Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on December 27, 2021 - January 2, 2022

THE debacle at Serba Dinamik Holdings Bhd has the distinction of bagging the story of the year award in 2021 as well as the accolade of the turkey of the year, given its use of legal redress against regulators and auditors, and its attempts to conceal the findings of a special independent report by Ernst & Young Consulting Sdn Bhd (EY Consulting).

When talk that Serba Dinamik — an oil and gas company with an impressive earnings track record — could be grappling with accounting issues emerged in May, the initial reaction was one of disbelief.

Slowly but surely, however, it began to sink in that there were indeed pressing issues. Serba Dinamik’s refusal to make public EY Consulting’s report on the basis that the review was preliminary and had not been concluded — and, as such, there was no material information to disclose to the investing public — only exacerbated matters.

Only last week, Serba Dinamik sought to expunge EY Consulting’s findings, which were included in Bursa Malaysia Securities Bhd’s affidavit in support of its lawsuit to compel the company to make public the independent review. Serba Dinamik managing director and CEO Datuk Dr Mohd Abdul Karim Abdullah contended that EY Consulting’s report was “documentary hearsay evidence”.

And a fortnight ago, the company tried to recuse the High Court judge presiding over its proceeding, Datuk Ahmad Fairuz Zainol Abidin, on grounds that he had previously been employed by another regulator, the Securities Commission Malaysia. It did not succeed.

All the legal suits and other defensive actions to prevent the disclosure of the EY Consulting findings may be backfiring, however, as they indicate that not all is well at the company.

In a filing with Bursa Malaysia, Serba Dinamik said EY Consulting was appointed “to assess the accuracy and veracity of the matters highlighted by the company’s former external auditors, KPMG”. KPMG had flagged an estimated RM4.54 billion in questionable transactions.

The Edge is given to understand that when EY Consulting briefed Serba Dinamik’s executives on its findings, a Bursa Malaysia representative was also present, which means the regulator would know whether the review had been concluded or was still at a preliminary stage.

Flexing its regulatory muscle on Oct 22, Bursa Malaysia suspended the trading of Serba Dinamik’s shares while waiting for the latter to make the EY Consulting report public.

Serba Dinamik responded by taking legal action against Bursa Malaysia, contending that the regulator’s instruction to the company to appoint EY Consulting was in excess of its power. Likewise, its decision to suspend Serba Dinamik’s shares.

The company also argued that Bursa Malaysia cannot instruct it to make public EY Consulting’s findings.

Talk in the industry indicates that EY Consulting’s findings generally highlight the same concerns that KPMG had over the company’s transactions. Previously, news reports stated that the financial impact on the company was RM1.438 billion as at Oct 22.

The onslaught against KPMG

Auditors KPMG, which highlighted the irregularities at Serba Dinamik, had to endure the wrath of then chairman Datuk Mohamed Ilyas Pakeer Mohamed, who at a press conference called KPMG — one of the big four accounting firms in the world — a “shoplot auditor [that was] behaving like official gangsters”. It then commenced legal proceedings against KPMG, alleging that the auditors had been negligent and in breach of their contractual and statutory duties to Serba Dinamik.

Ilyas even threatened to get the government to ban KPMG from operating in Malaysia for destroying a good bumiputera company.

In late November, however, Ilyas and another independent director, Johan Mohamed Ishak, stepped down from the board of Serba Dinamik as they claimed that the requirements imposed by Bursa Malaysia on the company had prohibited them from fairly discharging their duties as independent directors and from undertaking their responsibilities to the company and its shareholders.

In essence, both were against Bursa Malaysia’s direction that a special independent review by EY Consulting on KPMG’s findings be made public, as they argued that it was “still ongoing and thus inconclusive”.

And just last week, Ilyas’ successor as chairman, Datuk Seri Mohamed Farid Abu Hassan — a former special branch director — and independent non-executive director Siti Zaleha Sulaiman, formerly head of corporate risk management at Bursa Malaysia, also resigned from the board on the basis that there was “biased regulatory prosecution aimed towards Serba Dinamik”.

Siti Zaleha had joined the board in early July; Mohamed Farid’s stint as chairman lasted less than a month.

