Investigative audits common among listed companies
Saturday, 21 March 2015
MALAYSIA has seen only small-scale forensic accounting cases, mostly in the form of investigation audits done on Practice Note 17 companies, which has surged since 2000. So, the call on the Auditor-General to undertake a forensic audit on the government-owned fund –1Malaysia Development Bhd (1MDB) will be the largest by far in Malaysia’s corporate history.
According to Ferrier Hodgson MH director of forensic and investigations Liew Kim Yuen, the only investigation in corporate history that could be compared with 1MDB’s scale is the Bumiputra Malaysia Finance (BMF) scandal in 1983.“Yes, the BMF scandal could be deemed as one of the largest (forensic audit),” he says.
The BMF scandal entailed a Royal Commission of Inquiry, which, carried more weight compared with a forensic audit.
The Government had then appointed a three-man team led by the late Tan Sri Nordin Ahmad, who was then Auditor-General, to conduct a public inquiry into BMF’s affairs that led to the murder of Bank Bumiputra auditor Jalil Ibrahim.
Investigations into the BMF scandal are similar to 1MDB in terms of cross-border transactions.
The BMF controversy involved RM2.5mil compared with RM42bil which the 1MDB has chalked up in debt since its inception in 2009.
The BMF scandal involved transactions across several jurisdictions, primarily Hong Kong and started because of huge loans given to the Hong Kong-based Carrian Group, which was led by Malaysian businessman George Tan.
Since then, investigative audits have become common, starting from 2000, especially on PN17 companies such as Patimas Computers Bhd and Seloga Holdings Bhd.
“In recent times, the much talked about corporate investigation cases in Malaysia were Transmile and Megan Media. Other notable cases include Silverbird, Kenmark and HB Global, a China-based company,” says Baker Tilly Monteiro Heng and Ferrier Hodgson MH executive chairman Datuk Heng Ji Keng.
Heng adds that it is common practice among fraudsters to make overseas transactions or foreign business arrangements. Different jurisdictions with various regulatory requirements are often used to diminish the audit trail, which enables the fraudster to disguise fraudulent acts as bona fide arrangements.
“To facilitate the investigation of cross-border transactions, one must have affiliates/contacts in those foreign jurisdictions who have legal knowledge in those jurisdictions as well as be in a position to advise as to the most efficient legal means of tracing transactions in those jurisdictions,” says Heng.
The white knight that comes to the rescue had to do an investigative audit to determine what went wrong, but back then, the directors or officers of the listed-company were not penalised or reprimanded if they were found to be in the wrong.
This is because section 317A under the Capital Markets and Services Act 2007 was not enacted at the time. Under the section, a person who commits an offence shall be jailed between two and 10 years and liable to a fine of up to RM10mil upon conviction.
A “director” will include chief executive officer, chief operating officer, chief financial controller or any other person primarily responsible for the operations or financial management of a company.
A case in point is the Oilcorp Bhd accounting dispute, which essentially saw its statutory auditors Baker Tilly Monteiro Heng give professional clearance to Horwath to be the new statutory auditors of Oilcorp.
Oilcorp and Baker Tilly were in a dispute over the value of a biodiesel plant contract awarded by Plant Biofuel Corp, which would have affected the former’s earnings.
Oilcorp said the job was worth RM110mil, while Baker Tilly said it did not have enough evidence to fairly evaluate the job’s worth.
Horwath had earlier been hired to conduct an independent verification of the contract value, in which it affirmed Oilcorp’s RM110mil valuation, but Baker Tilly refused to amend the audited accounts.
However, according to reports, the job was given to BDO Binder which completed the accounts.
Although the country has seen some investigative audits conducted in recent years, none would share the same limelight as the 1MDB.
Auditor-General Tan Sri Ambrin Buang will be creating history with his unprecedented forensic audit and investigation into the government-owned fund.