PAC notes 1MDB changed auditors twice in 4 years

PETALING JAYA: In a span of four years, 1Malaysia Development Bhd (1MDB) had changed auditors twice, due to varying opinions on its investments and assets.

“This is the second time in a four-year period that audit services were terminated after the end of a financial year due to a difference in opinion regarding the valuation of investments,” said the Public Accounts Committee (PAC) in its report on 1MDB. Terengganu Investment Authority, the precursor of 1MDB, had appointed Ernst & Young (EY) as its auditors on March 25, 2009.

In relation to the financial year ended March 31, 2010, EY had asked for a due diligence to be conducted on the asset ownership in the joint venture (JV) with PetroSaudi International Ltd. It had also asked the management of 1MDB to provide the JV’s financial statements as at Sept 30, 2009 for it to assess the value of shares, assets and liabilities of the JV to determine the goodwill at that time.

The PAC report said EY had raised the matter at a meeting with 1MDB’s board of directors on April 5, 2010.

“This showed that EY was not satisfied with the report and supporting documents given.

“This caused it to raise questions and ask for more information from the board. EY could not find the documents relating to the actual ownership status, value and risks associated with the asset invested by the JV,” the report stated.

Its stance caused uneasiness to 1MDB’s management and shareholders, and resulted in the board’s decision to terminate EY’s services without it signing off on the 2010 accounts.

Following that, 1MDB appointed KPMG, which signed off unqualified audits for 1MDB’s annual reports for the financial years 2010, 2011 and 2012.

KPMG was dismissed as 1MDB’s auditors on Dec 31, 2013 after a difference of opinion on the fair value of 1MDB’s investment in Bridge GLobal SPC through Brazen Sky Ltd.

The PAC report said KPMG had decided to issue a qualified audit report for 1MDB’s 2013 financial statements. It was replaced by Deloitte before issuing its audit report.

KPMG had asked the board documents verifying 1MDB’s investment in Bridge Global, the due diligence on Bridge Global’s incorporation, as well as its net asset value report on March 31, 2013, among others.

“Based on meeting minutes between 1MDB and KPMG on Nov 29, 2013, Mohd Hazem Abd Rahman (former 1MDB chief executive) tried to convince KPMG on the investment. But KPMG was not satisfied due to the lack of written evidence,” PAC said.

Hazem then informed the board in a meeting on Dec 9, 2013 of KPMG’s dissatisfaction and said they would hold a meeting to determine if the information presented by 1MDB’s management was acceptable and sufficient for the audit, or they would issue a qualified opinion.

Following the differing opinions, 1MDB asked KPMG to seek clarification from the fund manager.

Only a day later, shareholders decided to disengage the contract with KPMG and proceeded to appoint Deloitte as its new auditor. “KPMG, in a letter dated Jan 6, 2014 to the management, raised the issue that 1MDB was trying to convince them without presenting the necessary documents,” it said.

Deloitte verified the accounts for the 2013 and 2014 financial years, with an unqualified opinion without any qualification or emphasis of matter.

“Referring to company records, an explanation was given for a change of auditors for 2013 and not 2014.

“For 2013, there was a difference in opinion for several technical accounting issues between KPMG and 1MDB’s management, which made the audit late.

“To save time, 1MDB gave those issues to Deloitte, to which they agreed on the accounting treatment,” the PAC report said.

Also, Deloitte is the “biggest auditor in the world” and gave a more comprehensive audit.

“The change in auditors by 1MDB is from KPMG to Deloitte and not as if it is from the Big Four to a small unknown local auditor,” the report said. 1MDB’s board appointed Deloitte based on assurance by its risk management and audit committees. The PAC said as at Oct 31, 2015, it found that Deloitte was still the auditors of 1MDB.