Y Bhg Tan Sri, I read with concern your recent
statement,
“Why aren’t we auditing 1MDB? As far as their accounts are concerned,
they are already audited by one of the big four.” To audit any firm was a
“very laborious task”.
In view of the controversies surrounding 1Malaysia Development Berhad
(1MDB), passing the buck to ‘The Big Four’ is simply not good enough. It
also creates a misleading impression of the role, scope and limitations
of external auditors.
Companies involved in the biggest scandals in financial history employed
leading audit firms. Enron was audited by Andersen. Our own BBMB was
audited by Touche Ross (later swallowed up by Deloitte who happens to be
1MDB’s current auditor). Deloitte was the auditor in the Transmile
scandal.
Lehman Brothers, the golden boy of
investment banking
that went spectacularly bankrupt in 2008, was audited by Ernst &
Young. It is chilling to remember that Lehman Brothers went bust by
selling US$50 billion worth of toxic asset to Cayman Islands banks on
the understanding that they would be bought back eventually.
What this created was the impression that Lehman Brothers had US$50
billion more cash than it did and US$50 billion less toxic assets than
it held. All this under the nose of ‘Big Four’ Ernst & Young.
Auditors are not infallible, if they were there would be no financial
scandals. Audit firms are businesses like any other and operate within
the scope of auditing standards which themselves are not infallible.
Sir, I do not dispute that reopening 1MDB’s books is a “very laborious
task”. The decision whether to take on this task should be determined
among other things by the entity’s risk profile and I would like to ask
did you factor these considerations into your decision?
1. 1MDB has gone through three of the ‘Big Four’ firms in the space of five years, according to reports in
The Star, The Edge and the
Singapore Business Times.
2. 1MDB’s first auditor was Ernst & Young who resigned without signing a single set of accounts (
The Star, The Edge).
3. 1MDB’s second auditor KPMG resigned in late 2013 (ie many months after FY March 2013 ended) without signing off the accounts.
4. 1MDB’s third auditor, Deloitte, issued unusually lengthy notes and
critical judgments to the FY 2013 accounts. In the industry this can be
termed ‘Cover Your Back’, disclosing as much detailed information as
possible in order to protect your reputational risk in the event of
future problems.
5. Add to this 1MDB’s unusual and inexplicable late filings of annual
reports for FY 2013 and FY 2014. Some of 1MDB’s subsidiaries have
allegedly not filed accounts since FY 2013.
1MDB’s former 100 percent subsidiary SRC International’s accounts have
not been filed since March 2012. This subsidiary is now 100 percent held
by the Finance Ministry and has borrowings of RM4 billion via
Retirement Fund (Incorporated) or KWAP bonds guaranteed by the government. The auditor of SRC in FY 2012 was Deloitte International.
Auditors are not infallible
As I explained, auditors are not infallible. They cannot 100 percent
evaluate a company’s financial health. However they are trained to watch
out for ‘alarm bells’ and evaluate fraudulent and other risk factors.
The question to ask is why did 1MDB’s first two auditors extricate
themselves from a lucrative and prestigious government account?
Tan Sri, with 1MDB’s multiple auditors, late filings, missing subsidiary
accounts, I find it astounding that your alarm bells as the
auditor-general of Malaysia have not rung at all.
You as the auditor-general have extensive powers as enshrined in the
Audit Act 1957 including the power to “call upon any person for any
explanations and information which the auditor-general may require in
order to enable him to discharge his duties”.
I would like to ask, before dismissing the need for the “laborious
tasks”, did you make any enquiries formal or informal to ascertain the
claim and discover the reasons why 1MDB had three external auditors in
five years?
Did you communicate with officials at the Finance Ministry to find out
why 1MDB’s ex-subsidiary SRC, now 100 percent owned by the ministry, has
not filed accounts since FY March 2012? With borrowings of RM4 billion
from KWAP guaranteed by the government, surely this company warrants the
interest of the Auditor-General’s Office.
In addition to the unusual pattern of 1MDB’s auditors and annual
reports, there is publicly available information which also rings alarm
bells and enhance the case for investigation.
1. 1MDB’s unusual revaluation policy. 1MDB’s revaluation surpluses
recorded in the accounts are RM826 million (FY2011), RM569 million
(2012), RM2.7 billion (2013) and RM896 million (2014).
Therefore total revaluation in the last four years amounts to a colossal
RM4.9 billion. If you deduct this amount from 1MDBs current
shareholders funds of RM2.4 billion, 1MDB is in a position of negative
equity of RM2.5 billion ie the company would be ‘balance sheet
insolvent’.
I will not go into the applicability of MFRS14 but this begs the
question why did 1MDB adopt an unusual revaluation policy in contrast to
most property developers who book in land at cost or book value?
The simple calculations show that if 1MDB did not undertake this unusual
revaluation policy its shareholders funds would be negative to the tune
of RM2.5 billion and the company would be considered ‘balance sheet
insolvent’. In the event of a material downturn in the property market
this has serious implications for 1MDB’s asset cover.
2. The infamous RM7 billion Caymans account (SPC). Tan Sri, as you know
Segregated Portfolio Companies (SPCs) are notoriously difficult to
value.
Deloitte took pains to highlight in the notes that they depended on
unidentified ‘independent third party valuers’ meaning they themselves
did not do a mark-to-market or other valuation.
Furthermore, much of 1MDB’s total RM16 billion cash and portfolio
investments held abroad is classified by Deloitte in the notes as ‘Level
3 assets’ ie illiquid assets whose fair value cannot be determined by
observable measures (high levels of Level 3 assets have been implicated
in insolvent companies of the 2007 global financial crisis).
These issues are highlighted for users of the accounts to read and make
their own informed interpretations. My question is, Tan Sri, did you?
Raising alarm bells
A brief look at the history of this Caymans RM7 billion and how it came
into being as noted in the accounts is again enough to raise alarm
bells. A JV with Petrosaudi, mubahara notes, KPMGs ‘emphasis of matter’
(audit flagging up significant uncertainty), stake purchased by an
undisclosed third party and finally the RM7 billion proceeds placed in
an off-shore Caymans account.
We therefore should ask the question, why did Deloitte highlight in the
accounts that they did not evaluate this Caymans portfolio investment
themselves?
Sir, taking all this into account can you really claim you have done
everything in your power to dismiss all allegations and doubts before
dismissing the need for the “laborious task” of opening 1MDB’s books?
I also address this question to the chairperson of the Public Accounts
Committee (PAC), Datuk Nur Jazlan Mohamad, in view of the PAC’s role of
examining not only the Audit Report but the “accounts of public
authorities and those administering public funds” and “other matters it
deems fit”.
“第三，首相纳吉个人在2013年大选比巫统对马来人更有号召力，但一马公司丑闻爆发以来，加上糟透的经济政策如消费税、汽油上涨，还有削减医疗和教育等公共开支，纳吉得到的支持已不大如前，甚至沦为巫统的包袱。对纳吉感到不满的巫统领袖与党员，另外成立了土著团结党，让在野党如今可以接触很多之前走访无门的地区。”
