Noor Adwa Sulaiman
The recently declassified Royal Commission of Inquiry report on Tabung Haji covers past financial and investment problems. But it is more than just an account of what went wrong.
It offers an important lesson on what can happen when governance is weak. Controls fail to challenge decisions and accountability becomes blurred.
Tabung Haji is entrusted with the savings of millions of Muslims in Malaysia, and these issues go directly to the heart of public trust.
Weak governance from the start
The royal commission identified several interconnected weaknesses, beginning with the governance structure itself.
First, it highlighted the broad powers vested in the responsible minister under the Tabung Haji Act 1995.
It also noted the lack of specific professional requirements for board appointments.
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It raised concerns over political considerations influencing decisions involving hibah (bonus payments to depositors), Hajj charges and financial support.
This is fundamentally a governance issue at Tabung Haji. Good governance is not simply about having a board or committees in place. It is about ensuring that those entrusted with authority have the competence, independence and willingness to exercise effective oversight.
An institution managing billions of ringgit requires board members with relevant expertise in finance, investment, accounting, risk and governance. Political or representational considerations should not outweigh professional competence.
The royal commission therefore recommended stronger competency requirements for board members. It also called for restrictions on active politicians serving on the boards of Tabung Haji and its subsidiaries.
The underlying principle is clear: decisions involving depositors’ money must be guided primarily by fiduciary responsibility and long-term financial sustainability.
Chasing high hibah payouts
A second concern was the pressure to maintain high hibah distributions. The royal commission found that the desire to sustain attractive returns between 2014 and 2017 contributed to greater investment risk. This weakened financial resilience.
It also referred to the use of ‘creative accounting’ in relation to hibah distributions. This illustrates how governance and control are closely connected.
Performance expectations are not necessarily problematic. But when expected outcomes become targets that must be achieved regardless of financial circumstances, they can weaken judgement. This can also encourage excessive risk-taking or aggressive accounting assumptions.
A strong control environment should provide a counterweight to such pressure. Hibah decisions should therefore be linked clearly to realised income, asset quality, liquidity and financial strength.
The royal commission’s recommendation that distributions be based on audited financial statements, rather than alternative valuation approaches, is particularly important.
The broader lesson is that controls should protect an institution from sacrificing long-term sustainability for short-term expectations.
Numbers that didn’t add up
The third issue concerns financial reporting practices at Tabung Haji. The royal commission stated that financial reporting standards were not fully applied in 2017. Had they been, LTH would have recorded an estimated RM1.4bn net loss – not the RM3.4bn profit it reported.
That is more than an accounting technicality. Financial reporting is a central mechanism of accountability. Depositors, regulators and boards rely on financial statements to understand whether an institution is genuinely financially sound. When reported performance diverges substantially from underlying economic reality, both control and accountability are weakened.
Controls over impairment, valuation and significant accounting estimates must therefore be robust and independent. Material judgements should be subject to challenge by audit committees, internal auditors, external auditors and, where necessary, independent experts.
The royal commission also raised uncomfortable questions about the effectiveness of external audit. It criticised the firmness of the 2017 audit response and concluded that the accounting issues identified warranted stronger action.
The lesson here matters. Auditors do not protect confidence by avoiding difficult conclusions. They protect confidence by ensuring that the financial information relied on by stakeholders is credible.
Effective control therefore depends not only on procedures but also on independence and professional scepticism.
Closing the accountability gap
A fourth issue involves investment governance. The royal commission recommended forensic audits into several investments that had suffered significant falls in value.
It is important to distinguish between investment losses and misconduct. An investment loss is not automatically evidence of fraud. Markets change, businesses fail and legitimate investment decisions can produce poor outcomes.
However, every significant loss should be explainable. From an accountability perspective, institutions must be able to identify:
- Who proposed an investment
- Who carried out due diligence
- Who assessed the risks
- Who challenged the assumptions
- Who approved the transaction
- Who monitored its performance
Without this clear chain of responsibility, accountability becomes diluted.
The royal commission also raised concerns over board members and senior management holding multiple positions across subsidiaries and committees. Such arrangements may create conflicts of interest. They can also lead to accountability diffusion. This is where responsibility becomes so widely shared that no one is clearly answerable for the outcome. More committees do not necessarily mean stronger accountability. Good governance requires clear ownership of decisions.
The fifth issue is the wider effectiveness of internal controls and oversight. The royal commission’s findings were not confined to one transaction or one department. Weaknesses emerged across financial reporting, investment decisions, auditing, board oversight and governance arrangements.
This suggests the problem was not simply the failure of one control. It was the inability of different layers of oversight to challenge one another effectively.
A sound governance system needs several lines of defence:
- Management must operate within approved policies.
- Risk management must identify emerging risks.
- Internal audit must independently test controls within an organisation.
- Audit committees and boards must challenge management.
- External auditors must provide credible assurance.
- Regulators must intervene when risk becomes excessive.
When these mechanisms operate independently, one layer can compensate when another fails.
The royal commission’s recommendations therefore provide an important reform agenda.
Board appointments should be based on competency and independence.
Political influence over fiduciary decisions should be limited.
Financial reporting and hibah decisions should rely on transparent, audited financial information.
Internal audit and risk functions should have sufficient authority to escalate concerns directly to the board.
Major investments should also be backed by stronger documentation, independent review and clearly assigned responsibility.
Public institutions could also benefit from periodic governance reviews, alongside financial audits. Such reviews should assess board effectiveness, conflicts of interest, management override, risk culture and whether internal challenge genuinely works.
Most importantly, accountability must follow authority. Those with the power to approve major decisions must also be responsible for explaining those decisions and their consequences.
The wider lesson from the royal commission’s report is therefore not merely about what went wrong in the past.
Governance determines who has power and how that power is constrained. Controls determine whether questionable decisions can be detected and challenged. Accountability ensures that those who exercise authority must answer for their actions.
Weak governance allows poor decisions to be made. Weak controls allow them to continue. Weak accountability allows responsibility to disappear after the damage is done.
The real test is whether these lessons can now be used to strengthen Malaysia’s public institutions. The aim must be to do so before the next crisis occurs.
Dr Noor Adwa Sulaiman is an associate professor at the Department of Accounting, University of Malaya.
The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.
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