KUALA LUMPUR (May 26): China Automobile Parts Holdings Ltd's (CAP) auditor PKF has retracted its audit report for its financial year ended Dec 31, 2015 (FY15).

The case is the first of its kind in Malaysia involving a public-listed firm, whereby an auditor has renounced reliability of a given prior audit opinion.

In a letter addressed to the directors of CAP which was filed with Bursa Malaysia today, PKF said reason for the firm renouncing the reliability of the unqualified or clean opinion given in its April 6, 2016 audit report, was due to undisclosed events by the company which it had only discovered after the report had been signed.

The auditor said it had on April 25 communicated its findings in respect of seven cases in litigation involving CAP’s subsidiary, QuanZhou Fen Sun Automobile Parts Co Ltd (Fen Sun).

“These cases were not disclosed to us by the directors of the company during the course of our audit at all,” PKF said.

Subsequent to the meeting on April 25, PKF said it had engaged Yuan Tai Law offices to carry out an independent legal due dilligence on FenSun.

“Yuan Tai Law has since confirmed the reliability of the information we had relayed [to CAP’s directors on the seven litigation cases].

“Further[more], there are numerous other cases in litigation — whether at trial or enforcement stage — in the sum of no less than RMB263.05 million [RM163.75 million] involving Fen Sun,” said PKF.

PKF said based on information it had obtained, which have been corroborated by Yuan Tai Law, there were significant unreported borrowings and material litigation surrounding Fen Sun’s FY15 financials.

The audit firm added CAP’s directors had an obligation to disclose these matters and to make available, the appropriate records for audit in FY15.

“The directors failed, refused and/or neglected to fulfil these obligations.

“We had discussed this matter with the audit committee and the board of directors [of CAP] and recorded our view in a letter dated May 1, 2017,” the firm said.

However, PKF said no actions were taken by CAP, following the issue of the letter.

“In spite of our advice, no appropriate and effective action on behalf of the company has been taken to address this matter to date.

“The state of affairs thus far, is unsatisfactory and may possibly infer an attempt to continue the suppression of the facts and circumstances surrounding the material litigation now revealed,” said PKF.

The audit firm said since the financial effects of these undisclosed events have not been determined and accounted for by the directors in the company’s financial statements for FY15, the audit report issued with those statements cannot be relied upon, as it does not represent a true and fair view of the financial position of the company for the period.

“Further[more], some or all of these undisclosed events may have a material adverse effect to the financial position of the company and may involve potential  breaches of the applicable securities laws and/ or Bursa’s Listing requirements,” the firm added.

PKF said it had also advised the audit committee and directors of CAP on April 25 that they would need to consider whether the FY14 audited financial statements of the group may be relied upon, in view of the said unreported events.

It had advised CAP’s directors to provide sufficient appropriate audit evidence to explain the unreported  events failing which the relevant financial statements will require amendments to address the events,  and the auditor’s report will be re-issued.

However, PKF said no such evidence has been forthcoming by the company, and the audit firm has also not received the amended financials statements from CAP's directors.

The auditor had given the directors of CAP until 5pm yesterday, to take all necessary steps to ensure users of CAP’s FY15 financial statements were informed of the situation, in particular regarding the undisclosed material litigation, and that the financial statements be amended to reflect the litigation.

Furthermore, the auditors required the directors to provide court papers in respect of the said litigation, details, correspondence and transaction papers related to the impugned borrowings, accounting and book entries of the borrowings, and a written explanation on how the borrowings impact the company’s financial statements.

“Subject to our continued appointment and terms of engagement and reference to be agreed, and the fulfilment of the directors of their obligations in respect of the financial statements, we will extend our audit and issue a new auditors report, based on the amended financial statements of the company as appropriate,” said PKF.

The firm said the impugned borrowings or transactions require further examination, but it has not been able to do so, since the necessary information was not provided by CAP’s directors.

The auditor said CAP’s failure, refusal or neglect to comply with its demands within the stated  timeframe (May 25) will lead to appropriate steps and legal actions in accordance with the International Standards of Auditing 560 Subsequent Events, and section 320 of the Capital Markets and Services Act 2007, to prevent reliance on the FY15 audited financial statements and its audit report.

“In particular, we will proceed to notify the Securities Commission of Malaysia (SC), Bursa Malaysia and any other regulatory agencies having relevant jurisdiction over the company, as well as any other party known to us to be relying on CAP’s financial statements for FY15.

“[We also] request that they take whatever steps they may deem appropriate in respect of our said disclosure,” firm said.

Today, Bursa Securities said it was informed by PKF on the non-reliance of the FY15 auditors report, hence implying the directors of CAP had not responded in time to PKF.

When contacted by theedgemarkets.com, an SC spokesman said the matter is being viewed seriously.

“The SC has secured relevant documents from all parties and we have also sought China Securities Regulatory Commission’s assistance. We take this matter seriously and will take the appropriate action when necessary,” the spokesperson added.

CAP, which is based in the Fujian Province in China, is a manufacturer of u-bolts, wheel axles, wheel-hub bolts and steel pins.

For FY15, the group reported a net profit of RMB65.54 million, a 52% drop from RMB137.23 million in FY14, while revenue fell 18.6% to RMB592.68 million, from RMB728.27 million.

The company, which was listed on Bursa Malaysia on Jan 30, 2013, marked its highest ever price on the first day of its listing at 38.1 sen. Since then, its share price has plunged by as much as 94% to a low of 2 sen on Nov 1 last year. Its shares closed unchanged at 2.5 sen today, for a market capitalisation of RM34 million.