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A Reading Must For All Patriotic Discerning Malaysians….Need We To Say More?!

May 25, 2015

By THE EDGE MALAYSIA  (TMI)

Published: 25 May 2015 7:00 AM

The backers of 1Malaysia Development Bhd (1MDB) have argued that because international accounting firms like KPMG and Deloitte have signed off all 1MDB’s accounts from FY2010 to FY2014, this meant no money has gone missing and no fraud has occurred.

This argument has been used to justify the not-so-eloquent silence of the management and board of directors of 1MDB, who have refused to respond to questions posed to them about various transactions and the movements of billions of ringgit.

They hide behind that argument despite the fact that 1MDB has run into serious cash-flow problems and can no longer service its debts, and so many questions have been raised about the whereabouts and nature of the so-called Available-For-Sale Investments valued at RM13.38 billion in its accounts for financial year ended March 31, 2014.

Critics of 1MDB have been asked to back off and let the auditor-general complete his work to review the audit of 1MDB.

The argument that because 1MDB’s accounts have been signed off by auditors meant that no fraud has occurred and that money was not missing is flawed. It shows that these people do not know what they are talking about.

They have badly misinterpreted, deliberately or otherwise, the role of external auditors and they do not understand the meaning of an auditor’s report when the auditors sign off the financial statement of a company.

There are no auditors in this world who will agree that their signing off on an account can in any way or form be interpreted to mean that they confirm or guarantee that the accounts are completely true, accurate and do not contain any misstatements, by fraud or error.

The International Standards for Auditing guidelines for auditors state that the external auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error.

That reasonable assurance is based on the external auditor trusting that the management and board of a company have carried out their fiduciary duties and were not involved in any fraud or have concealed any fraud.

Owing to the inherent limitations of an audit, there is an unavoidable risk that material misstatement may not be detected, even when the audit is planned and performed in accordance with international accounting standards.

The risk of fraud is higher than those of error because fraud usually involves sophisticated and carefully organised schemes designed to conceal it.

Therefore, it is not the role of an external auditor to determine whether fraud has actually occurred. That is the responsibility of the country’s criminal and legal system.

Indeed, auditors call the discrepancy between what the public expects and what auditors do as an “expectations gap”.

Let us now take a closer look at Deloitte’s audit report issued to 1MDB on November 5, 2014, for the financial year ended March 31, 2014. The fact that it was issued more than seven months after the year-end in itself should raise concerns.

Para 2: The directors of the company are responsible for the preparation of these financial statements so as to give a true and fair view. The directors are also responsible for such internal control as the directors determine what is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Para 3: Our (Deloitte) responsibility is to EXPRESS AN OPINION on these financial statements based on our audit… and perform the audit to obtain REASONABLE assurance about whether the financial statements are free from material misstatement.

The above remarks by Deloitte is a standard template statement issued by auditors to most companies. What is important to note are the following:

1. The directors of 1MDB are ultimately responsible for the accounts in so far as they give a true and fair view. The directors are also responsible for internal controls that are necessary to enable the financial statements to be free from misstatements, whether due to fraud or error. This is NOT the responsibility of the auditor.

2. The auditors only express an opinion that they, as external auditors, have done what is necessary to obtain REASONABLE assurance about whether the financial statements are free from material misstatement.

3. Critically, the external auditors DO NOT express an opinion on the effectiveness of the company’s internal controls.

In short, while auditors should be able to detect defective keeping of accounting records, they cannot detect falsified accounting documents. And neither can they question management decisions on, say, an investment that it made.

The questions asked of 1MDB mainly relate to the effectiveness of internal controls and corporate governance:

– Who approved the agreements and the various payments made since 2009?

– Why were funds diverted from what they were approved for? Why was money sent to an account controlled by Jho Low?

– Why did 1MDB overpay for the power assets, the Penang land and the commissions to the bankers like Goldman Sachs?

– Who verified and agreed to pay the US$700 million to PetroSaudi, purportedly as settlement of a loan?

– Why was Jho Low giving instructions to the management on matters of 1MDB?

– Who agreed to the Aabar options and then agreed to a termination settlement that cost 1MDB US$1 billion?

All these major issues that have been raised are about internal controls, decision-making and corporate governance at 1MDB.

Deloitte, in their audit report, had clearly stated they are NOT expressing any opinion on the effectiveness of 1MDB’s internal controls.

So, please stop passing the buck to Deloitte or using the fact that it signed off on the accounts, to say that nothing wrong has happened and that everything at 1MDB is fine.

And since the auditor-general has merely been asked to audit the work of Deloitte, it is most likely the case that his mandate is no more than that of Deloitte.

It is clear. The board of directors is responsible in ensuring the accounts are true and fair. The board is responsible for internal controls to ensure there is no fraud.

