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1MDB terminated the services of two audit firms after the auditors asked for documents the state investment firm failed to provide, the PAC report said. Buildings of the global ‘Big Four’ accounting firms (clockwise from top left) KPMG, Ernst & Young, Deloitte & Touche and PricewaterhouseCoopers are pictured in this combination photograph. — Reuters pic

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PAC report: 1MDB’s auditors sacked after asking for documents 

1Malaysia Development Berhad (1MDB) sacked two audit firms in four years after the auditors asked for documents the state investment firm failed to provide, the Public Accounts Committee’s (PAC) report said.

The first two auditors — Ernst & Young and KPMG — no longer acted for 1MDB after clashes in opinions with the state investment firm’s board, particularly when 1MDB failed to provide documents to back some of its investments, according to the PAC’s report on 1MDB tabled in Parliament today

“This situation is the second time in four years where the auditor’s services were terminated after the final financial year due to differences in opinion over the valuation of an investment,” the PAC said when commenting on KPMG’s termination of service in 2013.

Ernst & Young (EY) was appointed by 1MDB’s predecessor, Terengganu Investment Authority, on March 25, 2009, but had its contract terminated on September 15, 2010, before 1MDB submitted its first financial statements for the financial year ending March 31, 2010, the report said.

The parliamentary panel cited EY’s Audit Planning Memo dated March 26, 2010, where the audit firm was shown to have requested for documents and made queries relating to 1MDB and PetroSaudi International Limited (PSI)’s joint venture firm, 1MDB PetroSaudi Ltd.

Among other things, EY had asked for 1MDB’s due diligence report and sought additional information to evaluate the reasonableness of key assumptions regarding PSI’s estimated asset value, as well as the joint venture firm’s financial statements to determine its shares, assets, liabilities and contingent liabilities.

EY had in a 1MDB board meeting on April 5, 2010, raised the need for such documents, PAC said, as it noted that the audit firm had not found any documents regarding the actual owner, value and risks on the assets pumped in by PSI.

But 1MDB “did not have sufficient documents” on the day of the meeting to prove the assets owned by the joint venture firm, PAC said.

“The position taken by Messrs EY had resulted in an uncomfortable situation for the 1MDB management and the shareholders and Board of Directors decided to terminate the services of Messrs EY,” the PAC said.

PAC added that 1MDB’s subsequent board meeting on October 4, 2010 – after EY’s termination – showed that the joint venture firm had yet to prepare its financial statements, with the then 1MDB CEO Datuk Shahrol Azral Ibrahim Halmi convincing the board that the financial statements will be discussed at future meetings after it is received. But no such discussion papers were shown to have been presented in any 1MDB board meetings, the PAC said.

As for KPMG which was appointed on September 15, 2010, it had its contract terminated by 1MDB’s shareholders on December 31, 2013, and also before the submission of 1MDB’s 2013 financial statements.

Among other things, a November 29, 2013, minutes of a meeting between KPMG and 1MDB showed the latter’s CEO Mohd Hazem Abd Rahman attempting to convince the audit firm of 1MDB’s investment in Bridge Global SPC through Brazen Sky Ltd.

“However, Messrs KPMG was dissatisfied as there were no evidence in writing,” the PAC said after listing the documents that KPMG had sought from 1MDB on the investment.

Following the widening rift between 1MDB and KPMG, 1MDB’s board passed a resolution on December 31, 2013, that said both firms mutually agreed to remove KPMG as auditors, the report showed.

After its termination, KPMG wrote to 1MDB’s management on January 6, 2014, raising concern over the latter’s approach in only attempting to verbally convince them regarding its investments instead of providing the required documents.

As of December 31, 2013, Deloitte was appointed as 1MDB’s auditors on the recommendation of 1MDB’s Risk Management and Audit Committee and remains so, as of last October 31.

Deloitte has audited the 2013 and 2014 accounts of 1MDB, while the latter’s 2015 financial statements have yet to be audited.

1MDB had obtained an extension until this September 30 to file its audited financial statements to the Companies Commission of Malaysia, with the firm claiming that the audit could not be carried out as many of the financial documents remained in the hands of the authorities following a raid last July 8.

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