated that (1) he was answerable only to the Prime Minister (PM
Mahathir); (2) he was mandated by the PM to operate Perwaja as if it belonged to him; (3) he
implemented projects only after the PM had granted approval; (4) he received no salary or
benefits from Perwaja during his service; and (5) his service as MD in Perwaja is determined
by the PM.
12

Payments for projects, constructions of plants, purchasing of raw materials and services that include
technological consultancy (The Malay Mail, 3 August 2004).
13
During Abdullahs (Mahathirs successor) administration.
14
Alleged to dishonestly authorised payment if RM76.4million to the account of Frilsham Enterprise
Incorporated with the American Express Bank Ltd, Hong Kong for technical assistance (TAA) provided by
Japans NKK Corporation for Perwajas plant in Gurun, when in fact, no such payment was made.

19

Eric also informed the Perwajas Board of Directors during the meeting chaired by
Zainal Abidin Sulong that Perwaja was given special exemption by the Government for
purchases and contracts RM15million and above. In the minutes of the BOD meeting on 4
July 1993, Eric informed the Board that he had met Anwar, the then Minister of Finance a
day before the BOD meeting (i.e. 3 July 1993) who agreed to waive a circular 15 dated 6
August 1985 which requires all companies under the Government to get approval for tenders
amounting to RM15million and above. Eric then suggested for the formation of a tendering
committee (TC)16 comprising of himself as the chairman together with the other two directors
(i.e. Nik Mohamad Affandi and Zubir Embong).

The BOD unanimously approved the

procedure for the purchases and awards of contracts as directed by the MOF and proposed by
the tendering committee. Zainal further reported that the BOD also resolved that Eric be
allowed to conclude purchases and contracts without referring to the tendering committee for
consumable goods like electrodes, scrap, iron ore, lubricants, etc., and contracts of
RM5million and below.
Ironically, the former director of Perwaja, Nik Mohd Affandi Nik Yusoff, who not
only acted as the ministrys representative in Perwajas BOD but also sat on the TC panel,
told the court that the MOF had never forced Perwaja to activate its TC. Nik Mohd Affandi
also showed his disagreement with some parts of the 4 July 1993s minutes of meeting which
stated that the MOF had agreed to exempt Perwaja from seeking approval for purchases and
contracts of RM15million and above. These are not the comments of equal parties to a
commercial transaction, hence implying a calculated paternalism. Furthermore, evidence
shows all these liberal gestures were being carefully recorded as part of an accounting
process directed at securing a contract.
This case shows how Mahathir, as an ultimate powerful individual, was never referred
15

The Circular: is a strict financial guideline which requires companies in which the Government owns at least
51% equity, to keep the MOF informed on projects, tenders, and purchases at the initial stage of negotiations.
16
TC needs to approve on all contracts or purchase of RM15million or above.

20

to in the Perwaja fiasco. When the ACA investigating officer, Han Chee Rull was asked by
the court about (1) obtaining recorded statement from the PM, (2) the correspondence
between Eric Chia and the PM, (3) the PMs visit to the NKKs plant in Japan before the
TAA was signed, and (4) Eric Chias three suits that had been filed against NKK
Corporation, Lim Guan Eng and The Malay Mail, he confirmed that no recorded statement
was taken from Mahathir and that he was unaware of the last three issues. The unawareness
on the many incidents related to the accused Eric Chia by the ACA investigating officer
responsible in handling the case, implied some form of subjugation and control of the course
of justice by Mahathir.
Furthermore, the then Minister in the PMs department, Rais Yatim, stated that not
only was the Swiss Government prepared to cooperate with the Malaysian authorities in
probing the missing Perwajas money in Swiss bank accounts (The Malay Mail), but also an
official request to freeze the bank accounts of those allegedly involved in the scandal could
be done by the ACA when the Mutual Assistance in Criminal Matters Bill 2002 became law.
Following this, Rais Yatim reported that 3 senior ACA officers went to Zurich and some
went to Japan to find the last piece of evidence to wrap up the investigations. However, the
ACA officers later reported that they did not get cooperation from the Zurich bank and the
Japanese banking authorities, hence the vital evidence could not be sought. These two
government officers (i.e. Han Chee Rull and Rais Yatim) behaviour have been described as
staunch and working well (Kearins and Hooper, 2002). Raiss comments on Mahathirs
relative invisibility in the case ensured he was able to maintain friendly relations with the
powerful ruling party.
The Perwaja fraud case which dragged for 11 years (from 1996 until 2007) was
considered as one of the countrys longest investigations. Table 1 presents a brief chronology
of the fraud case involving Eric Chia.

21

Table 1 Brief chronology of the events involving Eric Chia:

Date/Year Events
1988

PM Mahathir appointed Eric Chia as MD of Perwaja Terengganu

1995

Eric Chia left PSSB

1996

Coopers & Lybrand reported PSSB losses of RM2.9billion; this was highlighted in
the parliament by Anwar (the Finance Minister) who was later expelled from the
government in 1998

2004

Eric was arrested and charged of CBT involving RM76.4million during PM

Abdullah premiership

2007

Eric was released/acquitted by the judge, Akhtar Tahir) who said the prosecution
had failed to establish a prima facie case against Eric.
Fault of the prosecution
1. failure to call 2 material witnesses (i.e. former secretary R.R. Durai Rajasingam
& the 5 Japanese witnesses including the director of NKK Corporation N. Otani)
2. the conflict in tendering documents prosecutions contention that the TAA was
free but when tendering its document at the trial, they stated the agreements would
be effective upon receiving first payment & NKK Corporations document which
stated the amount and the manner it should be paid i.e. in lump sum.

The involvement of foreign institutions and powerful individuals was blamed for the
case being dragged for so long. While this might be true due to the nature of the case, it may
also be a tactic used by the relevant party as a massive cover up exercise hoping that people
will forget about it with the passing of time (Grenfell, 1979).

Conclusion
The Perwaja Steel case did not only signify political patronisation of the government, but it
also by default, insinuates the intensification of capitalism by the various groups of
professionals (i.e. accountants and lawyers) and regulators. Although the case demonstrates
serious mismanagement of the company, its failure cannot be easily understood without
paying attention to the broader social, economic and political contexts of the case. It is
inconceivable to accept that serious fraud within any organisations could occur without
22

involvement of powerful and knowledgeable individuals such as political elites, regulators,

and professionals).
The ruling partys efforts in formulating policies which favour certain groups may be
attributed to the legacy of British colonialism and crony capitalist power. The case study
highlighted how the political patronage and the capitalist cronies managed frauds through
normalising the behaviours of individuals in organisations as well as inflict punishment on
those who oppose such conducts.

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