AN investigative audit. Now that is something to strike fear into the hearts of corporate wrongdoers – or any wrongdoer, for that matter. So when the Securities Commission (SC) recently instructed over 30 PN4 companies – there will likely be more – to probe past losses, there is anticipation of a major crackdown.
Going by the directives, it appears that the authorities are serious about exposing any mismanagement of listed companies and punishing those responsible.
The order to conduct forensic auditing came as a condition attached to the regulatory body's approval of the various schemes to revive the ailing companies.
If the companies or white knights want the go-ahead to proceed with their rescue plans, they must appoint audit firms to go through the books to get to the root of the company's troubles.
What is more, the PN4 companies are required to recover the losses, and if anything shady is uncovered during the audit, it has to be reported to the authorities.
It all sounds good. There is definitely a need to find out what went wrong. Many shareholders saw the value of their investments plummet when the companies slipped into PN4 classification, which indicates crushing financial distress.
Of course, not all the companies got into trouble because of crooked practices. The harsh economic conditions in recent years made it tough to keep businesses going. Sometimes, it’s just due to sheer bad luck and honest mistakes.
Nevertheless, the failure of a listed company is always extraordinary. It affects a whole lot of people and the suspicions, if any, must be addressed. Malaysia's journey to strong corporate governance demands this.
At the very least, there are lessons to learn from these corporate meltdowns.
The principle for wanting the investigative audits is rock solid. Unfortunately, the mechanism is not. To begin with, why shift the onus to the white knights? It is hard enough as it is to attract businessmen to come in and save these PN4 companies from de-listing.
It is clear by now that most PN4 companies are worth taking over mainly because of their listing status. When the white knights work out the rescue schemes, they would have factored in the fact that the companies are basically damaged goods and that they come with baggage.
The white knights are injecting their businesses into the PN4 companies or are taking over the listing status. It is fair to assume that they are not interested in the companies' past. They want to shed the baggage and move on.
However, the SC's requirement for the investigative audit means that the new management is responsible for establishing why the companies sank. And if there were any wrongdoings in the companies' past, the new guys must report to the authorities.
This diminishes the already limited appeal of rescuing PN4 companies. An investigative audit can be costly and onerous. The time frame set by the SC may well turn out to be impractical.
If indeed there had been transgressions, the trail would have turned cold long before the white knights showed up and chunks of evidence might have gone missing.
Furthermore, there are pitfalls if reports are lodged. The previous shareholders and managers may sue for defamation. And the new management may get dragged into messy, long drawn affairs when the authorities act on the reports and throw the book at the alleged culprits.
Perhaps, the idea is to lighten the SC's load. Based on the audit reports, it can pick and choose which cases it ought to pursue, rather than start from scratch and investigate dozens of companies on its own.
The problem is this approach puts off potential white knights. If they believed that there’d be legal complications arising from the audits, they might just decide not to bother taking over the PN4 companies.
In the absence of suitors, the companies will end up de-listed. And we'll still not be any closer to getting to the bottom of the PN4 problem.
And who's to ensure that the audits will be exhaustive and conclusive? The announcements by the PN4 companies say nothing about what the audits should cover. There's little incentive for the new management to make sure that the auditors leave no stones unturned.
In issuing the directive for the audits, the SC has its heart in the right place. But there should be a rethink. If this move is only going to burden others and yield poor results, the best thing is to conserve resources and fight the battles that can be won.
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