A confusing Karyon picture

  • Business
  • Saturday, 14 Sep 2013

Suddenly, two big shareholders want the auditors removed. But why?

TWO months after shareholders of Karyon Industries Bhd approved the reappointment of its auditors, two substantial shareholders and board members now want the auditors gone. Will we ever know why?

The ACE Market company, which makes products from polymers and oleochemicals, doesn’t have to offer an explanation because the bid to terminate the auditors was initiated by the two shareholders, not the Karyon management.

The duo, Karyon chairman Loh Chen Yook and his son, Loh Fatt Chong, who is also a non-executive director of the company, perhaps prefer not to publicise their reason for wanting a change in auditors, but keeping mum isn’t a great option.

The auditors aren’t taking this lying down. They have written to Karyon following the Lohs’ requisition for an extraordinary general meeting to vote on the proposed removal, and that letter was posted on the Bursa Malaysia website. Its contents scream for a response.

Attempts to boot out auditors of listed companies are rare. There can’t be more than 10 such cases in Malaysia since 2000. Rarer still is when the auditors refuse to go away quietly.

Things looked fine on June 26, when shareholders passed all 11 resolutions tabled at the Karyon annual general meeting, including the one proposing the reappointment of Raki CS Tan & Ramanan as auditors for the financial year ending Dec 31, 2013.

On Monday, however, Karyon said it had received a notice from the Lohs asking for an EGM to be held to replace Raki CS Tan & Ramanan with CAS & Associates as auditors for 2013. Under the Companies Act 1965, shareholders with a combined stake of at least 10% are entitled to requisition for an EGM. The Lohs have 14.3%.

Karyon added that a circular to shareholders and the notice of EGM will be sent out in due course.

It should be noted that Raki CS Tan & Ramanan issued a “clean” audit opinion on Karyon’s 2012 accounts; there was no qualification or any other red flags. So it appears that there’s no dispute on the audit opinion.

In previous instances of removal of auditors, the companies typically didn’t include rationales in the circulars since this isn’t a must according to the stock exchange rules.

On the other hand, the directors were required to make recommendations to shareholders on how to vote. Invariably, the boards concluded that removing the auditors were in the best interests of the companies but didn’t say why.

This time, the Karyon management may be compelled to share more information because the representation from Raki CS Tan & Ramanan, merely by pointing out a few facts, has raised several questions. The rest of the Karyon shareholders deserve to know the answers before voting at the EGM.

Karyon disclosed the auditors’ letter on Tuesday. In it, partner V. Venkatramanan said the Karyon audit committee, in a meeting on April 24, had recommended the auditors’ reappointment. The shareholders accepted this and the auditors were reappointed at the AGM two months later.

Venkatramanan added that his firm was not invited to attend an audit committee meeting on Aug 30 “where we believe our proposed removal may have been discussed”.

“We cannot see what could have transpired between June 23 (sic), when the AGM reappointed us, and Aug 30, to warrant our removal,” he said. He also pointed out that the Lohs had not engaged with the auditors.

“As a recommended best practice set out in the Listed Companies Corporate Governance Guide, the audit committee has not engaged with us to hear any explanation we might have for the notice of removal, especially so when the requisition is from the chairman of the company himself,” he added.

(Venkatramanan may be referring to Bursa Malaysia’s Corporate Governance Guide, a handbook published in 2009. Here’s maybe a relevant line from it: “In the event of removal or resignation of the external auditors, it is imperative for the audit committee to look into the reasons thereof, especially when the impending removal or resignation arises from an impasse in the resolution of contentious matters that affect financial reporting.”)

It’s indeed strange that the shareholders at the June AGM – we don’t know if the Lohs were among them – seemed happy to retain the services of Raki CS Tan & Ramanan, and yet they are now asked to switch auditors without knowing why. What has happened since the AGM to trigger this?

The Lohs may well be willing to explain themselves at the EGM, but why wait until then? Why divulge the information only to those who attend the meeting? By not going for the EGM, do shareholders forfeit their right to know?

That doesn’t sound right. If the Lohs believe that Raki CS Tan & Ramanan shouldn’t continue as Karyon auditors and need shareholder support to remove them, there ought to be transparency and fairness. The market needs to know that when auditors are dropped, it’s for the right reasons.

Executive editor ERROL OH realises that auditors are often under much scrutiny, but that’s what happens when your work is largely to determine if others comply with standards.

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