Internal and External Controls Violations in The Malaysia Development Brand Scandal

Internal controls serve as an armor for companies and organizations. Internal and external controls play a significant role in any business and ensuring that the inherent risk/limitations are mitigated. There are many internal and external controls that can be placed within and organization. Establishing internal controls protocols and procedures, can help a company prevent, correct or detect any fraud or theft that may be going on in the organization. 1MDB (1Malaysia Development Berhad) could have been averted, if the surrounding organizations or organizations involved with 1MDB had internal and external controls in place. However, there are some factors inside a business or an organization that are uncontrollable and cannot be mitigated. They are called inherent risk. Some examples of risk that are considered uncontrollable are management override, breakdown in internal controls due to human error or human failure, and Circumvention of controls through collusion. There is a strong possibility that 1MDB could have been prevented if the surrounding entities or entities involved had a stronger sense of internal controls. For instance, a billion-dollar government was issued, and it was guaranteed three months after the Terengganu Investment Authority was formed. The board advised that the Sukuk should not be issued. A sukuk is an Islamic Financial Certificate. It is very surprising, that the management ignored the board decision and pushed through and issued the financial certificate. Especially considering the idea that the sukuk was issued at a price that does not benefit the firm. That is a perfect example of Management Override.

Management Override is risk that cannot be limited. It could be defined as Managers making controversial decision that is contrary to what is on the company policy. Due to the bond being issued, a plethora of business deals were formed with the middle east. Business Deals that were funded with debt. As the debt increases the risk is only increasing as well. As a result, companies and organizations have Boards in the company. Companies and organizations have board of directors in place to form and uphold company policies. A characteristic that a board of director member must possess is to be independent and culpability, and as a result must act objectively in the best interest of the company. If the board of directors, would have acted as they should and reported the strangeness that was taking place within the company. As I mentioned earlier in the article, Companies and organizations have board of directors in place to create and uphold company policies. In addition, board of directors can also be considered as a form of internal controls. Board of Directors are required to be Independent from management. The 1MDB is a scandal that still under investigation, however it is almost certain that some form of bribery took place to corrupt officials and associates. Some of the individual characters involved in the 1MDB scandal are Najib Razak, Former Prime Minister, Low Taek Jho, Malaysian Financer, and Ng Chong Hwa and Tim Lessner, was the former southeast Asia chairman of Goldman Sachs. Goldman Sachs is also being held accountable for its role in the 1MDB scandal. An extreme high area for fraud to be committed is when associates have an opportunity to earn commission. Goldman Sachs facilitated three different bond offers for a total of 6.5 billion. The deals that Goldman Sachs facilitated earned 593 million dollars in revenues and fee.

As a result, the Goldman Sachs employees were able to make large bonuses. The former Goldman Sachs chairman of Southeast Asia, Tim Lessner was charged and pleaded guilty to conspiring to launder through US Financial System and embezzled. Nearly three million dollars were misappropriated by Jho Low, and Roger Ng from the funds to bribe and provide kickbacks to Malaysia Government officials, Abu Dhabi Government Officials, and other official personal accounts. Tim Lessner and Ng Chong Hwa lied and misrepresented to the internal committee and other personal that review the offers before they are made. Another form of Internal Control that was not present was the “Four Eye Review/ Approval Principle. The Four Eye Review/Approval Principle requires a second review by approved personal who may be in another area but by someone who can be skeptical, competent, and understands the red flags. Tim Lessner lied to Goldman Sachs internal committee and other personal and informed them that him Jho Low are not working together. Jho Low is known as a Malaysian financial officer. By misrepresenting and lying to Goldman Sachs, Tim lessner violated Foreign Corrupt Practice Act. Jho Low was a close adviser to 1MDB’s which was formerly known as Terengganu Investment Authority (TIA) and an intermediary between 1MDB and high foreign government officials. A few years prior, an earlier attempt was made to make Jho Low a client of Goldman Sachs. If Tim Lessner disclosed his relationship with Jho Low, the business deals between Jho Low, Goldman Sachs, and 1MDB could have possibly been prevented and the extremely lucrative business deals would not have taken place. According to court document “Tim Lessner claimed that the culture of secrecy at Goldman Sachs Southeast Asia, “was highly focused on consummating deals, at times prioritizing this goal ahead of the proper operation of its compliance functions” (Agnes 2018).

The culture at a company sets the precedent for the overall company. As Tim Lessner mentioned in court documents, the culture at Goldman Sachs in Southeast Asia made there was a culture which supported doing business even if the business was done wrong and illegally. Others consciously employees looked the other way. Can you imagine being in a work environment where almost everyone is doing something wrong and everyone knows about it. It comes to me as no surprise as to how this went on for so long. It all sounds like a disaster not just waiting to happen but one which did happen. Employees were simply doing what everyone else was doing, as a matter to keep their jobs or a fear for losing their jobs. In addition to all the other obvious problems, 1MDB has had several problems with external auditors from years 2010-2014. The problems did not stem from the external auditor but from management of 1MDB. 1MDB have been audited by three of the four biggest accounting firms in the world. 1MDB has been audited by Ernst & Young, KPMG, and Deloitte. Ernst and Young were the first auditors that was hired by 1MDB but the contract between the two parties expired in 2010. KPMG informed managers from 1MDB that the final audit reports for the years, 2010, 20111, and 2012 were not reliable.

The final audit reports are not reliable due to material information that management withheld from KPMG Auditors. In court documents, KPMG stated “If the requested material documents had been disclosed to the auditors, KPMG believe the information would materially impact the financial statements and the related audit reports. KPMG was relived as 1MDB auditors after inquiring about 2.3 billion dollars that claimed to have been held in the Cayman Island. Followed by Deloitte only for Deloitte to resign in 2016. Deloitte resignation is due to financial scandal surrounding 1MDB. The information that KPMG requested and 1MDB refused to give KPMG auditors only came to light because Mahathir Mohammad, the government released the previous auditor general report. The Malaysia Development Brand scandal is one of the biggest financial scandals of all time. The Malaysian state investment fund was designed and supposed to attract foreign investments from all over. Unfortunately, that was not the case. A plethora of things went wrong for the Malaysian Investment Fund. If one did not know any better, one would think the 1MDB is just trying to accumulate debt. The lack of internal controls and the management failure to cooperate with the external auditors are part of the reasons why the 1MDB took the turn it did. Internal controls are designed to assure that the process for achieving organization objectives are followed. Inherent Limitations played the biggest role in the 1MDB Scandal. Inherent Limitations such as Management Override, Collusion, and Faulty or Bias judgement used in decision making are some examples of inherent limitations that played a major role in the scandal. It is extremely unfortunate that it takes a global scandal such as 1MDB to remind us, the importance of Internal Controls.