Monday, May 25, 2015

Deloitte Malaysia Must Come Clean to Restore an Already Fading Reputation

Deloitte Malaysia has become the laughing stock of the accounting and financial community with their highly questionable audit of 1Malaysia Development Bhd and their being made the shield by the Malaysian government to defend the company

Deloitte Malaysia’s reputation as an independent and established international auditing firm lies in complete tatters as controversy rages over the financial status of the Ministry of Finance wholly-owned subsidiary, 1Malaysia Development Bhd (1MDB).

Deloitte has taken over the auditing duties of the books of 1MDB after the previous auditors, KPMG quit its role well past the March financial year end of the company in 2013. Since then the firm has signed off the accounts of 1MDB without even an emphasis of matter, not to mention any qualification.

However the Deloitte’s auditing standards have been heavily question over the past 6 months as 1MDB struggled to pay its matured debt obligations and service its interests.

In particular, how is it possible that Deloitte’s audit partner, Ng Yee Hong, was able to get it so wrong by signing off its March 2014 accounts in 5 November 2015 without any qualifications when 1MDB was in all practical terms, insolvent. The Auditors wrote that “the Group’s holding of cash and short-term deposits, together with committed funding facilities and net cash flow from operations, are expected to be sufficient to cover its cash flow needs” (page 144).

However, by the end of the same month of November, 1MDB was forced to repeatedly extend its repayment of a RM2 billion loan which was due. In fact, 1MDB had to beg local billionaire, Tan Sri Ananda Krishnan, who assisted by arranging a private loan from local investors to finally settle the loan in February, mere days before a default event was declared.

Since then, 1MDB had received a emergency bailout fund of RM950 million from the Federal Government to assist in servicing its loans. 1MDB is also forced to sell its prized real estate to local government-linked funds to keep itself afloat. On top of that 1MDB has been negotiating to dispose of all its energy assets which it had purchased at an inflated price in order to raise funds to pare down its debts.

It beggars belief that a firm of Deloitte’s standing was so wrong and negligent over a multi-billion ringgit state-owned firm which has resulted in massive losses for the Malaysian tax-payers.

The international accounting and financial community are also scrutinising Deloitte’s assessment of the firm’s classification of RM13.4 billion of “Level 3” assets. “Level 3 fair value measurements are those derived from valuation techniques… that are not based on observable market data (unobservable inputs).”

While the classification may be technically correct, the question remains if Deloitte has its responsibilities “to maintain professional skepticism throughout the audit” and to identify and assess “the risks of material misstatement due to fraud” as required under the International Standards of Auditing (ISA).

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.”

As a result of failing to perform its duties professionally and independently, the Prime Minister and the 1MDB Board of Directors have been using the Deloitte name as a shield against any misdeeds or malpractice, to defend the distressed 1MDB. Deloitte’s name gets tainted and dragged through the mud, making the firm the butt of jokes in the financial circles.

As an allegedly reputable international audit and accounting firm, it must come clean and protect its image of auditor independence and compliance with ethical standards in discharging their professional responsibilities. As it remains the auditor for 1MDB for the financial year ending March 2015, Deloitte must now leave no stone unturned for its audit of the company and restate the previous year accounts where appropriate in order to present the true picture of the financial state of the RM42 billion indebted company.

Tony Pua

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