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