Lower auditing standards seem to have been applied

“I have done a desktop review of the 2014 accounts of 1MDB without going deeper and have found that a few major accounting principles underlying the accounts dated March 31, 2014 may have been stretched to achieve the unqualified opinion.”

Jagdev Singh Sidhu, The Star

PUBLIC Accounts Committee (PAC) chairman Datuk Nur Jazlan Mohamed (pic) is a busy man. On Tuesday, the PAC launched an investigation into the dealings of 1Malaysia Development Bhd (1MDB) to get to the bottom of just what had happened to the cash-strapped strategic investment company.

In a media conference room crammed with 60 reporters, Nur Jazlan said the investigation, which will be closely followed, was to provide a good, professional and objective report on 1MDB’s history since its establishment in 2009.

“People want to know what happened. We are looking into the past. The aim is to get information and inform the public of what happened,” he told reporters.

What Nur Jazlan and the PAC are looking for is the truth and will examine the stretched application of auditing standards used in the preparation of 1MDB’s accounts.

The investigation is expected to be exhaustive and will delve into many aspects that have raised red flags.

“I am going to focus on a few major accounting principles in the preparation of the accounts, which seem to have been applied with the lower end of the auditing standards, which high-risk and high-economic-impact government-linked companies (GLCs) like 1MDB should not use in the preparation of their accounts,” he tells StarBizWeek.

“When it comes to the utilisation of public funds, GLCs should subject themselves to a higher degree of scrutiny to gain public confidence, and therefore, should apply more stringent and a higher level of auditing standards.”

The dealings of 1MDB have been a magnet for controversy. The numerous changes in its auditors and CEOs over a short period of time have raised questions over the operations and accounts of the company.

“The frequent change in auditors from Ernst & Young to KPMG to Deloitte in six years does not give confidence that the accounts are of a high standard of assurance,” he says.

He thinks the Malaysian Institute of Accountants as the regulator of the accounting profession in Malaysia should launch its own investigations into this unusual practice.

“I have done a desktop review of the 2014 accounts of 1MDB without going deeper and have found that a few major accounting principles underlying the accounts dated March 31, 2014 may have been stretched to achieve the unqualified opinion,” says Nur Jazlan, who is a trained accountant and an elected committee member of the Association of Chartered Certified Accountants.

“I feel the management, board and the auditors should be taken to task and made responsible for allowing such issues to cloud the accounts.”

The speed in which the controversial joint venture (JV) with Petro Saudi was done has raised allegations that not enough due diligence was exercised. Many parties have demanded a thorough investigation into all aspects of the deal, as there are a number of questions over what happened to 1MDB’s money that was pumped into that JV company.

While the allegations over the deals have caused much consternation, Nur Jazlan feels that the accounts of 1MDB have to be scrutinised deeper.

He is worried that there might have been an inconsistent use of the asset revaluation policy and whether 1MDB can be construed as a going concern, given the vast gulf between its cashflow and equity against its huge debt and interest payments.

“Can it be a going concern due to the unbalanced debt-to-equity ratio?” he asks.

“Looking at the current liquid assets of the company, it is very clear that it has very little cash to service its debt obligation, and therefore, the management, board and auditors should raise the red flag and explicitly declare that the company is no longer a going concern and therefore, requires the Government to step in and support it and not give an unqualified audit report,” he says.

Below are excerpts of his interview with StarBizWeek.

Why the need for this investigation and what is its scope?

We decided to carry out the investigation before the Auditor-General (AG) releases his report because our scope is wider than the AG’s. The AG’s scope is just financial management, but our scope goes beyond that because it involves political issues that affect the Government’s image as well. An example is the allegations that have emerged. The AG might not take all that into account, but we have to.

We are looking at total governance and have to be more sensitive to the political aspects that affect the image of the Government to mitigate any damage to the Government as a whole.

When we call witnesses, they will be relevant and pertinent to the case.

What is the PAC hoping to achieve from this investigation?

The truth. Today, there is a perception via the allegations, which have yet to be confirmed whether true or not, that certain people are guilty in the eyes of the public. If there is something wrong, we will recommend that the Government takes action to remedy the situation and punish those responsible.

