Sunday, July 27, 2008

Independence Of Accounting Firms



The Saga: The external auditor, BTMH, for Oilcorp Bhd has refused to amend the company's 2007 annual audited accounts despite an independent verification report. Horwarth, the firm hired for the independent report, has said that the value of a long-term contract, which was in dispute by the company and its external auditor, was RM110 million.

Oilcorp had argued that the contract was worth RM110 million. However, Baker Tilly Monteiro Heng said it was worth RM90 million due to a RM20 million variation order. Securities Commission (SC) has directed Baker Tilly Monteiro Heng (BTMH) to carry out additional work on the audited accounts of Oilcorp Bhd for financial year ended December 31 2006 and 2007.

The SC has exercised its powers under Section 320 of the Capital Market Services Act (CMSA) 2007 to call for an investigative audit on the accounts. "In accordance with the CMSA provisions, all public listed companies are obliged to assist auditors as directed by the SC," an SC spokesperson told Business Times.

The announcement comes after BTMH is believed to have given professional clearance to Horwath to take over its job as Oilcorp's auditors.BTMH has informed Horwath that apart from all the issues it had previously raised on July 11, there is no other professional reason for Horwath to not accept the job. It is believed that the reason why BTMH only suggested a probe into the contract in question in early May was because further reviews have raised more issues and more contradicting documents.

But Oilcorp said BTMH was prepared to give its audited accounts a clean bill of health on April 29 2008, a day before the submission deadline. This was provided Oilcorp could give it a letter from a client that the contract was indeed worth RM110 million.

However, BTMH refused to accept and recognise the letter the next day.Another accounting firm, Messrs Horwath, was later hired by Oilcorp to carry out a special audit on the disputed contract, the result of which was favourable to Oilcorp.

The report produced by Horwath, however, was just an "independent verification review", BTMH argued. Hence, it could not change its view on Oilcorp's account merely based on Horwath's report.

Comments: This has been dragging on for far too long. Oilcorp's management has basically threw their own baggage onto the ceiling fan and now its splattered all over the place. While its a relatively small amount of RM20m - the implications are far reaching.

a) BTMH is correct to maintain their stance even with the independent paper from Horwath.

b) MIA staying clear for now, should come out with some leadership on the matter instead of letting the parties resolve this themselves because it involves the integrity of the appointment of external auditors and the room to replace with a favourable firm.

c) Horwath should NOT take up the appointment as it would compromise the integrity of fellow professional accounting firms, especially when they have given a favourable independent report on the disputed contract.

d) MIA should step in with a directive as Oilcorp is basically saying they can change the external auditor if it does not like the one appointed. The external auditor was appointed to do a professional evaluation and give an independent opinion. To remove because you disagree would be like to change the judge in a court case AFTER the judge has ruled against you.

e) Even if Oilcorp wants to change external auditors, it should not be considering Horwath as Horwarth has been asked to do an independent report on the disputed contract and has made a favourable report on the contract. To allow Oilcorp to do so, is akin to allowing companies to shop for the auditors who would give the kind of opinion the company wanted.

f) Oilcorp should have just gone with the qualified opinion, who really cares when they read that its just a matter of RM20m, now it implies the possibility that maybe Oilcorp has something more sinister behind their moves. The management and board of Oilcorp have put themselves in a shady light - I would question their appreciation of proper corporate governance and respect for professionalism.

g) What if another accounting firm is appointed (not Horwarth) and they came to the same conclusion as BTMH? Will Oilcorp also seek to reappoint another firm?

h) It is said that BTMH has given the green light to Horwarth to take up the position if appointed by Oilcorp. While that is fair enough, both firms should consider the implications - companies may be more "open to the idea" of changing external auditors should things not go their way. More importantly, it could invariably affect the "willingness to impart truly independent and fair opinion on accounts" by external auditors now that they can be sacked so easily. Who knows, who is to say that the external auditors independence is not compromised somewhat by these developments - they must be given the room to operate without fear or favour, or risked having their reputation affected if they do not give favourable opinions.

