Wednesday, June 23, 2021

SERBADK: A Lost Cause!

Serba Dinamik has been in the news since May 25 when it was first reported that the company's external auditor, KPMG had filed a complaint to the company's independent directors regarding a matter of serious concern. How did the company's management handle this complaint?

Let me give you a bit of background of my training & experience in the field of accountancy & auditing. My first job was as an audit clerk in Ernst & Young (formerly, Ernst & Whiney) in its Sandakan office in 1983. It was a very exciting time for me as I had the opportunity to work with the audit team that handled such diverse clients like Harrison Holdings (M) Bhd (formerly, Harrison & Crosfield), Kretam & WMG (formerly, Tekala). As a result of this working experience, I decided to pursue a career in accountancy & auditing. I went to Tunku Abdul Rahman College to obtain a professional accountancy qualification.

Now back to the story: Accountancy is a highly regulated profession with strict rules to follow. One has to know all the accounting standards to ensure that the correct treatment is applied to the recording & presentation of accounting information. To the uninformed laymen, an accountant is often mistaken as a book-keeper. This applies even to some worldly businessmen too (think Donald Trump). These businessmen want the accountants to report whatever they wish to reveal to the world- be it their bankers or the tax authorities. Alas, we have been witnessing the same behaviour exhibited by Serba Dinamik, the one time O&G darling stock in Bursa Malaysia. 

Since the report of irregularity filed by KPMG more than 3 weeks ago, the investing public has learned very little about the problem or issue at hand. This is a very unfortunate affair for Serba Dinamik and its shareholders. And, it is entirely the fault of the major shareholder & management of Serba Dinamik. It is not the fault of KPMG as the publication of damaging information that could cause further harm to the company and its many stakeholders is professionally prohibited.

Let me venture a guess as to what actually happened: KPMG has discovered something in the course of the auditing of the company (or, the group) and it wished to report these in the financial statement. If these were irregular transactions, KPMG wants to include these in the report together with management's explanation. If these could lead to losses to the company (or, the group), KPMG wants to make a provision for the losses. I am confident that the KPMG team leader has brought the matter up to the management in order to seek an explanation and then he would have recommended the proper course of action. The management disagreed with the recommendation. What could KPMG team leader do? It must have been a very serious matter which may jeopardise KPMG’s professional reputation as well as exposing it to professional liability if it chose not to do anything. As such, it has no choice but to bring the matter to the audit committee comprising of independent directors of the company. And, that's when the whole thing blew up. 

The best course of action for Serba Dinamik would have been to appoint an independent audit firm to investigate the matter. The fact that this option was initially considered, however reluctantly but now no longer pursued, is simply because it is a dead-end. The named independent audit firm, Ernst & Young would in due course come to the same conclusion as did KPMG. So what can Serba Dinamik's management team do?

Yesterday, Serba Dinamik announced that it has hired a lawyer to sue KPMG. I read thru the news with incredulity (here). Even more shocking are the Q&A during the press conference following the press briefing (here). The gem is this exchange:

Some say the suit against KPMG is a distraction to the actual issue by Serba Dinamik. Can you comment?

Mohamed Ilyas: I don't know where you get your information from, but I think you should verify your information. If KPMG can mislead our directors, Bursa and the SC with trivial issues, I don't think we are supposed to work with them anymore. This is why we took the decision to take legal action on them. 

Plus they (KPMG) mentioned they were going to stop the audit process. How can you work with your auditor when you pay them a few hundred thousand ringgit and they dictate what to do? They should be working with us, not taking our money and behaving like this.

They are behaving like official gangsters, hiding behind the veil of whatever act they have. I have got all the information, I spoke to SC and I spoke to Bursa. I think you better clarify your information.

Hiring a fancy lawyer to sue KPMG looks less like the Charge of the Light Brigade but more like Don Quixote battling out with the windmills. But, I digress...

If you are holding shares in Serba Dinamik, you should seriously consider doing what EPF has been doing in the past few days- disposing of the shares (here). Sad to say, this one is a lost cause!

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