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Governance Mechanisms in the Malaysian Banking Sector: Mitigation of Fraud Occurrence

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Abstract

The recent credit crisis has forced banks to take a critical look at their governance and control system and exposed considerable weaknesses in risk management across the financial services industry. This study examines several elements of governance mechanisms that may be modified to reduce the occurrence of fraud in the Malaysian banking sector. These mechanisms include corporate governance, internal control procedures, fraud prevention programs, and risk management. A survey was conducted among bank managements, with focus on branch managers and assistant managers. Results showed that in general, the most common fraud case in branches that handled mortgage and other (credit) loans was money laundering, which was a common occurrence in the banking sector of Malaysia. Based on regression analysis, results of the study indicate that only risk management can significantly affect fraud occurrence. By contrast, corporate governance and fraud prevention program would affect negatively to the occurrence of internal or employee fraud, while risk management is negatively related to the external or customer frauds in the Malaysian banking sector. This paper also discusses the implications of the study and possible future studies.

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Acknowledgment

We would like to thank the Accounting Research Institute and the Research Management Institute, Universiti Teknologi MARA, in collaboration with the Ministry of Education Malaysia in providing support for this research project. We are indeed very grateful for the grant, without which, we would not be able to carry out the research.

Conflict of Interest

The authors declare that they have no conflict of interest.

Author information

Authors and Affiliations

  1. Accounting Research Institute, Universiti Teknologi MARA, Level 12, SAAS Building, 40450, Shah Alam, Selangor, Malaysia

    Zuraidah Mohd-Sanusi & Normah Omar

  2. Faculty of Accountancy, Universiti Teknologi MARA, Level 12, SAAS Building, 40450, Shah Alam, Selangor, Malaysia

    Mohd Nor Firdaus Rameli

  3. Department of Accounting and Finance, College of Economics, Rikkyo University, Tokyo, Japan, 171-8501

    Michihiro Ozawa

Authors
  1. Zuraidah Mohd-Sanusi
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  2. Mohd Nor Firdaus Rameli
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  3. Normah Omar
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  4. Michihiro Ozawa
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Corresponding author

Correspondence to Zuraidah Mohd-Sanusi.

Appendix 1—Question Items

Appendix 1—Question Items

Corporate Governance

  • There is a clearly defined management structure supported by organization charts for all roles.

  • Management meetings were held regularly and minuted, with actions clearly noted.

  • Fraud issues are being discussed seriously during meeting.

  • There is an effective mechanism for keeping staff informed on the key issues and decisions made by the management.

  • Each member of staff has clearly defined job descriptions and set performance targets which are updated annually.

  • There is a strategic planning lasting 3 years or more and is updated annually.

  • Strategic planning has a clear relationship with the organization’s objectives.

  • Code of conduct is clearly presented and emphasized in the organization.

  • Employees were encouraged to report illegal or wasteful activities within their agencies to the mass media.

  • Discuss reasonableness of audit finding/recommendation in audit reports with management.

  • Management seriously views corrective actions as avenue for improvements.

Internal Control Procedures

  • The branch personally interviewed the applicant during the loan processing in any circumstances even during peak time.

  • Generally, the branch positively verified the applicant identity card (Mykad) via Smart Card Terminal even for high net worth or well-known applicant.

  • For all cases, the branch always verified the genuineness of income supporting documents furnished during the loan processing without fail.

  • The branch confirmed the applicant’s income, employment, and business existence via confirmation with the employer or site visit on the applicant’s office or business premises for all loan application.

  • At all time, the applicants’ total income and total financial commitment were accurately derived, and their repayment capacity, i.e., debt serving ratio (DSR), were accurately computed.

  • In all cases, the loan applications were approved by the appropriate approving authority when necessary.

  • There are some occasions, the loan approval terms and conditions imposed were not complied with prior to disbursement of loan.

  • There is sometimes, the loan greement were not completely executed, i.e., not signed by the applicant especially during peak time and was done on the later part.

  • In some cases, the required supplementary security documents, which form part of approval conditions, were not executed and perfected before disbursement due to some constraint.

  • At all time, the disbursement transaction, i.e., vouchers, cheques, or deposit slips, were dually authorized and approved with the manager or the assistant manager in his absence.

  • In some occasion, the pre-signed of blank loan egreement was practiced to avoid the applicant being stolen by other competitors.

  • There are sometimes, the branch relied on the third party to witness the execution of the loan security documents.

  • At all time, the branch confirmed that the security documents were signed by the authorized signatories with legal capacity to perform the transaction as indicated in the BOD’s resolutions to avoid dispute in the later part.

  • The branch always makes sure that the movement of security documents were recorded in a Securities Movement Register, and any missing files can be easily traced.

  • Every 6 months, the branch will conduct security document count and report to the head office for any discrepancies on time.

Fraud Prevention Program

  • Employees in my organization know about the existence of fraud prevention programs such as the Fraud Awareness Program.

  • Employees in my organization understand the content of the fraud prevention program such as the Fraud Awareness Program.

  • Promotion of Fraud Awareness Program is made to increase the awareness of the staff in the organization.

  • The contents of Fraud Awareness Program are comprehensively and effectively communicated throughout the organization.

  • Policy was formulated in connection with fraud in full.

  • Goals and objectives of the plan are achievable.

  • Implementation strategy is entailed.

  • Fraud Awareness Program related programs, such as training and briefings, are frequently carried out.

  • The Fraud Awareness Program significantly contributes to the organizational performance changes.

  • Monitoring and reporting are made to measure the effectiveness of this program.

Risk Management

  • Branch’s staff competency level affects my branch performances.

  • Staff’s training for respective job function affects my branch performances.

  • The current market that branch is located affects my branch performances.

  • Branch customer demographic background affects my branch performances.

  • Stiff competitions among competitors affect my branch performances.

  • My branch location exposes to higher impaired loans (NPL).

  • My customer background exposes to higher impaired loans (NPL).

Branch Performances

  • I am satisfied with the services at my bank.

  • I am satisfied with my branch supporting staff.

  • I am satisfied with the performance target of my branch.

  • I am satisfied with my branch performances.

  • My branch is performing within bank’s performance target.

Fraud Occurrences

  • I have experienced customer fraud which is affecting my branch performances.

  • I have experienced employee fraud which is affecting my branch performances.

  • Fraud has a little bit affected my branch performances.

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Mohd-Sanusi, Z., Rameli, M.N.F., Omar, N. et al. Governance Mechanisms in the Malaysian Banking Sector: Mitigation of Fraud Occurrence. Asian Criminology 10, 231–249 (2015). https://doi.org/10.1007/s11417-015-9211-4

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