The integrity of accounting firms is being called to question. Fellow accounting firms must stand together to show independence and must not be seen as being open to be shopped by companies.
The SC is doing the right thing by warning Oilcorp severely. Oilcorp should just cave and take the BTMH ruling and their medicine, you have no foot to stand on. As usual, we have no leadership from the Bursa.

p/s photos: Fiona Xie

21 comments:

david said...

" To allow Oilcorp to do so, is akin to allowing companies to shop for the auditors who would give the kind of opinion the company wanted."


Do you honestly believe many other companies listed on Bursa or even not listed ones, use this principle to appoint auditors?

What about the same principle in appointing property valuers, lawyers?

Anonymous said...

When the shareholders fear of losing all their stake if their company going into PN17(shit !) (the newspaper has repeatedly propaganda this scenario), do they vote for/against the removal ? doesn't matter the audited account true or fair view anymore lah. Better still if the account could cook up better numbers. Damn the authorities, don't u see the way BTMH was voted out ! Don't u expect the result b4 the EGM? U want to lose your company or auditor? What the F@*# for the EGM anymore.
Do we expect our auditor throw away their ricebowl more often by saying spate is spate, shit is shit? It is indeed bravo BTMH ! I salute your team. I see you as winner. Clearly, the auditor works could be undermind again and again if those sleeping up there let the whole episode autopilot further........
I still remember more than 10 years back, about a plc, a big 4 resigned, replaced by another big 4 at abnormal time(market spoke unfavourable statutory report), the company evetually went into difficulty becos of the reason mentioned, massive restructuring, burn a lot of people.

Dali, I was waiting your comment on this issue, finally u did .

it seem a massive effort need to be done on our society......

keep going Dali...

Victor AY said...

I'm amazed that Oilcorp was allowed to change the auditor to their favour ? What is MSWG going to do about this ? Shouldn't SC and MIA be more stringent and work this together to prevent this kind of mess being happening again ? We seen this kind of auditing disreprency far too often in share here in Malaysia.... think about Transmile, Megan and many other....

Gamelion said...

When the company need to raise capital through public listing , it is subject to public scrutiny through
independent public auditing and should not be meddling their process
of fair and true view of opinion. The audit profession is at a very low ebb with a lot scandal going on and we cannot blame the public for mistrust the intention of the auditors of carrying out their work with independent, objectivity and integrity. Auditors are also held accountable to various stakeholders in the company through expressing their opinion.

Gamelion said...

When the company need to raise capital through public listing , it is subject to public scrutiny through
independent public auditing and should not be meddling their process
of fair and true view of opinion. The audit profession is at a very low ebb with a lot scandal going on and we cannot blame the public for mistrust the intention of the auditors of carrying out their work with independent, objectivity and integrity. Auditors are also held accountable to various stakeholders in the company through expressing their opinion.

Anonymous said...

Can a professional auditor like BTMH simply form their opinion without properly conducting its investigative
works ? So by simply changing auditor will imply that BTMH never do its job
properly in the first place ?

Avatar said...

Dear Dali,

Ah, I was wondering when you would be blogging about this rather exciting topic.

Good post. Just wondering, at the heart of it, just why is there a diference of opinion in the VO?

Surely, it must be that there is no actual VO approved that BTMH can sight, no?

Otherwise, I doubt the BTMH would take such a firm stance over it.

Care to share the links to the notification by BTMH and reply by Oilcorp and Horwath?

I'm sure they are at KLSE website but just too lazy to search for them.

Rgds

John said...

On the other hand, one has to wonder is there is any information from behind the scenes that we don't know.

I have intimate knowledge that some big-name external auditors are unprofessional assholes when it comes to releasing accounts to companies, unless the companies agree to renew their contract with higher fees.