If our findings find nothing wrong, then it should be accepted. If there are Government agencies that seek additional money or the help of the GLCs, then it warrants the attention of the PAC.

We also want to know how any assistance, monetary or otherwise, being requested by a GLC is being utilised.

Is the speed of the investigation important?

Because this issue has been left to fester for a long time and with new information coming out, we will have problems in narrowing the scope of our report. So, we will not at this point, set a date or time period for the report. We will consider all relevant information. Our investigation needs to be thorough and call the right witnesses and then come to a conclusion. At this point, we just started and can’t come to a conclusion. We want to complete the investigation as soon as we can.

What concerns you the most from what you have read and seen from the 1MDB issue?

First is the conflicting information or explanations given by the company and the Government on the allegations that have been raised.

There is no compulsion of witnesses to tell the truth?

No. Most of the witnesses who come to face the PAC will not dare to lie or tell an untruth because their reputation is at stake.

Will the report be made public?

It will be tabled in Parliament. Once that happens, it will be made public. We will be releasing it together with the hansard.

The PAC is bi-partisan. Is there a common ground on which they have come together to find out what went wrong with 1MDB?

The final test is whether we can come up with a consensus conclusion that we usually do. We have never differed on anything with our reports. To accuse Barisan Nasional members of trying to cover up things is unfair because Opposition members are there. If we do that, they will not agree on the conclusion via a consensus. This is the most independent commission you can find. A Royal Commission is chosen. The PAC members are selected by their parties to sit on the committee. When we print our report, it will be in the hansard.

How deep is this investigation going to be?

The reason why we didn’t limit the scope is because we want to consider all the information and allegations out there. And we want to make sure we can answer all of them.

There are checks and balances in Government when it comes to the usage of taxpayers’ money. When you see the allegations that have been levelled against 1MDB, are you worried that none of these were followed?

It is too early to comment. We have not called in all the witnesses yet. The investigation will look at whether proper corporate governance and due diligence have been observed in the operations of 1MDB.

How do you make a judgement that something wrong has happened? Are you in a position to determine whether something irregular has happened?

Through our interviews, we will find a difference in their statements. From there, we will make our conclusions and recommendations for action to be taken.

Will the investigations be completed before the AG’s report or use what that report finds?

I can’t say that now. We will get more information as we go along, and then we can decide whether we have enough evidence and findings to conclude the report.

As a trained accountant, are you surprised by what you see in the accounts?

Personally, and not as the PAC chairman, I am very surprised at the lax leeway given and the stretching of the auditing standards. Then, there is the special treatment given to 1MDB compared with other commercial enterprises and GLCs.

When you look at the accounts, should there have been a uniform application of standards?

The standards are there. The question is whether you want to apply them to the highest or the least degree. In this case, it was applied to the least.

It’s not like these firms are not reputable international companies. They have been auditing other listed companies. They should actually observe a higher standard.

There is so much taxpayer money involved. How does it affect the scope and gravity of the investigation?

Because of that, it attracts people’s interest, and because of that, we have to delve deeper into the issue. That’s why we are taking our time and getting to the bottom of it.

You only revealed the first few people you will be questioning. Do you have a list?

Hopefully, from the first four witnesses, we will get information to call more. There are a lot of allegations and we have to interview a lot of witnesses to get a clearer picture.

What if your finding differs from what the AG reports?

Our report is independent and we assume our report will take a higher degree of importance.

There is so much secrecy involving the transactions of 1MDB. Are you hoping those witnesses who come forward will tell the truth instead of hiding behind secrecy?

They better tell the truth because we are going to call more witnesses. If it is proven that what they said is false, then we will call them again if need be.

How long will each witness be interviewed?

The Secretary-General of the Finance Ministry took three hours, but we will go on for as long as we exhaust all the questions. We want to get as much information as we can.

Is it just verbal testimony or will you be requiring documents?

Documents too. They have not been denying our request for documents.

What about the PetroSaudi International deal?

People presume that there is a lot wrong about 1MDB, including the PetroSaudi deal. We want to know the big picture about what actually had happened at 1MDB and then go deeper into issues such as PetroSaudi, Jho Low, etc. But it is too early to jump to that conclusion now.