A healthy financial standing is crucial for a public-listed company because it will help them to raise finance easily. But for public-listed companies with poor financial standing, it will be the contrary, and they will be under pressure to answer to the regulator and its shareholders. Desperate, some of these companies try to camouflage their poor financial standing by inflating their sales profits through transactions with related-party companies.

Why companies inflate their sales revenue?

• To artificially increase their profits to meet their profit forecasts and fulfil the regulator’s requirements especially during the early years of their listing on the exchange;
• To convince the banks or financial institutions to grant them loan facilities;
• To avoid being questioned by shareholders;
• To maintain investors’ confidence.

How is it done?
The following is an example of how a company can improve its financial standing by using a related company and inflating its sales revenue.

Bijak Bhd and Cerdik Sdn Bhd were two related companies in the manufacturing business. They have the same directors and controlling shareholders. Bijak Bhd, a public-listed company, was having difficulty meeting its profit forecast and was facing cash flow problems. Conversely, Cerdik Sdn Bhd, a private company, was one of the main buyers of Bijak Bhd manufactured goods and had entered into an agreement with Bijak Bhd to buy RM1 million worth of manufacturing supplies. This RM1 million transaction was legitimate but Bijak Bhd’s controlling shareholders (who were also controlling shareholders of Cerdik Sdn Bhd) saw it as an opportunity to overcome the company’s prevailing financial woes. Subsequently, Bijak Bhd, in collaboration with Cerdik Sdn Bhd, created a fictitious transaction. Instead of purchasing RM1 million worth of supplies, Cerdik Sdn Bhd had agreed to fictitiously buy RM5 million. Due to the additional RM4 million purchase, Bijak Bhd was able to record a “healthy” income statement and meet its profit forecast for that financial year. In addition, Bijak Bhd was able to use the fictitious invoice from Cerdik Sdn Bhd to obtain bankers acceptances facility to ease its cash flow problem. The fictitious transaction was recorded as follows: