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ACRA keeping a close watch on Hyflux and its scandal-ridden audit firm accused of fraud and corruption by govts around the world

Shareholders and investors are now asking why Hyflux's audit firm gave the organisation a clean bill of health in its annual reports over the last decade, instead of failing to flag the risk that Hyflux would become embroiled in heavy debt

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Anger against Hyflux has been mounting, especially after the Salim-Medco rescue deal fell through with no assurances of another such deal. The Indonesian consortium was touted to be a “white knight” and the only hope for the retail investors of Hyflux who have been left high and dry.

About 34,000 perpetual securities and preference shareholders who invested in Hyflux are owed a total of S$900 million, but only stand to receive a recovery rate of 10.7 per cent comprising of 3 per cent in cash and 7 per cent in equity.

Shareholders and investors are now asking why Hyflux’s audit firm gave the organisation a clean bill of health in its annual reports over the last decade, instead of failing to flag the risk that Hyflux would become embroiled in heavy debt.

The Accounting and Corporate Regulatory Authority (ACRA) said on Saturday (6 Apr) that this question is on its mind as it confirmed that it is keeping a close watch on Hyflux, along with fellow financial regulators, the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX).

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An ACRA spokesperson indicated to the national broadsheet that the agency is looking at whether Hyflux’s auditing and accounting complies with local laws and standards and that it will “assess if further action is warranted”

KPMG has audited Hyflux since 2008. Hyflux slipped into the red for the first time in 2017 since it was listed in 2001. Two months later, it filed for bankruptcy protection.

The move shocked investors who had believed the company was healthy. Indeed, Hyflux’s financial statements before this point did not give cause for concern since it was prepared on the basis of an accounting method that assumes since the company will remain solvent and operational indefinitely until proven otherwise.

Auditors are required to question this assumption, assess any risks to the company’s solvency and remain alert to any events showing otherwise, under Singapore’s accounting standards.

In February this year, Hyflux curiously claimed that there were no events to cast significant doubt on the assumption that it will remain solvent and operational indefinitely until proven otherwise.

Interestingly, Hyflux recorded the S$500 million perpetual securities it issued as equity instead of debt in its books, which could have given auditors an impression of recovery as it possibly improved the organisation’s debt-to-equity ratios. It is curious that KPMG did not seem to investigate this more deeply, especially since Hyflux had been generating negative cashflow for consecutive years.

According to Mr Mak Yuen Teen, an associate professor of accounting at the National University of Singapore who spoke to ST, ordinary shareholders and creditors could have chosen to get out of Hyflux earlier if the audit firm had given an adverse opinion. He added: “It is often the case here that auditors do not challenge assumptions enough.”

One of the “Big Four” auditors – along with PricewaterhouseCoopers, Deloitte and Ernst & Young – KPMG is a scandal-ridden global professional services firm that has been accused of fraud, corruption and improper practices by governments around the world since the early 2000s.

KPMG has courted controversy for decades in several nations and has been slapped with hefty fines costing millions, a plethora of court cases as well as outright criminal charges.

Earlier, the Financial Reporting Council (FRC) – a prominent watchdog that independently regulates the UK and the Republic of Ireland and plays a vital role in enforcing UK corporate governance standards – found that KPMG’s audit work had shown an “unacceptable deterioration”.

The firm’s practices were found to be so unacceptable that for the first time in its history, the FRC said that it would investigate 25 per cent more audits conducted by the firm in the 2018-19 financial year.

Financial analysts believe that the FRC’s close scrutiny over KPMG is more than overdue given its past. After all, the firm even caused the FRC’s reputation to be criticised when it was revealed in 2013 that seven senior members of the council that was to investigate KPMG’s role in a controversy that year were current or former employees of the accounting giant at the time.

Closer to home, KPMG retracted its audit reports of troubled Malaysian state fund 1MDB for FY2010-FY2012, after Dr Mahathir and the Pakatan Harapan won the last General Election and toppled the Barisan Nasional.

As the new government launched a probe into the state fund following the election, 1MDB reported that KPMG told it not to rely on its reports over the three years as it does not reflect the “true and fair” assessment of the fund’s finances.

Besides this, KPMG has been embroiled in countless scandals in various countries over the years, with the latest controversy occurring as recently as last year:

2003 & 2004: After the US Justice Department commenced a criminal inquiry and accused KPMG LLP of fraud in marketing abusive tax shelters, KPMG fired or forced the retirement of over a dozen who were involved and admitted criminal wrongdoing in creating fraudulent tax shelters to help wealthy clients avoid $2.5 billion in taxes between 1996 and 2002. It then agreed to pay $456 million in penalties to avoid indictment.

2003: KPMG agreed to pay $125 million and $75 million to settle lawsuits stemming from the firm’s audits of Rite Aid and Oxford Health Plans Inc., respectively.

2004: KPMG agreed to pay $115 million to settle lawsuits stemming from the collapse of software company Lernout & Hauspie Speech Products NV.

