Whistleblowing practices have beenknown as one of the efforts to improve the industry culture especially infinancial institutions or banking sector. Due to the depressed economiccondition, the financial sector especially banks have been criticized becauseof the unethical and unprofessional ways in the business operation like createda system to make it rich through the expense of society, by assisting taxevasion and money laundering which led to major financial crisis worldwide(Beu, Buckley & Harvey, 2003). Therefore, most of the countries have issuedguidelines regarding whistleblowing practices in order to improve the qualityof financial reporting in banking sector and protect the interest ofstakeholders as well as conduct the operations in the most ethical and professionalway (Erin & Ogundele, 2016). Whistleblowing is important corporategovernance to prevent and detect any fraudulent or malpractices in anorganization (Robert, 1992). Today, public has more awareness on the corporategovernance of an organization, so, whistleblowing practices have becomerelevant for greater accountability, transparency and integrity especially infinancial and banking sector.
According to report of Committee of SponsoringOrganizations of the Sarbanes-Oxley Act stated that whistleblowing is animportant business ethics which capable to improve the economic stability andfinancial reporting process of any country. This indicates that financialsector particularly need to have whistleblowing as part of the corporategovernance guidelines since it involved financial process which easily exposedto manipulation of financial reports and creative accounting that results toloss of investment of many shareholders (Erin & Ogundele, 2016). Financial reporting can bemanipulated easily which has been proved from the financial reporting scandalsin Germany and US (Schmidt, 2005).
Financial reporting scandals like accountingfraud in an organization caught the attention of public during the cases ofEnron and WorldCom. Enron case showed how the major corporate accountingscandals have shaken the confidence in corporate governance. Although EnronCorporation has been known as one of the most innovative companies in US, thecompany appeared to be burdened with debt and money-losing businesses but it coveredthe terrible financial shape by manipulating its accounting statement(Jickling, 2003). WorldCom was thecompany that failed and put into bankruptcy which involved the largestaccounting fraud in history (Theodore, 2005). Accounting fraud cases of Enronand WorldCom indicated that the employees were suspicious of malpracticesalthough the employees were not involved in the financial reportingmanipulations. That was because the employees were the first one to know anyunethical conducts that happened within the company and the staff members alsotend to cover the illegal conducts because fear to loss job, discriminate bythe colleagues and afraid not to be promoted (Morse & Bower, 2002).Therefore, the staff will always be the last to speak out and it resulted tolack of whistleblowing practices by the employees.Financial and banking sector ishighly regulated industry and the nature of its operation tend to be exposed tounethical business practices by employees and management (Ponnu, Naidu &Zamri, 2008).
Financial and banking industries in Malaysia are governed by theBanking and Financial institution Act 1989 (BAFIA). The act provides rules andregulations which need to be obliged by all licensed banks and representativeoffices of foreign bank located in this country. The act also relevant to beimplemented as it promotes ethical practices in those organizations. However,the study found that most of financial institutions and commercial banks do nothave a policy on whistleblowing. Unethical conduct like fraudcommitted by a firm can be identified as an offence against the listingrequirement of Bursa Malaysia.
Fraud in financial sector can be classified intomisappropriation of assets and fraudulent financial reporting. Most of thefraud cases occur in falsification of financial statements to gain benefits oran intentional distortion of financial statements (Ata & Syerek, 2009).Association of Certified Fraud Examiners (ACFE) reported that financialstatement fraud has contributed to the highest loss among misappropriation ofassets and corruption (ACFE, 2014). Mintz (2009) found that fraud detection is important for investors andother stakeholders of public listed companies because the benefited parties mayexperience significant financial losses once the fraud or any scandals occurlike the cases of Enron and WorldCom. Reports by Hamer (1983), financialdistress is the main reason for a company to engage in fraudulent financialreporting to cover up its firm poor financial conditions which lead tounethical conduct (Hawariah Dalnial et al.
, 2014). Mismanagement on the issues willeventually cause the company to collapse and go into insolvency and damage ofreputation that cannot be recovered as showed by the international companieslike Enron, WorldCom, Typo and many others. Those cases showed that poorethical conduct of its employees, particularly the top management will lead tothe destruction of the organization (Sims & Brinkman, 2003).
Malaysia in2016 was ranked 55 out of 176 surveyed countries on the Corruption PerceptionsIndex with a score 49 out of 100, which indicates that Malaysia is still unableto effectively deal with corruption scandals and Malaysia has been listed as2017 watch list country due to 1MDB corruption scandals that contributing tothe country’s lackluster score of 49 (Transparency International, 2016).According to KPMG Malaysia Fraud Survey Report 2009, Malaysia is one of thecountries that have been plagued with many corporate scandals even though therehas been so much effort made by the government to prevent these scandals fromoccurring but it still widely happens (KPMG, 2009). Fraudulent issues arise when the organizationdid not take seriously on its corporate malpractices and mismanagement whichhave led to immoral attitude and behavior especially among employees to conductfraud, financial crime and financial loss to the company (Ahmad Saiful Azlin& Zubaidah, 2015). Like the international companies issues, Malaysia alsohas its own cases such as Transmile, Megan Media Holdings, MEMS Technology,Fountain View Development and FTEC Resources proved that fraud is prevalent inMalaysia too (Salin et al., 2011).