RCI uncovers ‘creative accounting’, political influence behind TH’s financial woes

 Report traces the roots of the fund’s financial problems to political interference in board appointments, and unsustainable hibah payouts, among others.

The RCI report said Tabung Haji concealed the true state of its finances for years, reporting a RM3.4 billion profit for 2017 when it should have recorded a RM1.4 billion net loss.

PETALING JAYA:

The royal commission of inquiry has found that Tabung Haji (TH) concealed the true state of its finances for years, reporting a RM3.4 billion profit for 2017 when it should have recorded a RM1.4 billion net loss under proper accounting standards – a shortfall of nearly RM4.8 billion.

The six-member commission, chaired by former chief justice Raus Sharif, said the discrepancy stemmed from changes in impairment policies, unrecorded losses from troubled investments, and the use of “creative accounting” to justify annual profit distributions, or hibah, to depositors.

In its 252-page report submitted to the Yang di-Pertuan Agong on Aug 30, 2022, and declassified today, the commission traced the roots of TH’s financial problems to political interference in board appointments, unsustainable hibah payouts, and the national audit department softening its findings over concerns about depositor confidence.

Overall, the RCI concluded that a combination of excessive hibah commitments, questionable accounting practices, weak oversight, ambitious investment strategies and rising subsidy obligations placed significant financial pressure on TH.

Political influence and unsustainable hibah payouts

The RCI said several TH chairmen and board members appointed between 2014 and 2018 were active politicians, and found that decisions on hibah rates, haj fees and financial assistance during that period were influenced by political considerations.

It said the minister overseeing TH also had unchecked authority to remove board members without cause – a power that was used to end the tenure of a CEO and chairman before the expiry of their terms.

The commission found that TH’s decision to maintain high hibah payments between 2014 and 2017 exceeded its financial capacity and depleted its reserves.

The attractive returns encouraged depositors to maintain large sums of money with TH, creating pressure on the institution to continue providing high payouts.

This exposed TH to the risk of significant withdrawals if hibah rates were reduced, as seen in 2019 when deposits fell from about RM73 billion to RM69 billion following the announcement of a 1.25% hibah rate.

To sustain high hibah payments, TH took on greater investment risks, with its portfolio becoming increasingly exposed to equities and market volatility.

‘Creative accounting’ masked TH’s financial losses

The RCI also found that TH engaged in “creative accounting” by using Realisable Asset Value (RAV), instead of asset values reported in audited financial statements, to determine its ability to declare hibah payments.

This resulted in higher asset valuations and allowed larger distributions than TH’s actual financial position could support.

The commission also criticised the national audit department for failing to adopt a firmer stance in auditing TH’s financial statements between 2014 and 2017.

It noted that while the department issued a clean audit opinion for 2017 despite highlighting an “Emphasis of Matter”, it later admitted in a written response to the prime minister that it had avoided issuing a qualified opinion partly due to concerns over its potential impact on depositor sentiment.

The RCI said this compromised the department’s independence, and that a qualified opinion should have been issued.

Risky investments and growing financial pressures

Another contributing factor was TH’s expanded vision of becoming a “pillar of the ummah economy”, which led the institution beyond its original purpose of helping Malaysians save for and perform the haj pilgrimage.

The RCI found that TH ventured heavily into areas such as property and plantations despite lacking sufficient expertise, resulting in significant losses, particularly among its subsidiaries.

It also highlighted the growing burden of Haj Financial Assistance (HAFIS), which subsidises pilgrimage costs. The cost of performing the haj increased from RM15,553 in 2013 to RM25,540 in 2022, while TH’s subsidy burden rose from RM106 million in 2014 to RM300 million in 2019.

Although TH increased haj payments in 2022 through a two-tier system for B40 and non-B40 pilgrims, the commission warned that HAFIS costs could reach nearly RM400 million annually and potentially RM742.47 million by 2030.

As the subsidy is funded through TH’s investment profits, rising HAFIS costs could reduce funds available for hibah payments and affect depositor confidence.

Sweeping reforms needed to restore confidence

The RCI report said TH’s existing structure should be maintained, but warned that major reforms were needed in its management and operations to restore public confidence in the fund.

It recommended amendments to the Tabung Haji Act 1995 to establish clear criteria for board appointments and prevent active politicians from serving on the board.

It also proposed separating ministerial oversight, with the religious affairs minister responsible for haj operations while the finance minister oversees funds and investments.

Other recommendations include removing Bank Negara Malaysia’s regulatory role over TH, or limiting it strictly to reserve and liquidity matters, replacing the national audit department with a private audit firm for TH’s financial statements, and ensuring hibah payments are based solely on audited financial statements rather than internal valuations.

The RCI also called for forensic audits into 14 problematic investments, including TH Indo Plantations, Trurich Resources, and FGV Bhd, while proposing an increase in the minimum haj registration deposit from RM1,300 to RM12,980 to reduce the waiting period from 130 years to 33 years. - FMT