The auditor only expresses a reasonable opinion. Nothing more.

The corporate sector, at home and around the world, is littered with many examples of corporate fraud that escaped the scrutiny of auditors. In a few cases, auditors were also culpable, if not outright complicit.

The largest corporate fraud ever in the world was US energy giant Enron, whose US$78 billion market value was wiped out in days. Former Enron president Jeff Skilling is still serving a 24-year jail term.

And its auditors, Arthur Andersen, one of the Big Four accounting firms in the world then, had to cease operations.

Bernard Madoff’s US$65 billion Ponzi scheme is evidence that funds under management, with third-party valuations by international institutions, may also be subject to misappropriations and fraud. Madoff is currently serving a 150-year sentence in prison.

An article was published in the November 20, 2012 issue of Forbes magazine, on how Hewlett-Packard (HP) lost US$5 billion on a US$11.1 billion acquisition.

HP said it had to write down the value of UK software company Autonomy because it was inflated through serious accounting improprieties, misrepresentation and disclosure failures.

That scam tainted all the auditors involved – Deloitte as the auditors for Autonomy and Ernst & Young, the auditors for HP – for not detecting the fraud.

Need we say more? – May 25, 2015.


– See more at: http://www.themalaysianinsider.com/malaysia/article/why-auditors-cannot-guarantee-there-was-no-fraud-at-1mdb#sthash.UdOhBb6j.dpuf

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2 Comments leave one →
  1. Black Arrow permalink
    May 26, 2015 12:40 am

    I read the article. Very good write-up. Fitch will soon send us into the ditch.

  2. najib manaukau permalink
    May 26, 2015 1:08 am

    Malaysia will never ever have to worry about their deficits because they have a bottomless pit in EPF to keep Malaysia supplied with whatever revenues they need. A good example of their behavior is to compare Malaysia with Japan . Despite being very heavily in debt Japan is still spending and going round ‘giving’ away money that they don’t even have or shall I say with only money from the pension funds, just like Malaysia.
    The only difference if that Japan has a population of 3000 millions and as such the retirement fund of Japan must be much much bigger for Japan to dig into. Most of all they are a very heavily industrial country and it is in a position to turn things around if they can. Of course over the past decades or two that has not happened yet. In fact they ratings has now fallen will below what the a rich nation ought to be even below that of Singapore or Hong Kong. Just to name two countries only !
    Sad to say Malaysia is trying to emulate what Japan is doing except Malaysia who is also in deficit not because they are giving away money they don’t have but is in deficit because not only of its expenditure but most important of all it must be because of all the corruptions involving billions of dollars. Also having to make the richest man in Asia with money from the national coffer and also having to pay all the inflated bills to the Umno appointed contractors.
    Money that should have gone to cover the deficits of the country instead. With a population of less than 26 millions very soon, and I mean very soon EPF will run out of money. That must be one of the main reasons why EPF is proposing to increase the retirement age further. Are they running out of money ? Also EPF must be in a dilemma of having to pay the members higher rates of interest than what they the interest they are getting from the government bods. Most important of all is EPF willing and able to reveal to the public the total amount of government bonds they are holding. The real situation must be very critical now even an opposition MP is trying to impede EPF from further buying of the government bonds.
    I can only feel very sorry for the subscribers of EPF of the younger generations that when their turn comes to retire will EPF have the money to pay them to retire. Or EPF will have to increase the retirement age higher just to delay paying out money they no longer has. EPF will keep ‘paying’ their members very attractive dividends years after years just to show how smart they are able to invest the members’ money and also to entice them to keep their money with EPF even after their retirement. Just ask yourselves how smart can the Umno appointed EPF board members be ? Is buying Malaysian government bonds consider to be a smart way to invest.
    So far everything that has to do with Umno are falling apart like MAS, the entire MAS board was also appointed by Umno and see what has happened to MAS. The latest news ifs that the entire MAS is to be revamped, how sad for the thousands of employees ? How come Air Asia who is only a budget carrier is not facing the same predicament when it is operating in the same country ?
    This is the result of having Umno in Putrajaya for the last 58 years. Sure in 58 years someone from Umno has become the richest man in Asia and his on has become a billionaire, only now he has diminished to be just a multi millionaire, how sad, Enough is enough and wake up all hie Malays of this country kicked all these half breeds yesterday not tomorrow, out of Putrjaya. Start taking charge or have a true Malay of your choice to run the country instead of having a half breed and giving him 22 years to rob you blind ! This half breed was able to make his son a very rich man by any standard but unable to achieve the 30% of the nation’s wealth that is reserved for you in 22 years as the PM. This half breed is now trying to dictate who the PM should be when this prerogative belongs to the people of Malaysia. It is not his right to decide who the PM should be especially when it is proven how bad is decisions are.

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