Tuesday, May 19, 2015

Delloite, 1MDB's (not so) Invisible Shield

Dato’ Seri Najib Razak needs to stop using Deloitte auditors like an invisible shield which will be able to deflect all bullets and start giving some real answers.

The Prime Minister, Dato’ Seri Najib Razak has been touring the country to defend his flagship investment baby, 1Malaysia Development Bhd (1MDB) in the light of heavy criticisms pouring in against the company and his leadership in managing the company.

While Dato’ Seri Najib Razak, who is also the Finance Minister, pleaded for the critics to wait for the investigation reports by the Auditor-General before judging 1MDB, he himself have no qualms to immediately absolve 1MDB from any wrong-doings, embezzlement and misappropriations.

Last Saturday, he had the nerve to tell UMNO Selangor members in Klang that "the [1MDB] RM42 billion is not lost. There, the 70 acres TRX and 500 acres Bandar Malaysia lands." That argument is ridiculous because 1MDB only paid RM1.86 billion for these pieces of land.

Yesterday, he tried to convince the UMNO former lawmakers’ club, Mubarak, that RM42 billion could not have disappeared “because the accounts were audited by Deloitte. Auditors will not sign if even RM1 million is missing. Now it is said that RM42 billion has vanished. How can it vanish? It hasn't vanished, there are assets, there are liabilities."

This argument takes the same line as the one taken by the 1MDB Board of Directors where they stressed last week “that 1MDB accounts are audited by an international audit firm, Deloitte”. It said that Deloitte signed off 1MDB’s 2013 and 2014 accounts without qualification.

For the well-informed, the attempt to use Deloitte as a shield is clearly misleading and disingenuous.

Firstly, Deloitte could very well have abetted or assisted 1MDB in producing their “unqualified” accounts. Such complicity would not be the first as we have seen how the world’s largest auditing firm, Arthur Andersen collapsed overnight over their role in the multi-billion dollar Enron financial scandal in the United States.

Deloitte has at the very least been negligent because 1MDB failed to produce the necessary funds to repay a RM2 billion loan at the end of November 2014, despite the auditors signing off the accounts in the first week of the same month. Surely a firm with facing such imminent going concern crisis should never have had their accounts signed off without even an “emphasis of matter”.

Alternatively, the management of 1MDB could very well have misled Deloitte. For example, it was recently exposed by The Sarawak Report that 1MDB’s bank statements in BSI Bank, Singapore were purportedly forged and circulated by the top management of 1MDB to secure loans from lending banks.

Secondly, while Deloitte did sign off the 1MDB accounts for March 2013 and 2014, it did not mean that there were no questionable elements highlighted in the financial statements.

While the balance sheet of 1MDB in 2014 would show that it has RM51.4 billion of assets which is more than its RM50.0 billion of liabilities, the Auditors classified 26% of these assets or RM13.4 billion as “Level 3” assets. “Level 3” assets are where “fair value measurements are those derived from valuation techniques that include inputs… that are not based on observable market data (unobservable inputs).”

In other words, the Auditors have put on record that they are unable to vouch for the veracity and accuracy of these numbers which were supplied by the 1MDB management. Therefore even a mere 20% shortfall in the above “Level 3” asset valuation would trigger a severe liquidity crisis by 1MDB, as we witness today.

The RM13.4 billion “Level 3” assets doesn’t even include another questionable US$1.4 billion (RM5 billon) pledged to Aabar Investment PJS as collateral for the guarantee provided by the latter’s parent, International Petroleum Investment Corporation (IPIC).

If 1MDB is as healthy as Dato’ Seri Najib Razak insists it is, then there would have been no need for the company to beg local billionaire, Tan Sri Ananda Krishnan to arrange for a RM2 billion loan to assist 1MDB to repay its matured debt. There would also not have been a need for the Cabinet to approve an emergency RM950 million “standby credit facility” for 1MDB to service its outsized loans.

Therefore, the Prime Minister must stop misleading the people of Malaysia with half-truths and lies by claiming that being audited by Deloitte is proof that 1MDB is in the pink of health. While the UMNO brethen may not know any better, such attempts to absolve 1MDB and himself from the monster scandal only serve to worsen his credibility and reputation in the financial community.

Tony Pua

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