KUALA LUMPUR (Feb 26): Audit firm KPMG came under fire today for failing to protect the interests of Putrajaya and Malaysians by allegedly neglecting its duty to raise a "red flag" over the shady joint venture between 1Malaysia Development Berhad (1MDB) and PetroSaudi International (PSI).
DAP lawmaker Tony Pua, a strong critic of 1MDB, said today that KPMG would have had complete access to the agreement and would have vetted the relevant transactions including the US$700 million (RM2.5 billion) transferred from 1MDB to PetroSaudi.
"The question must therefore be asked if the auditors for 1MDB, KPMG Chartered Accountants, who signed off the accounts on October 4, 2010, abetted 1MDB in covering up the above PetroSaudi scam," he said in a statement today.
"The failure to red flag the above transactions meant that the 1MDB auditors would have failed in their duty to protect the interests of the government and the Malaysian public at large."
Pua was commenting on the joint venture agreement between debt-ridden 1MDB and PSI, in which the strategic investor had paid US$1 billion to the latter's subsidiary, 1MDB PetroSaudi, despite its lack of a tangible track record.
PSI created the shell company, 1MDB PetroSaudi, from scratch on September 18, 2009, just 10 days before its subsidiary received US$1 billion from 1MDB.
Documents on whistle-blower website Sarawak Report showed that four days after 1MDB PetroSaudi was created, PSI signed an agreement saying the subsidiary owed it US$700 million.
Four days later, on September 29, 1MDB bought 40% of new shares in 1MDB PetroSaudi and injected RM1 billion in cash. The next day, US$700 million was taken out of 1MDB PetroSaudi and given to PSI.
Pua said that details of the deal were not reported in 1MDB’s very first financial report for March 2010 as the agreement was terminated 6 months later in March 31, 2010, which happened to be the last day of the financial report.
He said the US$1 billion investment was revalued to US$1.2 billion and sold back to PSI but that the money was instead converted into Murabaha notes or an Islamic loan back to 1MDB PetroSaudi.
"I raised the question earlier as to whether conversion of shares to loan was in actual fact a cover-up of the JV scam. By converting it into a loan to the Petrosaudi, 1MDB was then able to avoid reporting the key salient details of the JV agreement in the 2010 Financial Report," he said.
"The action of 1MDB raises strong suspicions of hanky-panky because if 1MDB decided that the venture with Petrosaudi was not working out, why didn’t it just withdraw its US$1.2 billion investment in full?"
Following the allegations, 1MDB president Arul Kanda Kandasamy said that the joint venture with PetroSaudi had earned the state-owned entity a profit of US$488 million (RM1.78 billion).
Saying it was surprised at the attention on the joint venture agreement, Arul Kanda said the Murabaha notes were paid back in full in 2013, adding that this had already been made public in its accounts for the year ended March 31, 2013.
Pua, who had called the deal a "con job", said unless KPMG was convinced after a thorough audit process that there were no elements of fraud in the joint venture, the auditors were obligated to report the matter to the relevant authorities.
"The public trusts auditors to fulfil their responsibilities proficiently. Auditors must balance competing interests to perform their role and provide public service.
"In this case, unless they were convinced after a thorough audit process that there has been no suspicious element of fraud or the misappropriation of government funds, the auditors are obligated report the matter to the relevant authorities, such as the police or even the Malaysian Anti-Corruption Commission," he said.
"To protect the integrity and independence of the international chartered accountants, KPMG must declare its role in the PetroSaudi scandal, and if there has been omission and negligence its audit of 1MDB," the DAP national publicity secretary said.
"The failure to do so would necessitate an investigation over its conduct by the Malaysian Institute of Accountants as the statutory body established under the Accountants Act, 1967 to regulate the accountancy profession."