Academic journal article International Journal of Business and Society

The Role of Islamic Ethics to Prevent Corporate Fraud

Academic journal article International Journal of Business and Society

The Role of Islamic Ethics to Prevent Corporate Fraud

Article excerpt


In recent years, public and business communities have been surprised by the exposure of many corporate scandals and accounting fraud committed by company managers. This has disappointed many stakeholders, as, after the financial crisis in 1997, many efforts have been initiated and implemented to strengthen the business control and company conduct (Salin et al., 2011). It was acknowledged that one of the most important lessons learned from the financial crisis of 1997 is that weak corporate governance practices, such as too much power given to a single person in managing the company, weak internal control, and poor ethical work of directors have contributed to a company's failure and poor performance (Rahim et al., 2017; Ahmad et al., 2016; Zakaria et al., 2016; Omar et al., 2016; Asmuni et al., 2015; Salin et al., 2015; Hamid et al., 2011).

Realising this, market players around the world, including watchdog agencies and regulatory bodies, have embarked on a total overhaul of the corporate governance ecosystem in their respective country. From the United States (US) with the establishment of the Sarbanes Oxley Act, in the United Kingdom (UK) with the Code of Corporate Governance (formerly known as the Combined Code), and in South Africa with the South African King Report I, II and III, these guidelines were extensively established and revised to stop all these corporate diseases from spreading and becoming a cancer for the global business community. In Malaysia, the country's very own corporate governance guidelines, the Malaysian Code of Corporate Governance (MCCG), was issued in 2000. It was revised seven years later, to become known as MCCG (Revised 2007). The Securities Commission in July 2011 issued the Corporate Governance Blueprint 2011 - Towards Excellence in Corporate Governance (the Blueprint) with the aim to strengthen self and market discipline, complement regulatory discipline, promote internalisation of corporate governance culture, and underpin the sustainable growth of the company. The MCCG 2012 then launched in March 2012 as a first deliverable from the Blueprint.

However, all this effort seemed fruitless, as, after intensive works done by regulator and market administrators, corporate scandals still returned but with more searing facts. In the United States, for example, the Sarbanes Oxley Act, which was enacted on July 2002, did not solve problems, it created bigger problems for companies. Apart from too much compliance cost, these rules-based regulations did not educate the corporations and their players on the importance of good governance and corporate responsibility but merely taught the company the skills of "ticking the box" to meet the terms of the Act. As a result, the accounting scandals still persisted. In 2005, the American International Group (AIG), one of the largest multinational insurance corporations, was investigated for fraud. Billions of US dollars were manipulated as errors in accounting transactions. A few years after that, Lehman Brothers Holdings Inc., which filed for bankruptcy, caused the subprime mortgage crisis that later played a part in the global financial crisis. This financial services firm also was involved in massive accounting fraud.

The scenarios, from hundreds of irregularities and cases, have just concluded that laws and regulations are no longer a safety net and the last shield of protection for the stakeholders. As posited by Schwartz et al. (2005), now is the right time for the business community to place emphasis on the ethical obligations more on the regulations' obligations. They also should stop from depending too much on laws and regulations. Revision, revamp, and introduction of new rules and guidelines seem like an unsuccessful effort to curb all the scandals and corporate criminals, as there has been a never-ending problem of mismanagement and manipulation by greedy top management.

Recognising the situation, the purpose of this paper is then to compile and highlight some of the selected Malaysian corporate frauds and scandals and address possible factors that may contribute to the situation. …

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