2006: The US Federal National Mortgage Association sued KPMG for malpractice for approving years of erroneous financial statements.

2007: KPMG Germany was investigated for ignoring questionable payments in the Siemens bribery case.

2008: KPMG was accused of enabling “improper and imprudent practices” at New Century Financial, a failed mortgage company. The firm agreed to pay $80 million to settle suits from Xerox shareholders over manipulated earnings reports. Also in 2008, two funds audited by KPMG had $2.37 billion invested with the Madoff “Ponzi scheme. Class action suits were filed.

2010: KPMG made headlines after the Swedish Financial Supervisory Authority reported to the Swedish accountancy regulator that KPMG client HQ Bank was forced into involuntary liquidation after the Financial Supervisory Authority revoked all its licences for breach of banking regulations.

2011: KPMG conducted due diligence work on Hewlett Packard’s $11.1 billion acquisition of the British software company Autonomy. In 2012, HP announced an $8.8 billion write off due to “serious accounting improprieties” committed by Autonomy management prior to the acquisition. 

Also in 2012, an independent panel formed to investigate irregular payments made by KPMG client Olympus found that KPMG’s affiliate in Japan did not identify fraud at the company.

2013: A corruption scandal emerged as a former KPMG LLP partner in charge of KPMG’s US Los Angeles-based Pacific Southwest audit practice admitted passing on stock tips about clients, including Herbalife, Skechers, and other companies, to a friend in exchange for cash and gifts. The ex-partner agreed to plead guilty to one count of conspiracy to commit securities fraud and pay around $1.3 million in restitution in a plea deal but the scandal caused KPMG to resign as auditor for Herbalife and Sketchers.

2015: KPMG was accused by the Canada Revenue Agency of tax evasion schemes: “The CRA alleges that the KPMG tax structure was in reality a ‘sham’ that intended to deceive the taxman.” In 2016, the Canada Revenue Agency was found to have offered an amnesty to KPMG clients caught using an offshore tax-avoidance scheme on the Isle of Man.

2017: KPMG terminated five partners in its audit practice after an investigation of advanced confidential knowledge of planned audit inspections by its Public Company Accounting Oversight Board. This followed criticism about KPMG’s failure to uncover illegal sales practices at Wells Fargo or potential corruption at FIFA.

Also in 2017, KPMG paid a $6.2 million fine to the US Securities and Exchange Commission for inadequacies in its audit of the financial statements of oil and gas company, Miller Energy Resources.

Also in 2017, 91 partners of KPMG faced contempt proceedings in Hong Kong High Court, as China Medical Technologies (CMED) liquidators investigating a $400 million fraud took action against KPMG with regard to its refusal to honour a February 2016 court order to produce Chinese working papers, correspondence, and records to the liquidators.

Also in 2017, the FRC opened an investigation into KPMG’s audit of the accounts of aero-engine maker Rolls-Royce.

Also in 2017, KPMG became embroiled in the South African corruption scandal involving the Gupta family. KPMG faced calls for closure, and an uncertain future, as a consequence of the damage done to the South African economy as a result of revelations of corruption and collusion in 2016.

The firm’s activities in 2015, when it issued a controversial report that implicated former Finance Minister Pravin Gordhan in the creation of an illegal intelligence gathering unit of the South African Revenue Service (SARS), also came into scrutiny. This report was seen by elements of the media to be part of a wider Gupta-linked state capture conspiracy, with the aim of forcing Gordhan out of his post. KPMG withdrew the report in 2017.

Numerous South African companies either fired KPMG in the immediate aftermath of the scandal, or were reconsidering their relationships with the firm.

2018: The FRC examined KPMG’s role in the case of collapsed UK construction firm Carillion after it was reported that KPMG and the other ‘Big 4’ accountancy firms collected fees of £72m for Carillion work during the years leading up to its collapse. KPMG was singled out for particular criticism for signing off Carillion’s last accounts before a profit warning in July 2017. It was also found that two out of three former Carillion finance directors had also worked for KPMG.

The final report of the Parliamentary inquiry into Carillion’s collapse, published on 16 May 2018, criticised KPMG for its “complicity” in the company’s financial reporting practices. The authorities accused the big four accounting firms of operating as a “cosy club”, with KPMG singled out for its “complicity” in signing off Carillion’s “increasingly fantastical figures”.

KPMG was also recently fined a hefty £3.2 million by the FRC over its audit of insurance firm Quindell.

In July 2018, the FRC started an investigation into KPMG’s audit role at collapsed drinks merchant Conviviality.

https://theindependent.sg.sg/temasek-uses-scandal-ridden-audit-firm-accused-of-fraud-corruption-and-improper-practices-by-govts-around-the-world/

https://theindependent.sg.sg/hyflux-tells-investors-that-it-can-give-no-assurance-that-it-can-secure-another-rescue-deal-now-that-salim-medco-has-walked-away/

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