Qualified opinion raises questions

  • Opinion
  • Saturday, 16 Aug 2014

AN opinion is only as good as the facts, understanding and judgement that support it. This is something to bear in mind because of our dependence on the auditors’ reports on annual financial statements.

The essence of each report is the opinion expressed by the auditors after auditing the financial statements. The auditors are supposed to say whether they believe the statements present a true and fair view of the organisation’s financial position and performance.

More often than not, the auditors indeed conclude that the statements give a true and fair view, and they thus issue “clean” or unmodified reports.

This is what people expect to hear, particularly from auditors of listed companies. Stakeholders take it as an independent assurance that the companies’ accounts are reliable.

However, once in a while, a listed company’s financial statements come with a modified audit opinion, which is often seen as a red flag. And sometimes, the follow-up action doesn’t help much.

Take the case of Compugates Holdings Bhd. On April 30, the distributor of IT products released its audited accounts for the year ended December 2013. Auditors Baker Tilly Monteiro Heng (BTMH) came up with a qualified audit opinion, saying it couldn’t get “sufficient appropriate audit evidence” relating to a professional fee of RM3mil that was incurred by a Compugates subsidiary.

Although the qualified audit opinion didn’t tip the company into PN17 status – an adverse or disclaimer opinion would have done so – it was still a cause for concern considering that Compugates reported a loss after taxation of RM3.7mil in 2013.

According to the notes to the financial statements, the RM3mil fee was paid to an offshore company “in relation to advisory support services for work done and proposed projects”.

Said the company in the notes: “The Group will in future, put in place further documentations (sic) to strengthen the current limitation in the documentation and justification in supporting the payment of the advisory support services.”

But Compugates didn’t stop there. On May 26, it announced that it had appointed Crowe Horwath, another accounting firm, to conduct a special audit on certain payments made by the subsidiary for advisory services.

The company explained that its audit committee had met to discuss BTMH’s audit report and had decided on the “proactive measure” of getting Crowe Horwath to help in a review of the fee transactions. Compugates said the special audit would begin on May 27 and would take four weeks.

However, it was only on Thursday that the company disclosed the findings, which it had summarised into this grammatically awkward sentence: “Based on the work performed by Crowe Horwath and the information available, Crowe Horwath have not identified any unusual or unauthorised cash payments or whether the contracts for advisory support services were not valid.”

On what will be done in response to the findings, Compugates basically repeated the assurance (first made months ago in the notes to the 2013 financial statements) that it will improve the documentation that backs up the payments for advisory support services.

It appears that after going through the report submitted by Crowe Horwath, the Compugates audit committee and the rest of its board and management are satisfied that there’s nothing worrying about the RM3mil fee.

However, for those who have no access to the report, what the company has revealed so far is rather meagre. If the idea of commissioning the special audit is to dispel doubts, it hasn’t worked well because we continue to have questions about the fee.

For example, we don’t know the names of the subsidiary and the offshore company that received the fee. The nature of the services rendered remains vague. What are these “work done and proposed projects” and how is the fee determined? And has the company sent copies of the Crowe Horwath report to Bursa Malaysia and the Securities Commission?

It’s useful to know what was it really that Crowe Horwath was asked to do. These details were provided in Thursday’s announcement.

The objective of the special audit, according to Compugates, was to review the transactions and accounting entries related to the professional fee so as to ascertain whether there were any unusual and unauthorised cash payments, and whether the contract for services rendered or to be rendered is valid and accounted for correctly.

To do this, Crowe Horwath needed to study Compugates’ internal control system in respect of cash payments and related party transactions; review and examine source documents and perform further tests if required; interview the management and any other personnel who may have knowledge of the matter; perform search and request documents from third parties, namely, the Companies Commission of Malaysia, banks and suppliers; and review director’s circular resolutions and minutes of meetings.

That’s a lot of work, but was it all outside the scope of BTMH’s audit? Couldn’t BTMH have done the same things, or at least part of them, if it wanted to gather sufficient evidence of the fee? Or were there other factors (such as time and cost constraints or the unavailability of documents at that point) that compelled the firm to qualify its opinion?

Auditors have to maintain client confidentiality, and they therefore can say very little about their work and findings. On the other hand, Compugates is free to disclose a lot more about the fee and the Crowe Horwath findings.

Let’s not forget that BTMH’s audit report on the Compugates financial statements is a requirement of the Companies Act. In the absence of additional facts to help us understand and judge better the circumstances surrounding the RM3mil professional fee, the firm’s qualified audit opinion still carries the most weight.

  • Executive editor Errol Oh is aware that this article is an opinion piece.

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