KUALA LUMPUR (June 1): The Malaysian Institute of Corporate Governance (MICG) said Serba Dinamik Holdings Bhd's response to the dispute with its external auditor, namely KPMG, had raised serious governance concerns.
In a statement, MICG deputy president David W Berry said it is inappropriate to remove an auditor when the executive is unhappy with the audit findings.
He noted that the central purpose of the external audit is its independent adoption of the relevant professional and ethical accounting standards and to report accordingly the findings.
Hence, he stressed that the independence should not be undermined.
“The external auditor is obliged to ascertain whether the company’s accounts represent, in its opinion, a true and fair view of the concern’s financial status. In this case, the financial values are significant, adding extra weight to the need for the auditor’s independent opinion,” he added.
On top of that, he said for the executive to suggest that the independent directors are unqualified to understand the accounting issues would be an attack on the competence of the company’s audit committee, which is composed of independent directors.
According to him, criticising the auditor for addressing its concerns to the company’s independent directors is perverse.
“Against that background, the silence of the audit committee and the company’s independent directors raises questions,” he said.
“More light is needed on the audit committee’s findings and its recommendations to the board. These should be revealed to shareholders in the extraordinary general meeting (EGM),” he added.
He expressed his concern that an EGM is being called by a non-independent director (albeit a non-executive director) who appears to be in agreement with the managing director’s (the executive) position.
“It is the MICG’s view that in this scenario, none of the directors who are shareholders should vote on the matter, irrespective of whether they are executive or non-executive, independent or non-independent. It should be for other shareholders to hear both viewpoints and vote accordingly,” he suggested.
“More information should be provided to the shareholders to facilitate a proper understanding of the dispute before any vote.
“It is appropriate, therefore, for an independent review to be conducted. The professional and ethical standards applicable to that review should be identical to those applicable to a statutory audit. In this regard, the appointment of BDO is a correct step, but KPMG should remain on board to provide any information and clarification that may be required,” he added.
Additionally, he said any committee set up by the board with oversight of the matter, when referred to as an “independent” committee, should be just that — being independent.
“There should be no executive director or other management on the committee, or any non-independent director. They can be available to answer questions as required,” he pointed out.
Berry also said the due process in the removal of an external auditor should be complied with guidelines as below.
“The current external auditor should provide a clearance letter to the new auditors for them to be comfortable to take on the role.
“The EGM will then vote on the resolution. Given the inherent conflict noted above, no shareholder-director should be permitted to vote,” he said.
The MICG noted that both Bursa Malaysia and the Securities Commission Malaysia (SC) are reviewing the situation, and will clearly follow up on areas that are of concern vis-a-vis the board’s conduct and process, and the outcome of any independent review.
“We assume some of the governance issues highlighted above will be included in their reviews. Additionally, from the perspective of the current external auditor and future independent consultant/auditor, we have no doubt the audit oversight board (AOB) will be keeping a watchful eye on the audit conduct and process, the independent review, and the findings of both processes,” he added.