The scandal surrounding Malaysian state fund 1Malaysia Development Berhad has thrown up some very interesting facts about how the state fund was managed. According to a probe by a parliamentary committee, the fund had sacked two audit firms over a span of four years after they asked for documentation over its investments.
The Public Accounts Committee, which submitted a report to parliament on 7 April, noted that the first two auditors - Ernst & Young and KPMG - had their services terminated after they clashed with the state investment's board over documentation. "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," it said, referring to KPMG's termination of service in 2013.
Ernst & Young was appointed by 1MDB's predecessor, Terengganu Investment Authority on 25 March 2009 but had its contract terminated on 15 September 2010 before 1MDB submitted its first financial statement for the financial year ending 31 March, 2010, the report said. According to the audit company's planning memo dated 26 March 2010, it had requested for documents and made queries pertaining to 1MDB PetroSaudi Ltd, a joint venture between the state fund and PetroSaudi International Ltd.
The report said Ernst & Young had asked for 1MDB's due diligence report and sought additional information to evaluate the reasonableness of key assumptions on PSI's estimated asset value as well as its financial statements to determine its shares, assets, liabilities and contingent liabilities. PAC noted that the audit firm had not found any documents on the actual owner, value and risks on the assets pumped in by PSI.
"The position taken by Messrs EY [Ernst & Young] 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 report said.
It noted that following Ernst & Young's termination, it was revealed that the joint venture firm had yet to prepare its financial statements when the 1MDB board met on 4 October 2010. It said the then 1MDB chief executive Shahrol Azral Ibrahim Halmi convinced the board that the statements will be discussed at future meetings after it is received. However no such discussion papers were shown to have been presented to any 1MDB board meetings, PAC said.
The committee pointed out that KPMG which was appointed on 15 September 2010 had its contract terminated on 31 December 2013, also before the submission of the fund's 2013 financial statements, it said. According to minutes of a meeting between the auditors and 1MDB, the new CEO Mohd Hazem Abdul Rahman was seen trying to convince the audit firm of the fund's investment in Bridge Global SPC through Brazen Sky Ltd.
"However, Messrs KPMG was dissatisfied as there were no evidence in writing," PAC said. Following its termination, KPMG wrote to 1MDB's management on 6 January 2014 raising concerns over its approach of trying to provide verbal statements instead of the required documents of its investments.
Its latest and current auditor Deloitte was appointed on 31 December 2013 at the recommendation of the 1MDB's Risk Management and Audit Committee. As of 31 October 2015, it remained the fund's auditor, PAC said. Deloitte had audited the 2013 and 2014 accounts. The 2015 accounts have yet to be audited.
1MDB has secured an extension until 30 September this year to file its audited statement as the auditors are unable to carry out their duties because many of the financial documents needed are still in the hands of the authorities.
Shahrol says no wrongdoing during his tenure
Meanwhile former 1MDB CEO Shahrol insisted that there was no wrongdoing or illegal activity at the state fund while he was there. In a statement, he said: "I gave them [PAC] a full and honest account of my time as CEO of 1MDB. As explained to the PAC, I wish to emphasise again that there was no wrongdoing or illegal activity at the company under my watch. I will continue to extend my full cooperation, confident in the knowledge that I have done no wrong and have nothing to hide."
PAC, in its report submitted to parliament had asked the authorities to investigate Shahrol and other relevant officers. It slammed the 1MDB management for not seeking board approvals for many decisions and transactions and giving inaccurate information to the board and the auditors.
It also noted that investment decisions were made without due diligence citing the case of how the $1bn joint venture with PetroSaudi was made in just eight days and that the fund's investments changed shape four times from 2009 to 2012. The PAC report in Malay can be found here.