Monday, September 21, 2015

Was Deloitte Malaysia wilfully misled or negligent over the options granted by 1MDB to IPIC?

The Wall Street Journal (WSJ) reported on Thursday that US$993 million which was allegedly paid to IPIC by 1MDB to buy back the latter’s options have not been properly unaccounted for.  The options were granted to IPIC in 2012 to acquire up to 49% of its two energy subsidiaries, Powertek Investment Holdings and 1MDB Energy (Langat) Sdn Bhd as part of the condition for the provision of a guarantee by IPIC for US$3.5 billion of 1MDB bonds.

According to the March 2014 Financial Statement audited by Deloitte Malaysia, 1MDB claimed the proceeds of US$1.22 billion derived from the redemption of its investment in Cayman Islands was instantly and “substantially utilised to pay debt interest, Aabar options, working capital”.  The sum used to redeem the options granted to Aabar Investment PJS, a subsidiary of IPIC, according to both The Edge and WSJ amounted to US$993 million.

However, this payment of nearly US$1 billion was not reflected anywhere in the IPIC financial statements for the year ending December 2014, which was audited by Ernst & Young.  Instead, the statements disclosed that 1MDB still owes an additional US$481 million to IPIC for the termination of the said options.

In 1MDB’s responses since the above expose, the company failed to explain the “missing” billion dollars.  Instead the company executives tried to obfuscate the matter by claiming that “despite the malicious and wrong second Wall Street Journal article on September 18, 2015, upon payment of the “nearly US$1 billion” deposit by 1MDB, the options over the energy assets have indeed been terminated”.

However, the WSJ never queried the termination of “the options over the energy assets”.  WSJ asked if 1MDB had indeed paid “nearly US$1 billion” to terminate the options and IPIC’s accounts did not reflect any such payments received, where did the “nearly US$1 billion” go?

As such, the question that needs to be asked is if 1MDB’s auditors, Deloitte Malaysia, have wilfully misled 1MDB or if they have been unprofessionally negligent, or both, over its audit of 1MDB’s options granted to IPIC and/or the latter’s subsidiary, Aabar.  Did Deloitte Malaysia vet the options termination agreement cited by 1MDB, verify the amount to be paid, and confirm with IPIC the amount paid by 1MDB?

Or did Deloitte Malaysia merely take the word of 1MDB’s management as the gospel truth?  Deloitte’s reputation is seriously at stake today as 1MDB has been leveraging on the presumption that the auditors conducted all the necessary verifications and signed off the accounts.

Although Deloitte is not responsible for any fraud which occurs in 1MDB, the International Standards of Auditing (ISA) adopted by the Malaysian Institute of Accountants (MIA) dictates that “the auditor shall maintain professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with governance.”

The ISA further states, “maintaining professional skepticism requires an ongoing questioning of whether the information and audit evidence obtained suggests that a material misstatement due to fraud may exist. It includes considering the reliability of the information to be used as audit evidence and the controls over its preparation and maintenance where relevant. Due to the characteristics of fraud, the auditor’s professional skepticism is particularly important when considering the risks of material misstatement due to fraud.”

Given the overwhelming criticisms and public scrutiny of 1MDB in the past year, there is absolutely no basis for Deloitte to claim ignorance, and therefore the lack of skepticism with regards to the 1MDB financial statements prepared by the management.

If however, Deloitte belatedly discovered that, given the recent exposes by the WSJ and other media, it had been misled by the management of 1MDB, then it is Deloitte’s responsibility to file police reports against those who have provided the fraudulent information since a crime could have taken place.

Malaysians rely almost entirely on Deloitte to audit and vet the financial statements of 1MDB to ensure that the audited accounts present a true and fair view of the company.  For the past 6 months, the Deloitte name has been dragged through the mud by 1MDB, where the latter used the international audit firm’s reputation as a shield to hide its shenanigans.

Therefore, to protect not only its brand name but also the interests of the Malaysian tax-payers, Deloitte possesses the grave responsibility to make right what was wrong and play its role to ensure those who defrauded the nation will pay for their crimes.

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