So I take this with a grain of salt. We are postulating, there are other details we might not know about.

Why did BTMH agree to accept the letter, then refuse to do so only 1 day later?

Anonymous said...

Is this the corporate governance in Malaysia??

If there is no strong accounting oversight board, I doubt this issues will be resolved. Even though yes, if Oilcorp prevail in this case, this is bad sign for audit firm ie first precedent open, everyone will follow.

Saying so, where are the so called independent directors? They have not said a word on this. Can I presumed they have no opinion??

The other issue is one of our national fishing project is with this company. Do you want this with them??

This company also politically well connected. Not sure whether it is now?

I think someone wanted the fishery project....what say you Dali?

robert said...

Don't be so naive and think that the auditor is always correct & independant. Do you mean that Horwath is not independant & lack of professional competency. I'm certain that Horwath would had made a through investigation work. The verification report (meaning audit work done) is most likely to have a higher certainty than an auditor's report that only give a true and fair view. Do you think that Horwath dare to give a verification report without 100% certain that the verification work done is sufficient to justify it.

How do you expect the Board of Directors to response if they truely believe that the contract sum is RM110m. They would never allow the Company to be under PN17 under these circumstances. The shareholders would lose $$$$.

BY the way, MIA should come forward NOW and provide guidance and maybe a verification is necessary. (just like other professionals-architect)

Anonymous said...

I think the SC/Bursa should have done more - and earlier before auditor removal come into the picture. Joe public simply does not have the necessary details to make an informed judgement. We still don't know who is right...

Salvatore_Dali said...

robert,

nobody is being naive here... yes, nobody is doubting Horwarth's opinion, then what do u make of BTHM's opinion? Are u saying one is bs one is not?

Even if Horwarth is correct, Oilcorp should NOT be allowed to appoint Horwarth as the replacement as its already a pre-selection thing... I hope acctg is not like Malaysian courts where u can pre-select the judges, or am I wrong? Horwarth should disqualify themselves as replacement.

What do I expect the Board to do... act professionally... don't u remember the Transmile case, how did the board act... how did the shareholder act? Pls la, dont assume that all are motivated by money hence that is pragmatic n correct... Transmile shareholders voted for a forensic acctg investigation thus revealing the rot... are they stupid?

What is professionalism... saving yr company from destruction or upholding the integrity of accounts, appointment of external auditors... and where the fuck are the independent directors in this case, why arent they saying anything???

david,
whether I believe othe rprofessionals do act or not act in a prof manner is another matter... I can only comment hoping ppl act as professionals... if others are bad does that mean u have to be as well?

anon,

if shareholders are scared of company losing value, I betcha if they voted for the sacking of BTHM and appoint Horwarth... their share px WILL ALSO collapse, mark my words... its too late to think of share px... damn if u do, damn if u dont

Avatar said...

Dali,

What you commented on earlier is exactly the question that Joe Public (including me) is asking?

Just why is there a difference between two reasonably established mid-tier audit firms?

Knowing auditors, they must have weighed these issues *VERY* carefully. For them to disagree so vehemently and publicly means something is very wrong.

In any case, this is intriguing and I'll see what I can dig up to share on this blog.

Rgds

elizabeth said...

The shareholders voted to remove the auditors becuz of fear of oilcorp going into PN17. This is a demonstration of how shallow our investing public is.

No doubt both the accounting firms are 2nd tier, but still, their conduct of audit is governed by the internatinal standards and their global firm stadard practice. Sad to say but true, auditors are not really independent, and as statutory audit is generally not being viewed as value-added so client-auditor relationship is always a high priority thing. Normally, when sthg this serious, it is not just the decision of the engagement partner, but the firm as a whole would also hvae to endorse it.

Now what the auditor did is a very unpopular thing... U can be assured, if a coy is not really into corp governance and honest reporting 100%, they may want to give this firm a miss, going forward.

So the outgoing auditor has alot to lose as well for sticking to his gun...

