Whistleblowing has been proved from the financial reporting

Whistleblowing practices have been
known as one of the efforts to improve the industry culture especially in
financial institutions or banking sector. Due to the depressed economic
condition, the financial sector especially banks have been criticized because
of the unethical and unprofessional ways in the business operation like created
a system to make it rich through the expense of society, by assisting tax
evasion and money laundering which led to major financial crisis worldwide
(Beu, Buckley & Harvey, 2003). Therefore, most of the countries have issued
guidelines regarding whistleblowing practices in order to improve the quality
of financial reporting in banking sector and protect the interest of
stakeholders as well as conduct the operations in the most ethical and professional
way (Erin & Ogundele, 2016). Whistleblowing is important corporate
governance to prevent and detect any fraudulent or malpractices in an
organization (Robert, 1992). Today, public has more awareness on the corporate
governance of an organization, so, whistleblowing practices have become
relevant for greater accountability, transparency and integrity especially in
financial and banking sector. According to report of Committee of Sponsoring
Organizations of the Sarbanes-Oxley Act stated that whistleblowing is an
important business ethics which capable to improve the economic stability and
financial reporting process of any country. This indicates that financial
sector particularly need to have whistleblowing as part of the corporate
governance guidelines since it involved financial process which easily exposed
to manipulation of financial reports and creative accounting that results to
loss of investment of many shareholders (Erin & Ogundele, 2016).

Financial reporting can be
manipulated easily which has been proved from the financial reporting scandals
in Germany and US (Schmidt, 2005). Financial reporting scandals like accounting
fraud in an organization caught the attention of public during the cases of
Enron and WorldCom. Enron case showed how the major corporate accounting
scandals have shaken the confidence in corporate governance. Although Enron
Corporation has been known as one of the most innovative companies in US, the
company appeared to be burdened with debt and money-losing businesses but it covered
the terrible financial shape by manipulating its accounting statement
(Jickling, 2003).  WorldCom was the
company that failed and put into bankruptcy which involved the largest
accounting fraud in history (Theodore, 2005). Accounting fraud cases of Enron
and WorldCom indicated that the employees were suspicious of malpractices
although the employees were not involved in the financial reporting
manipulations. That was because the employees were the first one to know any
unethical conducts that happened within the company and the staff members also
tend to cover the illegal conducts because fear to loss job, discriminate by
the colleagues and afraid not to be promoted (Morse & Bower, 2002).
Therefore, the staff will always be the last to speak out and it resulted to
lack of whistleblowing practices by the employees.

Financial and banking sector is
highly regulated industry and the nature of its operation tend to be exposed to
unethical business practices by employees and management (Ponnu, Naidu &
Zamri, 2008). Financial and banking industries in Malaysia are governed by the
Banking and Financial institution Act 1989 (BAFIA). The act provides rules and
regulations which need to be obliged by all licensed banks and representative
offices of foreign bank located in this country. The act also relevant to be
implemented as it promotes ethical practices in those organizations. However,
the study found that most of financial institutions and commercial banks do not
have a policy on whistleblowing.

Unethical conduct like fraud
committed by a firm can be identified as an offence against the listing
requirement of Bursa Malaysia. Fraud in financial sector can be classified into
misappropriation of assets and fraudulent financial reporting. Most of the
fraud cases occur in falsification of financial statements to gain benefits or
an intentional distortion of financial statements (Ata & Syerek, 2009).
Association of Certified Fraud Examiners (ACFE) reported that financial
statement fraud has contributed to the highest loss among misappropriation of
assets and corruption (ACFE, 2014). 
Mintz (2009) found that fraud detection is important for investors and
other stakeholders of public listed companies because the benefited parties may
experience significant financial losses once the fraud or any scandals occur
like the cases of Enron and WorldCom. Reports by Hamer (1983), financial
distress is the main reason for a company to engage in fraudulent financial
reporting to cover up its firm poor financial conditions which lead to
unethical conduct (Hawariah Dalnial et al., 2014).

Mismanagement on the issues will
eventually cause the company to collapse and go into insolvency and damage of
reputation that cannot be recovered as showed by the international companies
like Enron, WorldCom, Typo and many others. Those cases showed that poor
ethical conduct of its employees, particularly the top management will lead to
the destruction of the organization (Sims & Brinkman, 2003). Malaysia in
2016 was ranked 55 out of 176 surveyed countries on the Corruption Perceptions
Index with a score 49 out of 100, which indicates that Malaysia is still unable
to effectively deal with corruption scandals and Malaysia has been listed as
2017 watch list country due to 1MDB corruption scandals that contributing to
the country’s lackluster score of 49 (Transparency International, 2016).
According to KPMG Malaysia Fraud Survey Report 2009, Malaysia is one of the
countries that have been plagued with many corporate scandals even though there
has been so much effort made by the government to prevent these scandals from
occurring but it still widely happens (KPMG, 2009).  Fraudulent issues arise when the organization
did not take seriously on its corporate malpractices and mismanagement which
have led to immoral attitude and behavior especially among employees to conduct
fraud, financial crime and financial loss to the company (Ahmad Saiful Azlin
& Zubaidah, 2015). Like the international companies issues, Malaysia also
has its own cases such as Transmile, Megan Media Holdings, MEMS Technology,
Fountain View Development and FTEC Resources proved that fraud is prevalent in
Malaysia too (Salin et al., 2011).