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Without Najib’s protection, ex-1MDB auditors KPMG, Deloitte face the full brunt of action from accounting body

July 13, 2018

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TWO of 1Malaysia Development Bhd’s (1MDB) former external auditors, KPMG Malaysia and Deloitte Malaysia, are still under investigation by the Malaysian Institute of Accountants (MIA) for possible breaches of compliance with auditing standards, sources say.

“If it is found that there are indeed breaches, then MIA, as the professional body, can only take disciplinary action. Actions that can be taken are imposing a fine on the auditor, suspending its membership [with MIA] or ending its membership,” a source with knowledge of the probe tells The Edge.

If necessary, MIA can also take more drastic action by recommending that the Ministry of Finance (MoF) revoke the auditor’s licence, the source adds. In Malaysia, it is the MoF that issues licences to auditors. A licensed auditor is required to be a member of MIA.

MIA started its scrutiny of KPMG and Deloitte back in 2015 after the then Opposition lawmaker Tony Pua lodged complaints that year — in March about KPMG and in May about Deloitte — with the MIA council. Pua claimed that they had intentionally or negligently failed to conduct a thorough audit on 1MDB.

However, those in the know tell The Edge that MIA’s official probe into the two auditors commenced only a year later as it faced hurdles obtaining relevant documents from the parties to assist in the investigation.

“It is taking some time, but the due process by the accounting body [MIA] is still ongoing,” a source says.

Things took an interesting twist last week when 1MDB revealed that KPMG had, in a letter on June 8, written to inform 1MDB to disregard the audited accounts for the financial years ended March 31, 2010 (FY2010), FY2011 and FY2012 that it had signed off on. The auditor felt that they did not provide a true and fair assessment of the company.

KPMG said it reached the decision after going through the recently declassified Auditor-General’s (AG) report on 1MDB and other relevant documents that were withheld from the auditor by the previous management of 1MDB.  It advised 1MDB to immediately take all necessary steps to “prevent any further or future reliance on the three audit reports”.

Sources say KPMG’s move will likely prompt more questions from MIA as it is a rare practice for auditors to say that their audit reports should not be relied upon.

“It is very rare. In recent years, there have been maybe five such cases globally … and now, there are two in Malaysia (KPMG and Deloitte) within just two years. There is a due process and the auditor has to show it has done everything possible, exhausted all options, before getting to that point. This is important as other implications can arise, for example, what about the banks that have lent 1MDB money based on those financial statements?” an accounting expert comments.

Recall that Deloitte too, in July 2016, said its audit of 1MDB in FY2013 and FY2014 would have been impacted if it had known at that time the information contained in the US Department of Justice’s (DoJ) lawsuit to seize 1DMB-linked assets. As such, it said the financial statements of those two years that it had signed off on “should no longer be relied upon”.

Critics also question why KPMG’s warning bells did not go off earlier, considering that Deloitte had shown concern right after the DoJ report came out. “The question is, how much different is the information in the DoJ report to [that in] the AG’s report?” one asks.

The AG’s report, previously classified under the Official Secrets Act 1972, was made public on May 15 after Pakatan Harapan took over Putrajaya.

Sources say MIA will be looking to see if the two auditors were in breach of compliance of the International Standard of Auditing (ISA) 560. Among others, ISA 560 clearly outlines what auditors are required to do if they come to know of events or facts that could affect financial statements after those statements have already been issued.

Meanwhile, the Companies Commission of Malaysia said last week that it will be seeking further clarification from KMPG on the status of 1MDB’s audit reports.

MIA has declined comment on KPMG’s latest move. “Currently, the enforcement process is in progress. Taking note of current developments, it will be inappropriate for MIA to make any comments,” its CEO Nurmazilah Mahzan said in a statement.

KPMG, when contacted by The Edge, said: “KPMG Malaysia has cooperated and continues to fully cooperate with all relevant authorities investigating matters associated with 1MDB. Given the ongoing investigation by the authorities, it would not be appropriate for us to comment further.”

Deloitte, meanwhile, had yet to respond at press time.

Ernst & Young Malaysia (EY) was 1MDB’s first external auditor. KPMG took over from EY in September 2010 after the latter was sacked as it would not sign off on 1MDB’s FY2010 accounts unless it was provided with certain documents on the company’s US$1 billion joint venture with PetroSaudi International.

KPMG’s contract was terminated on Dec 31, 2013, after which Deloitte was appointed as the new auditor for 1MDB. According to the AG’s report, KPMG had wanted to qualify 1MDB’s FY2013 accounts unless it was provided with enough proof on the value of investments in Bridge Global SPC via Brazen Sky Ltd.

Deloitte then announced its resignation in July 2016 following the DoJ complaint alleging an international scheme to siphon more than US$3.5 billion from 1MDB.

1MDB then appointed UK-based Parker Randall International as its auditor in January last year.

PricewaterhouseCoopers Malaysia, the only of the Big Four not appointed by the previous 1MDB board, was hired by the government last month to conduct a special position audit on 1MDB.


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