NOT many people may know that – it comes as a surprise to me – Deloitte is the largest audit firm in the world, with a total revenue of nearly US$48 billion (a massive RM195 billion, or 13% of Malaysia’s gross national income) last year.
Yes, the same Deloitte that was in charge of 1Malaysia Development Bhd’s (1MDB) audit from 2011 to 2014, a crucial period when 1MDB, arranged by Goldman Sachs, obtained US$6.5 billion in bonds, almost all of which was filched by Low Taek Jho, or Jho Low, and company.
The entire sorry saga of 1MDB could have been nipped in the bud if auditors had been vigilant enough, and more than RM40 billion and as much as RM50 billion in losses avoided if the right flags had been raised. Yet, the Finance Ministry settles for a paltry settlement of US$80 million, or a mere RM324 million, from Deloitte! Why?
Here is the first paragraph of the statement: “The Finance Ministry is pleased to announce that Deloitte PLT has agreed to a RM324 million (US$80 million) settlement to resolve all claims related to its fiduciary duty in auditing the accounts of 1MDB and SRC International Sdn Bhd for the period 2011-2014.”
And, considering the enormity of its liability, I am sure that the giant Deloitte will be very pleased to get away with this rather generous settlement, which amounts to just 0.17% of its turnover last year, by the Malaysian government.
Older readers will remember that there used to be a “Big Five” in accounting – the missing one is Arthur Andersen, which disappeared from the face of the Earth following sanctions and penalties in the wake of the Enron Corporation scandal in 2000. Enron was a corporate high-flyer in the United States then.
I am not advocating the demise of Deloitte, of course, but considering the gravity of the offence and that it should have been aware of the misdeeds at all levels of 1MDB, the penalty should have been much higher.
When I was editor of KINIBIZ, we ran an eight-part series in March 2013 on 1MDB and its misdeeds, which should have alerted the audit firm, if it wasn’t already. The first article was titled “1MDB: Giant ponzi scheme or strategic investment fund?“.
Although the settlement announcement said Deloitte is responsible for the audit from 2011 to 2014, it was the auditor on record until July 16, 2016, when it quit after the US Justice Department released its report that blew the 1MDB case wide open, leaving no doubt as to guilt. From that, it looks like Deloitte did not sign off on the accounts after 2014.
Deloitte should also have been alerted by the earlier terminations of auditors. On September 15, 2010, Ernst & Young was terminated as the auditor of 1MDB for refusing to sign off on the sovereign fund’s 2010 accounts without sighting documents relating to the PetroSaudi International joint venture.
In 2009, 1MDB had a RM5 billion bond arranged by AMMB Holdings, the subject of the AmBank settlement of RM2.83 billion. Much of this money was stolen by Jho Low and company through dubious transfers, including to PetroSaudi.
Following that, on October 4, 2011, KPMG was appointed the auditor but terminated on December 31, 2013. On January 6, 2014, KPMG said it was unable to undertake audit procedures and could not verify claims made by 1MDB.
Deloitte replaced KPMG, probably in 2014, but apparently signed off on all accounts between 2011 and 2014. At the time of Deloitte’s appointment, Datuk Mohamad Nizar Razak, now 41, was a partner in Deloitte. He is the eldest son from the first marriage of the then prime minister and 1MDB co-conspirator Datuk Seri Najib Razak, it was reported.
Deloitte had to know things were wrong at 1MDB. Besides, two previous Big Four auditors were sacked. So, is US$80 million sufficient settlement for not flagging billions of US dollars in possible losses? Definitely not.
The order of magnitude must be in the billions of ringgit, at least, and Deloitte should be suspended from practice for at least a year in Malaysia and put on probation for another four.
If it had flagged the problems at 1MDB, things may not have blown out of control the way they did, and resulted in losses for the country of as much as RM50 billion and given Malaysia the dubious distinction of having the largest theft in the world.
The Finance Ministry, in its statement, did not mention the basis for the settlement, but surely this must be related to the losses 1MDB incurred because of misrepresentation, which could only have been done with the connivance of the auditors.
So far – and strangely – of the three settlements the Finance Ministry made, the two with foreign parties look especially inadequate. Other than the one with Deloitte, is the US$2.5 billion Goldman Sachs settlement, which I have analysed to be rather inadequate here.
Conversely, the only settlement with a local bank – the RM2.83 billion settlement with AMMB Holdings – is rather harsh compared with the amount Goldman shelled out, as I showed here.
That is a rather curious state of affairs, and demands much more accountability and transparency on the part of the Finance Ministry to avoid any suspicion as to the efficacy and integrity of the negotiating process. Right now suspicion is increasing rather than decreasing. – The Vibes, March 5, 2021
P. Gunasegaram has written extensively on 1MDB since 2013 and authored a book on the subject. He is editorial consultant at The Vibes and executive director of advocacy group Sekhar Institute