At end-June, after Serba Dinamik sought legal redress against KPMG, five independent non-executive directors — Rozilawati Basir, Sharifah Irina Syed Ahmad Radzi, Tengku Datuk Seri Hasmuddin Tengku Othman, Hasman Yusri Yusoff and Masleena Zaid — resigned from the board, with four out of five of the directors citing differences of opinion with the company’s handling of the issues with KPMG.

The KPMG and EY Consulting reports

In its report, KPMG had indicated that the auditors had doubts about the veracity of Serba Dinamik’s transactions with 11 customers that were prompted by suspicious external confirmation letters received, where representatives signing the confirmation documents were not identifiable and did not exist in the database of the companies.

KPMG was also concerned, as it could not ascertain the existence of six local suppliers, which, in turn, raised concerns over purchases made. There were also issues as two suppliers had the same incorporation date, April 23, 2019, and shared the same business address, while five suppliers had the same registered office and were owned by an individual shareholder. The suppliers were owed sizeable amounts of between RM60 million and RM90 million.

When KPMG visited some of the suppliers to determine their existence, the auditors were unable to locate them at both the registered and business addresses, raising more red flags.

Another supplier, Kekal Jitu Sdn Bhd, had only one employee, an administrative executive.

Serba Dinamik’s IT contracts are also said to contain many irregularities, although the extent of it is unclear. KPMG’s report highlighted that Serba Dinamik’s IT division had recognised revenue of US$102.5 million and net profit of US$16.1 million since its incorporation in 2019. Suspicions were heightened, as the profits of Serba Dinamik’s IT arm — yet to be received from customers — amounted to US$15.2 million.

Another issue was with Serba Dinamik’s customers making direct payments to subcontractors while the group received the net amount, its share of profits, as part of an arrangement, even though Serba Dinamik was the contracting party with its customers.

As such, KPMG was unable to determine the appropriateness of the IT transactions entered into between Serba Dinamik and its customers.

Other than the above, there are also allegations of related party transactions in Serba Dinamik’s dealings in the Middle East.

KPMG’s physical visit to a Bahrain supplier’s address led it to a supermarket.

In a telephone conversation, Serba Dinamik’s Mohd Abdul Karim claimed that the company had been treated unfairly in the whole issue with KPMG. “It’s not fair. We have been transparent, we have been in constant contact with Bursa [Malaysia], our shareholders, [as per] our responsibility.

“They (KPMG) have been our auditors for seven years. Why now, suddenly, [have they raised these issues]? The company is intact, we have strong fundamentals, we will ride through this,” he says.

“I’m also bound by the legal framework,” he adds, explaining that he is not at liberty to elaborate on the issues adversely affecting the company.

In a message to The Edge, a Serba Dinamik executive said, “Trust me, we have done nothing wrong.”

As the uncertainty continues to drag on, investors have voted with their feet, dumping Serba Dinamik shares. Its market capitalisation is now some RM1.3 billion — a far cry from the RM6 billion at its peak before the accounting irregularities surfaced.

In hindsight

In the past, oil and gas executives from rival companies had expressed doubts over Serba Dinamik’s fantastic profit margins. Their griping was brushed aside as dengki — for want of a better word — or jealousy, given that analysts and fund managers had strong “buy” calls on the Serba Dinamik stock.

At the same time, the company’s earnings and stock performance were bucking the trend, gaining strongly despite the many challenges the oil and gas sector was facing. Its share price had gained some 120% since its debut in February 2017 to end-May 2021, when the accounting issues were raised.

In contrast, Brent Crude over the last five years had fluctuated between lows of just above US$20 per barrel in April last year and highs of above US$85 in October 2018. While others were reeling from the fluctuating oil prices and weak demand, Serba Dinamik had consistently shown profits since its listing in February 2017 — except for a RM42.11 million net loss from revenue of RM799.34 million for the first financial quarter ended September this year.

The company’s high receivables (RM1.81 billion as at end-September) and depleting cash pile (RM290.28 million as at end-September) went unnoticed, until highlighted by KPMG.

What transpires next in the long-drawn affair is anyone’s guess.

 

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