The Center to Combat Corruption & Cronyism (C4 Center) views with concern the resignation of 1MDB’s incumbent auditors, help Deloitte and their cautionary advise that 1MDB’s 2013 and 2014 financial statements which it signed off ‘should no longer be relied upon’. This is an incredibly potent development following the lawsuits of the Department of Justice, claiming massive embezzlement and aggravated stealing of public funds.
So what influenced Deloitte to sign those financial statements in the first place? Did it knowingly sign off on the financial statements? Did it assist the facilitation of the grand corruption of the 1MDB?
While the role of an auditor is viewed as providing an opinion on the authenticity of financial reports, the management makes implicit assertions regarding the recognition, measurement and presentation of assets, liabilities, equity, income, expenses and disclosures in accordance with the applicable financial reporting framework.
For example, if a balance sheet of an entity shows buildings with carrying amount of RM100 million, in effect management has asserted that:
The buildings recognised in the balance sheet exist at the period end;
The entity owns or controls those buildings;
The buildings are valued accurately in accordance with the measurement basis; and
All buildings owned and controlled by the entity are included within the carrying amount of RM100 million.
These assertions assist auditors in considering a wide range of issues that are relevant to the authenticity of financial reports. Auditors challenge assertions as they relate to material balances, plan and carry out their work accordingly before concluding on whether the financial reports present a true and fair view.
The assertions that come straight to mind considering allegations surrounding 1MDB is the existence and valuation of the investments 1MDB allegedly made. KPMG and Ernst & Young appear to have been quick to identify issues with these assertions. Which begs the question what persuasive work did Deloitte perform to comfort themselves that any of these investments existed or were valued appropriately?
Deloitte’s reasoning yesterday that if the information in the US DoJ complaint had been known during the 2013 and 2014 audits, it would have impacted the financial statements and audit reports it signed off on for those years, is unconvincing to say the least. While carefully orchestrated fraud may involve deliberate efforts to conceal it such as omission of transaction records or intentional misrepresentations being made to the auditor, the question that still remains is what persuasive work did Deloitte perform during the 2013 and 2014 audits to comfort themselves over the balances relating to the existence and valuation of the alleged investments? What information did Deloitte gather then that gave them a contrasting view on the existence of those amounts that comforted them enough to sign off on the financial statements in the first place?
Did they aid 1MDB in glossing over glaring misinformation?
For a professional services firm who pride themselves with ‘highest levels of ethics, integrity and quality’, one might be left thinking if they could have done much more to detect 1MDB’s alleged scams.
A check of Deloitte’s Code of Ethics and Professional Conduct , which summarises behavioural expectations of its partners, executive directors, principals, directors and employees provides the following:
On professional behaviour, ‘We foster a culture of appropriate professional scepticism and personal accountability which supports clients and drives quality in the services we provide.’
On objectivity, ‘We do not allow bias, conflict of interest, or inappropriate influence of others to override our professional judgments and responsibilities.’
On anti-corruption, ‘We support efforts to eradicate corruption and financial crime.’
On whistle-blowing, ‘It is necessary to report any signs of negligence, abuses or dangers that might result in serious personal, commercial or social damage. If our superiors do not act to curtail or mitigate such negligence, abuses or dangers, it may be necessary to ‘blow the whistle’ to help correct the problems or reduce the risk.’
Were any of the above attributes demonstrated in the 1MDB audit?.
As the alleged fraudulent activities occurred during the financial years which Deloitte signed off on, although these activities were discovered subsequent to the corresponding year-ends, C4 Center urges Deloitte to issue amended audit opinions, instead of washing their hands of the matter.
Malaysians have been massively defrauded and cheated – at the very least a corrected honest audit is in great need now.