Thursday, February 26, 2015

KPMG Should Declare Its Role In The 1MDB Petrosaudi Scandal

Did KPMG fail their duty to protect the interest of the Government and the Malaysian public when scrutinising and signing of the Financial Reports of 1MDB in the light of the Petrosaudi exposé?

The Sarawak Report exposed the secret 1Malaysia Development Bhd (1MDB) and Petrosaudi International Limited (PSI) joint venture (JV) agreement dated 29 September 2009, revealing details which points towards a highly elaborate scam to siphon money from 1MDB.

Despite knowing that “1MDB Petrosaudi Limited” had a dubious existing debt of US$700 million, 1MDB agreed to invest US$1 billion (RM3.5 billion) into the newly set up company to subscribe for 40% of new shares.  Hence 1MDB had invested US$1 billion in a JV where the JV partner immediately gets to siphon 70% of the funds out of the joint venture for practically nothing in return.

However, the salient details of the JV agreement above were never reported in 1MDB’s very first Financial Report for March 2010.  This is because the JV was terminated 6 months later in 31 March 2010, very coincidentally on the very last day of the Financial Report.

The US$1 billion investment was revalued to US$1.2 billion and sold back to PSI.  However the US$1.2 billion was “converted into Murabaha notes” or an Islamic loan back to “1MDB Petrosaudi Limited”.

I had raised the question earlier as to whether conversion of shares to loan was in actual fact a cover up of the JV scam. By converting it into a loan to the Petrosaudi, 1MDB was then able to avoid reporting the key salient details of the JV agreement in the 2010 Financial Report.

The action of 1MDB raises strong suspicions of hanky-panky because if 1MDB had decided that the JV with Petrosaudi did not work out, why didn’t 1MDB just withdraw its US$1.2 billion investment in full?  In other words, if 1MDB did not believe in the business model any more, then why did it still lend money to the venture, where 1MDB would then have no representation nor control over the funds?

The question must therefore be asked if the Auditors for 1MDB, KPMG Chartered Accountants who signed off the accounts on 4 October 2010, had abetted 1MDB in covering up the above Petrosaudi scam.

Under the International Standards on Auditing (ISA) 240 adopted by the Malaysian Institute of Accountants (MIA) in 2010, it is the responsibility of the Auditors “to maintain professional skepticism throughout the audit” and to identify and assess “the risks of material misstatement due to fraud”.

In fact the ISA clearly states, “for significant transactions that are outside the normal course of business for the entity… the auditor shall evaluate whether the business rationale (or the lack thereof) of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets.”

The public trusts auditors to fulfil their responsibilities proficiently. Auditors must balance competing interests to perform their role and provide public service.  If the auditor has identified or suspects a fraud, the auditor shall determine whether there is a responsibility to report the occurrence or suspicion to a party outside the entity.

In this case, unless they were convinced after a thorough audit process that there has been no suspicious element of fraud or the misappropriation of direct or indirect Government funds, the Auditors are obligated report the matter to the relevant authorities, such as the Police or even the Malaysian Anti-Corruption Commission (MACC).

There is no question that KPMG would have had complete access to the JV Agreement and vetted the relevant transactions including the US$700 million transfer from 1MDB or the JV to Petrosaudi or its nominee.  The failure to red flag the above transactions meant that the 1MDB auditors would have failed their duty to protect the interest of the Government and the Malaysian public at large.

To protect the integrity and independence of the international chartered accountants, KPMG must declare its role in the Petrosaudi scandal, and if there has been omission and negligence its audit of 1MDB.  The failure to do so would necessitate an investigation over its conduct by the Malaysian Institute of Accountants (MIA) as the statutory body established under the Accountants Act, 1967 to regulate the accountancy profession.

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