Who can review the 1MDB audits?

AOB can do the job, but first, the law needs a simple tweak

CAN anybody remember the last time the names of accounting firms were popping up in non-business news articles as often as they are now?

It seems like not a day goes by without seeing Deloitte, KPMG and Ernst & Young mentioned in a report somewhere, and invariably, the story is on government-owned 1Malaysia Development Bhd (1MDB).

Deloitte is 1MDB’s current external auditors, while KPMG and Ernst & Young had that job previously. There are mounting questions and criticism about 1MDB’s deals and debts, and people are wondering if the audited accounts of the strategic development company – that’s what it calls itself – truly reflect its financial health. In other words, the auditors and their work are catching some of the glare of controversy.

In early March, Prime Minister Datuk Seri Najib Tun Razak directed the Auditor-General to “independently verify” 1MDB’s accounts and submit the findings to the Parliament’s Public Accounts Committee (PAC). The day that announcement was made, Deloitte representatives and the 1MDB management briefed the Cabinet and fielded questions on the company.

The Auditor-General’s preliminary report is expected to come out next month, but the PAC went ahead and began its own investigations into 1MDB on May 19. The PAC probe will include getting information from the company’s past and present auditors.

Committee chairman Datuk Nur Jazlan Mohamed, who has a professional accounting qualification, told StarBizWeek recently: “I am going to focus on a few major accounting principles in the preparation of the accounts, which seem to have been applied with the lower end of the auditing standards, which high-risk and high-economic-impact government-linked companies (GLCs) like 1MDB should not use in the preparation of their accounts.”

To the naysayers, it sounds like the PAC may be on to something in relation to the audit of the financial statements. But even if that’s the case, the committee has no authority to punish any wrongdoing or professional negligence. It can table recommendations in Dewan Rakyat, but it’s up to the Government to investigate further and take action through regulators.

If there are audit lapses that should be penalised, who can step up to enforce the law?

On separate occasions, Nur Jazlan has talked about two candidates: the Malaysian Institute of Accountants (MIA) and the Audit Oversight Board (AOB). Another possibility is the Companies Commission of Malaysia (CCM).

In the StarBizWeek interview, Nur Jazlan pointed out that it’s unusual that 1MDB had changed auditors twice within five years, and suggested that the MIA looked into this.

In a March media statement, he said it was important for the AOB to be involved in the review of the work done by 1MDB’s auditors. Although the 1MDB isn’t one of the organisations whose audit is within the AOB’s jurisdiction, he argued that the board was best placed to determine if the 1MDB accounts were audited according to the requirements of the law and international standards.

Here’s a look at the three regulators with the powers to act against auditors:

> MIA

What it does

A creation of the Accountants Act, the MIA is both a regulator and a professional body. It oversees the accountancy profession in Malaysia and is tasked with developing it as well. Strictly, you can’t call yourself an accountant here unless you’re an MIA member.

What the law says

The MIA’s disciplinary rules allow it to investigate and punish members – not their firms – for unprofessional conduct, which is explained as “conduct which is discreditable to the accountancy profession and includes gross carelessness, neglect and incapacity in the performance of professional duties, impropriety in professional conduct and conduct unbecoming of an accountant”. Examples include not having professional indemnity insurance (the bulk of recent disciplinary cases are for this), failure to lodge annual returns with the institute, and, yes, a member’s failure to discharge his professional duties in carrying out an audit.

Something to think about

The MIA’s Disciplinary Committee has come up with 82 decisions since 2008. None is against a member from a large accounting firm.

Also, the Accountant General or his nominee is a permanent member of the MIA council, which has between 25 and 30 members. In addition, the Accountant General advises the Finance Minister on the appointment of up to 18 council members. The Accountant General’s Department is part of the Finance Ministry, which wholly owns 1MDB.

> CCM

What it does

Regulates matters relating to corporations, companies and businesses, primarily according to the Companies Act.

What the law says

Section 174 of the Companies Act spells out the powers and duties of auditors in reporting to shareholders on a company’s accounts. These include the obligation to report whether the accounts are properly drawn up so as to give a true and fair view of the company’s affairs and financial position, and that the accounts follow the approved accounting standards.

In addition, if auditors of a public company – 1MDB is a public company as defined by the Companies Act – believe that officers of the company have committed a serious offence involving fraud or dishonesty, the matter must be reported to the CCM.

Something to think about

Although the commission says it monitors the auditors’ compliance with the law, its latest annual report doesn’t indicate any checks on audit work. Instead, the focus was to nab people who acted as auditors despite being barred due to conflicts of interests.

> AOB

What it does

Oversee the auditors of public-interest entities (PIE) and protects the interests of investors by promoting confidence in the quality and reliability of the PIEs’ audited financial statements.

What the law says

The Securities Commission Act empowers the AOB to to conduct inquiries and impose sanctions against auditors who don’t comply with auditing and ethical standards. But this is restricted to the auditing of the accounts of PIEs, which are listed companies, banking and financial institutions, insurance companies and takaful operators, and those with Capital Market Services Licences, such as securities and futures trading firms, and fund management companies. A growing section of the public is interested in what happens next with 1MDB, but as far as the law is concerned, the company is not a PIE. The AOB’s experience and expertise in reviewing the big accounting firms’ audit of large businesses, makes it the ideal regulator for dealing with the 1MDB auditors, if warranted. However, the 1MDB case is outside its jurisdiction.

Something to think about

Schedule 1 of the Securities Commission Act lists the types of organisations that are categorised as PIEs. The final line in the Schedule is handy; it says any other person can be gazetted as a PIE through a ministerial order.

Such a move will allow the AOB to begin an inquiry into the audit of 1MDB’s accounts. All that’s needed is the stroke of the pen by the Finance Minister.

Like just about everybody else, executive editor Errol Oh is waiting to see what the PAC and the Auditor-General will come up with.