By David W. Berry
THE Malaysian Institute of Corporate Governance (MICG) does not wish to comment on the specifics of the dispute between the external auditor of Serba Dinamik Holdings Bhd and the company which has triggered the current events.
However, Serba Dinamik’s response to the dispute raises serious governance concerns.
Using the process of removing an auditor when the executive is unhappy with the audit findings is not appropriate.
The central purpose of the external audit is its independent adoption of the relevant professional and ethical accounting standards and reporting accordingly on the findings.
That independence should not be undermined. The external auditor is obliged to ascertain whether the company’s accounts represent – in its opinion – a true and fair view of the concern’s financial status.
In this case, the financial values are significant, adding extra weight to the need for the auditor’s independent opinion.
For the executive to suggest that the independent directors are unqualified to understand the accounting issues appears to attack the competence of the company’s audit committee, which is composed of independent directors.
Criticising the auditors for addressing their concerns to the company’s independent directors is perverse, therefore, when that is exactly to whom the auditor is expected to direct any concerns.
Deafening silence
Against that background, the silence of the audit committee and the company’s independent directors raises questions. More light is needed on the audit committee’s findings and its recommendation to the board.
These should be revealed to shareholders at the extraordinary general meeting (EGM).
The fact that an EGM is being called for this purpose by a non-independent director (albeit non-executive director) who appears to be in agreement with the managing director’s (the executive) position, raises conflict concerns.
It is MICG’s view that in this scenario, none of the directors who are shareholders, should vote in the matter, irrespective of whether they are executive or non-executive, independent or non-independent.
It should be for other shareholders to hear both viewpoints and vote accordingly.
More information should be provided to the shareholders to facilitate a proper understanding of the dispute before any vote. It is appropriate, therefore, for an independent review to be conducted.
The professional and ethical standards applicable to that review should be identical to those applicable for a statutory audit. In this regard, the appointment of BDO is a correct step, but KPMG should remain on board to provide any information and clarification that may be required.
Truly independent
Additionally, any committee set up by the board with oversight on the matter when referred to as an “independent” committee, should be just that – independent. There should be no executive director or other management in the committee or any non-independent director.
They can be available to answer question as required.
In addition, the due process in the removal of an external auditor, should be complied with.
The current external auditor should provide a clearance letter to the new auditors for them to be comfortable to take on the role.
The EGM will then vote on the resolution. Given the inherent conflict noted above, no shareholder director should be permitted to vote.
Finally, we note both Bursa Malaysia and the Securities Commission (SC) are reviewing the situation and will clearly follow up on areas that are of concern vis-à-vis the board’s conduct and process, and the outcome of any independent review.
We assume that some of the governance issues highlighted above will be included in their review.
Additionally, from the perspective of the current external auditor and future independent consultant/auditor, we have no doubt the Audit Oversight Board (AOB) will be keeping a watchful eye on the audit conduct & process, the independent review, and the findings of both processes. – June 1, 2021
David W. Berry is the deputy president of the Malaysian Institute of Corporate Governance (MICG)
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
