How Transmile's books were cooked

The absence of banking slips to show that cash of about US$11 million (about RM38 million) had been paid by customers directly to Transmile's suppliers of aircraft parts resulted in the whole scam coming into the open. Auditors Deloitte & Touche led by partner Jimmy Lai became suspicious when all the relevant parties — the supplier of parts, marketing agents acting for customers and the company's accounts department — collaborated to say that the transaction took place but none could furnish documentary evidence. "Even the agents and suppliers came forward and saw the auditors. They verbally verified that their customers had paid directly to suppliers on behalf of Transmile Air Services Sdn Bhd (TAS). But nobody could provide the banking slips," says a source. In normal circumstances, such documents are filed for inspection and are readily available on request by auditors. Considering that no such documents were made available, it did not take long to suspect that suppliers and agents were also part of the whole scheme to cook Transmile's books. In a nutshell, it was a well-designed scheme running for years involving some customers and suppliers and the company's top management. The modus operandi involved the agents, which are mostly RM2 paid-up dormant companies, commissioning TAS to undertake certain "services". TAS issues fictitious invoices for so-called services rendered and these are endorsed. At the same time, TAS also makes purchases from suppliers, where purchase orders are given out. In many of the instances in 2005 and 2004, the transactions were all done in cash. "But the money is taken out after the auditing period. It's as though there is a revolving fund, which provides short-term funds for such purposes. It just goes on and on for years," says the source. But the scam was uncovered when the transactions became bigger and more complex, and showed higher revenues for Transmile. The bigger the transactions, the more difficult it became for the schemers to cover their tracks. In the last two months of 2006, numerous transactions were recorded, as dealings between the company and its suppliers, the company and its agents and between the agents and suppliers. The "so-called amount" that customers owed TAS was paid directly from agents to suppliers. In TAS' books, purchases from suppliers were recorded as part of their property, plant and equipment. As many such transactions were done in the last two months, the auditors got suspicious. "It would have fooled anybody. The only thing that gave it away was when the agent, supplier or company could not provide proof of a series of transactions totalling US$11 million," says a source. According to sources, the doubts began to gather momentum when Transmile's management could not provide a logical explanation as to why the marketing agents had paid TAS' suppliers on their behalf, especially since the amounts were big and lacked commercial rationale. The auditors were unconvinced about the reasonableness of the transactions based on the documentation furnished and explanations given. Deloitte asked Transmile to prepare and furnish a movement of accounts with the agents, which never came. It finally led to the audit firm standing by its decision not to sign off the accounts without qualification. This matter came up to the board, which ordered a special audit by Moores Rowland. Nevertheless, based on special audit findings by Moores Rowland, it appears that no money laundering was involved. Instead, it was revealed that Transmile revenues had been overstated by RM622 million over the past three financial years. What was the motive for such an elaborate scheme? If not money laundering, could the motive to falsify accounts have stemmed from the need to paint a rosy picture of Transmile's growth to please shareholders, particularly Kuok Brothers Sdn Bhd? Kuok Brothers bought a 28.9% stake in March 2004 from Transmile's then CEO Gan Boon Aun, reducing his stake to the current 2.8%. Gan recently voluntarily relinquished all executive posts in Transmile but he still remains a company director and has been attending board meetings. However, people familiar with the Transmile fiasco believe it was for the self-interest of certain shareholders of the company, who would benefit from the rising share price. From Dec 31, 2001, when its share was trading at RM1.71, Transmile had skyrocketed to RM14.20 on Dec 31, 2006. It even reached a high of RM15.20 on Jan 25. With investigations and the special audit still ongoing, however, it will be premature to point fingers at any party. To investigate further, Moores Rowland has proposed that a special audit be conducted on Transmile's 37.5% associate company, CEN Sdn Bhd, and its indirect associate company, CEN Worldwide Sdn Bhd. Moores Rowland says there is a possibility of underbilling or non-billing of genuine sales to other customers, including CEN Worldwide, which is Transmile's major client. Total sales to CEN Worldwide from 2004 to 2006 amounted to RM604 million. Searches at the Companies Commission of Malaysia show that CEN Worldwide posted a net loss of RM15.65 million for the financial year ended Dec 31, 2005. Its shareholders' funds were in deficit of RM22.5 million. The total amount owed by CEN Worldwide to Transmile stood at RM103 million. CEN Worldwide had been loss-making and has had negative shareholders' funds since Dec 31, 2004. CEN Worldwide, which is an express distribution and logistics management services provider, was incorporated in March 1997 as a RM2 paid-up company, with Datuk Mirzan Mahathir and Gan as its directors and shareholders. In September 1997, CEN Sdn Bhd emerged as the major shareholder of CEN Worldwide. The paid-up was subsequently increased to RM10 million. In 1999, Mirzan resigned from CEN Worldwide and Transmile. CEN Sdn Bhd is held by Pos Malaysia Services & Holdings Bhd (42.5%), Transmile (37.5%) and Konsortium Logistik Bhd (20%). What's appalling is that despite Pos Malaysia being the largest shareholder, it does not seem to know what's happening at CEN. The same goes for the major shareholders of Transmile. The books were cooked right under their noses but they did not even catch a whiff. It was, as those familiar with the matter describe it, a well-executed scheme involving everyone