This article first appeared in The Edge Malaysia Weekly, on April 11 - 17, 2016.
One of the twists and turns of the 1Malaysia Development Bhd (1MDB) saga was the replacement of audit firms Ernst & Young (EY) and KPMG as the state-owned strategic investment fund’s auditors between 2010 and 2013.
According to the Public Accounts Committee report on 1MDB, the termination of EY and KPMG’s contracts was mainly because the firms did not manage to get sufficient information from the fund’s board with regard to its investments and they thus were not prepared to sign off the accounts.
EY was the first auditor appointed by 1MDB’s predecessor Terengganu Investment Authority on March 25, 2009. However, EY’s contract with 1MDB was terminated on Sept 15, 2010, before the fund filed its first financial report for the year ended March 31, 2010.
According to the report, a March 26, 2010, audit planning memorandum prepared by EY revealed that the audit firm requested to review the due diligence report on the status of PetroSaudi International’s (PSI) asset ownership in the joint-venture (JV) company 1MDB PetroSaudi Ltd.
EY needed to review the due diligence report to ensure the fair value of the assets and liabilities of the JV company at the time of acquisition. The audit firm also requested to view the financial report of 1MDB PetroSaudi on Sept 30, 2009, for the same purpose.
This was needed to determine the goodwill value of the JV company at the point of acquisition. EY had undertaken early assessment and requested additional information to assess the reasonableness of key assumptions in order to determine the estimated value of PSI’s assets.
“This shows that Messrs EY [were] not satisfied with the report and supporting documents presented. This caused EY to raise various questions and request that the management present more related information.
“EY did not manage to find any documents regarding the real ownership status, value and risks of the asset invested by the joint-venture partner,” the committee stated in the report.
EY had also raised the need to reaffirm the value of the asset for the purpose of reviewing the appropriate accounting treatment with regard to equity conversion to murabahah notes for the financial year ended March 31, 2010.
However, 1MDB did not provide sufficient documents to EY to prove ownership of the JV company’s assets.
This was supported by the minutes of the board of directors’ meeting on Oct 4, 2010, that 1MDB PetroSaudi had not prepared its financial reports and the CEO had convinced 1MDB’s board that this matter would be discussed at the next board meeting after receiving the reports.
However, there is no evidence that the matter was presented or discussed in any of the subsequent 1MDB board meetings.
“EY’s stand created a tense situation towards the management team of 1MDB, and subsequently its shareholder and board of directors decided to terminate its service,” the report stated.
The shareholder of 1MDB is Minister of Finance (Incorporated).
After EY was terminated, 1MDB appointed KPMG as its independent auditor on Sept 15, 2010. However, its services were also terminated on Dec 31, 2013, before 1MDB reported its financials for the year ended March 31, 2013.
Based on the minutes of 1MDB’s board meeting on Nov 11, 2013, KPMG had requested several documents in order to determine the fair value of the fund’s investment in Bridge Global SPC through Brazen Sky Ltd.
Following the board meeting, a meeting was held by 1MDB and KPMG on Nov 29, 2013, in which the fund’s former CEO Mohd Hazem Abdul Rahman tried to convince the audit firm of the [positive] investment in Bridge Global SPC.
However, KPMG was not satisfied as there was no written evidence on the investment.
Due to the growing differences of opinion between 1MDB and KPMG, the fund, via a Dec 30, 2013, letter informed the audit firm that it would have to obtain further information on the investment from the relevant asset management firms.
Nevertheless, KPMG’s contract was terminated on Dec 31, 2013, by MoF Inc, replacing it with Deloitte. KPMG had, via a Jan 6, 2014, letter raised 1MDB’s approach of only trying to convince the audit firm verbally without presenting the needed documents.
Other factors were also mentioned in the Jan 6, 2014, letter, which showed that KPMG was unable to determine the valuation of the Bridge Global fund without being provided with additional information.
KPMG also faced difficulties in getting supporting documents and additional information from 1MDB with regard to the valuation of a murabahah note.
On Dec 31, 2013, Deloitte was appointed as 1MDB’s independent auditor. Deloitte has ratified its audit of 1MDB’s financial reports for FY2013 and FY2014. The FY2015 accounts have yet to be affirmed.
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