KUALA LUMPUR (Nov 13): The recent legal actions initiated by Serba Dinamik Holdings Bhd against Ernst & Young Consulting Sdn Bhd (EY Consulting) and Bursa Malaysia have raised questions on the outcome of its ongoing special independent review (SIR) to address audit matters flagged by its previous auditor, KPMG.

One contention Serba Dinamik raised in its legal suit against EY Consulting is that the latter’s appointment as independent reviewer is null and void, as it is not registered with the Audit Oversight Board.

V U Kumar, a former partner at PwC, said the "auditor" in this case refers to both an audit firm or an individual auditor, based on Bursa Malaysia’s definition of an auditor in accordance with section 31O of the Securities Commission Act 1993.

Speaking to theedgemarkets.com, V U said he also “found it strange” that a consulting company is conducting the special audit, when it should be done by an auditor.

“However, if EY Consulting has a licensed auditor, it is possible that that individual could sign off the findings,” said V U.

“The Terms of Reference (TOR) should clearly indicate that the work has been done in accordance with the requirements under the Bursa Malaysia MMLR (Main Market Listing Rules) and that would avoid any doubt on whether the report could be released to Bursa Malaysia.

“Surely the independent directors and EY Consulting would have put in these TOR and ensured it (the special independent review) would be done by an approved auditor,” he added.

Another question raised is whether the legal suit constitutes a conflict of interest between EY Consulting and Serba Dinamik.

Recall that KPMG had resigned as Serba Dinamik’s former external auditor on June 24, after the company filed a legal suit against the auditor, citing negligence and breach of statutory duty.

At the time, KPMG said the legal proceedings between the two parties “compromised their ability to independently continue the audit engagement and discharge their professional duties as auditor of the company”.

This was also in line with Sections 430 and 120 of the Malaysian Institute of Accountants (MIA) by-laws, which state that a litigation between an auditor and a client will likely deter the accountant from acting objectively, and may only be addressed by ending the relationship.

In response to the legal suit, EY Consulting said it was appointed by Serba’s board of directors under the directive of Bursa Malaysia, and that it had undertaken its duties professionally and was standing by all its actions. The directive was made on June 28 under Section 2.23 and 2.24 of the Bursa Malaysia Main Market Listing Requirements.

In the directive, Bursa told Serba Dinamik to appoint an international accounting firm or an accounting firm with international affiliation, that has adequate experience and resources, to undertake the SIR. 

The directive was issued "to ensure the issues highlighted by KPMG are addressed in a timely manner and provide clarity to the market”, Bursa further said.

Under Section 2.24, Bursa may instruct a listed issuer to appoint a special auditor, where the cost incurred must be borne by the listed issuer.

When announcing the appointment on July 2, Serba Dinamik said it formally appointed EY Consulting as the special independent reviewer “to assist the board in undertaking the special independent review”.

In its suit against EY Consulting, Serba Dinamik also attempted to block the latter from sharing any findings from the independent review with any party.

V U Kumar thought that Nexia SSY PLT, which was appointed as Serba Dinamik’s new external auditor, should have full access to the findings due to its role as the company’s statutory auditor.

“Given that the findings are available, what is the new auditor going to do? Nexia should validate the matters. And if there are reportable conditions, report them to the shareholders and the Securities Commission.  

“Frankly, after the episode with KPMG, I wouldn’t have taken this assignment... This saga should be quickly addressed by the regulators because it is affecting the integrity of the capital market in Malaysia,” he added.

The situation at Serba Dinamik is unfavourable for minority shareholders of the oil and gas services company, with trading in its shares suspended indefinitely since Oct 22 by Bursa Malaysia.

The legal disputes would likely take months to resolve, adding further to the saga which is now entering its sixth month since the audit issues in Serba Dinamik first came to light in late May 2021.

When contacted, Minority Shareholder Watchdog Group (MSWG) declined to comment, saying the issue is being addressed by regulators.