Auditors under scrutiny in 1MDB probe

Auditors under scrutiny in 1MDB probe
PUBLIC Accounts Committee (PAC) chairman Datuk Nur Jazlan Mohamed speaks during a press conferences after he a meeting at Parliament on Monday.

PETALING JAYA: The auditors of 1Malaysia Development Bhd (1MDB) will now be the focus of the inquiry by the Public Accounts Committee (PAC) after two key witnesses asked for a delay to appear before the committee.

PAC chairman Datuk Nur Jazlan Mohamed said Deloitte and previous auditors KPMG and Ernst & Young would be called next to provide information into the accounts of 1MDB.

The audited accounts of 1MDB had raised a number of questions. Resignations by KPMG and Ernst & Young as auditors had compounded the intrigue over the state of accounts of the strategic investment company.

Nur Jazlan, a trained accountant who had raised concerns over the1MDB, had raised a number of issues surrounding the 2014 audited accounts of 1MDB. The accounts were audited by Deloitte.

He said the balance sheet of 1MDB showed total equity of RM2.4billion (S$893.5 million) against total liabilities of RM48.97bil, with borrowings at RM41.87bil. "With two board members from Lembaga Tabung Angkatan Tentera and Lembaga Tabung Haji, being experienced in restructuring highly leveraged companies from the Asian Financial Crisis, and the Finance Ministry via Khazanah Nasional Bhd having to bail out numerous distressed companies, including Malaysia Airlines from Tan Sri Tajudin Ramli and the Renong Group in the early 2000s, how did such a leverage capital structure be allowed in the first place?" asked Nur Jazlan.

"Why did the management and the board, in its wisdom, allow an investment holding company with no access to free cashflows service its debt?"

Nur Jazlan said the RM2.4bil in equity is a result of total revaluation of RM5bil on the Tun Razak Exchange (TRX) and Bandar Malaysia land parcels, which is now carried at RM7.1bil on the balance sheet. He pointed out that previous accounts had shown revaluation gains of RM897mil in 2014, RM2.74bil in 2013, RM570mil in 2012 and RM827mil in 2011.

"This shows that had it not had substantial revaluations of these two tracts of land that were injected at attractive valuations, it would be carrying a negative equity of RM2.6bil as of March 31, 2014," he said.

He said the financial state of 1MDB was also a major concern, as the net cash from operating activities was RM69mil and finance costs paid was RM2.3bil.

Another issue from the 2014 accounts was the available for sale investments that total RM13.38bil of the RM51.4bil of total assets.

"This is a very large number if reduced/impaired with no corresponding reduction in debt or liabilities. By its own admission, RM4.03bil had been redeemed and utilised during the course of 2014 post-accounts for interest payment, working capital and payments to Aabar Investments PJSC as refundable deposits to extinguish an options agreement," he said.

"None of these appear to be reducing the RM49bil of overall liabilities or RM42bil of debt in the March 31, 2014 accounts," he said.

Nur Jazlan pointed out that there was little clarity on the quality of the remaining RM9.35bil of available for sale investments.

"A clear listing of all the assets in this category must be sought," he said.

The PAC chairman also noted that the financial accounts of 1MDB suggested that over RM20bil of assets are attributable to Edra Global Energy Bhd, and that it was important to get an update on what enterprise value is likely to be achieved by an Edra initial public offering or sale. "Any impairment here will also hit the balance sheet."

He said there have been a number of articles expressing concern on the value of the Penang and Klang tracts of land and any impairment on the land would impact on the balance sheet of 1MDB.

"In summary, the company will only remain in positive equity if it continues to revalue or generate profit from the sale of tracts of land in TRX and Bandar Malaysia," he said, adding that there was no doubt that those tracts of land were attractive and would generate gains.

"But it doesn't detract from all other business lines and investments being significantly negative or questionable as to their strength and valuation," he said.

"Whilst no investment company can have a 100 per cent gain record, an investment company that's solely relying on these two prime properties gifted to it at a cheap cost to plug the hole from high interest expense due to excessive or reckless leverage, questionable fees and funky guarantee/options structures with Middle East entities that reduce net proceeds in every funding exercise, and over RM13bil of available for sale investments of questionable quality needs a detailed forensic probe," he said.

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