The mystery of the RM20 million may be sthg quite interesting... wld be nice to be the fly on the wall, then we may know when and how, this gap is being closed nicely...

The authorities must probe this matter thoroughly....

robert said...

So two different conclusion from same set of facts??????

Yes. I have to agree to with you that Horwarth should not have agree to act as auditors until this issue have been settled. This will certainly act more credibilty on the verification report.

But I strongly believe that a verfication report done by Horwarth is more detail as the opion sought is more stringen than a audit opnion on the audited accounts.

The Board have requested a different/independant auditor to conduct a verfication report. Else what can they do.... Just accept the auditors report. Ever they know that might not represent the real situation.

I suppose nobody is stupid enough to challenge the authorities after the fiasco of Trasmille and Megan.

Based the the facts, you just think that Oilcorp is in the wrong?

SC should have requested a new auditor to verufy this amount.

All these issues have created a lot of bad publicity to the whole industry, especially Oilcorp.

They might be just making a stand that they are right.

Where is MIA? (missing in action)

Avatar said...

Dali,

I'll be sending you my findings as promised. If it's good enough, you can post it on your blog :)

Rgds

Anonymous said...

Besides these issues, if this plant was built via financing, I think the financial institution would have more worries??

Hope this does not open the floodgate.

On the hindsight, I inclined to believe the problem is deeper than the plant valuation. There could be more accounting issues in it....

MP said...

I agree that Horwarth ought not accept the appointment. Not for any rulebook but for common sense reasons:

#1 the owner of the BDP in question is PBC & Horwath is PBC's auditor

#2 whatever chinese walls you say you'll put up, it's just not cool to be the auditor of a major customer of another company that you're also an auditor of ... or in this case a company who is asking you to be their new auditor .... LOL... read this one carefully lah ... lunch time mah :)

#3 go read moola's July 07 collection of newspaper articles on Oilcorp ... the SC had caught them fiddling with intra-group accounting in the 2003 accounts. But profits from outside the group is ok, right?

Then again it's Horwath's prerogative. I'm sure they know more than what we read in the papers & I doubt there's any rule against accepting the appointment.

Oh by the way, check out this google on PBC, Cergas Kenali & MIDA ... http://www.google.com/search?hl=en&safe=off&rls=com.microsoft%3Aen-us%3AIE-SearchBox&rlz=1I7ADBF&q=Cergas+Kenali+approved+project

I'll leave it up to you to read moola's collection of newspaper articles and the MIDA info & link the dots that leads to a beautiful island where you can do a little bit more digging. I have no idea what you'll find there but it's worth a look. cryptic a bit lah .... scantily dressed is nicer than naked, no? LOL

btw, Ms Xie looks jaundiced in one and pale as a cadaver in the other lah

Avatar said...

Dali,

Ok, I did a quick summary of the issues on Oil Corp. It's rather lengthy, so you can check it in my blog.

http://wonderwealthwisdom.blogspot.com/2008/07/basics-of-investing-part-viii.html

Anonymous said...

According to the newspapers, the work done by Horwath was different from that done by BTMH. This was perhaps the reason why the 2 firms came to different conclusions.

The following was reported by the Star:
"Horwath partner Onn Kien Hoe in his presentation said it was true that there was no formal documentation for the additional work worth RM20mil in 2007, and that the management of the company was at fault for this.

However, having made visits to the project site and following interviews with quantity surveyor ER Consult and independent checking engineer Jurutera Perunding Zaaba, Horwath had found that “the contract is a bona fide business transaction.”

“There is evidence of changes and additional works. Oil-Line Engineering and Associates Sdn Bhd has the legal right to claim variation for changes and additional works. Plant Biofuels Corp Sdn Bhd has agreed to RM110mil,” Onn said.

However, he added, the contract was still subject to final measurement on completion and handing over."


We understand that BTMH only checked to documents but did not do a site visit or check with third party consultants.

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