SERBA AUDIT HASSLE EXPLAINED - Things KPMG won’t tell you & will never tell you, unless in court.
Disclaimer: Below are merely discussion for better understanding on how audit is conducted & for general public educational purposes. Any party who feel offended due to whatever reasons below, pls consult your company's auditors, MIA, SC or/and Bursa first for clarification & confirmation, before you consult your lawyer.
Let's try to take a look at normal audit process conducted by KPMG over Serba accounts in early years
1) Serba informed KPMG, accounts are ready for audit
2) KPMG & Serba concluded audit program
3) KPMG sent a team to Serba office & liaise with accounting department
4) Along the audit process, KPMG team would communicate with accountant/managers of account department over certain audit matters
5) after all vouching works, audit risk analysis & management explanations obtained for certain audit queries, KPMG team would compile the audit working papers & sent for KPMG manager's review.
6) assuming only mirror audit issues & without suspicious of frauds, KPMG will meet Serba Group CFO for final meeting.
7) Serba drafted financial statements & sent to KPMG for review.
8) once all were good, KPMG issued auditors report with "true & fair view"
>>>> Not sure if there were a few good golf games in between for better working relationships? (welcome to confirm or deny <<<<
SO WHAT POSSIBLY WOULD GO WRONG IN AN AUDIT?
If you look at item 4 & 5 above, no further audit were needed with below situations:
A1) invoices to customers & payments from customers were in satisfactorily good order
A2) acquisition of PPE & leased assets were supported with proper documentation, postings & payments by Serba
A3) inventories were purchased in the ordinary way of transactions
A4) Contract assets were supported with proper documentation & in accordance with the terms of the contracts
Hardly we see any auditors conduct background investigation or physical checks on client's customers or/and suppliers because:
A5) no need. As long as the audit findings & tests on estimates so far were good & in satisfactory manner
A6) cost (audit industry is not big fat but indeed pity little profit industry)
B1) someone in the company told auditors something very fishy in the accounts, and that information were proven reliable
B2) auditors discovered some documents which were not supposed to be stored in the company's premises, say unusual quantities of the customers/suppliers internal documents
B3) accounting postings or reclassification across the item A1 to A4 abnormally or inconsistent to general acceptable manner.
B4) payment transactions or records among item A1 to A4 were abnormal or suspicious
B5) unusual or inconsistent information were discovered during the audit and when checked with management, the explanations given by the management were contradicted or not in satisfactory manner
B6) ______________ (others?)
An audit partner needs to decide if there is any need to conduct investigative audit over the inconsistent or unusual audit findings if B1 to B6 existed, in order for the audit partner to discharge his duty & responsibilities as auditors.
AFTER CONDUCTING FURTHER BACKGROUND INVESTIGATION & PHYSICAL CHECKS, WHAT NEXT?
I personally don't know what triggered KPMG (please refer Item B1 to B6) to conduct such background checks on these customers & suppliers.
After received the check results and if I were the audit partner in-charge of KPMG for Serba audit, I would start sweating......I will definitely discuss the issues with other partners and collectively a decision will be made by KPMG management.
Can you follow until now? If you can't, please leave your comments below.
Now, let’s see what was happening after that:
C1) In the very high ranking meeting with Serba, KPMG raised queries over the subject matters
C2) Serba responded & replied with their version of findings & explanation, if not on the spot, later.
C3) KPMG opined that the replies from Serba were NOT satisfactorily justified & thus requested independent 3rd party to review the validity of the replies & evidences produced by Serba. By getting internationally recognized audit firm to be the independent reviewer to review over the evidences, the outcome of the review will be able to assist KPMG to conclude the audit.
C4) But Serba refused such suggestion from KPMG and labelled that request WAS UNNECESSARY. (Go read yourself on the statement of claim point 58 by Serba over the law suit to KPMG)
C5) Now KPMG & Serba had disagreements over the evidences & the situation remained unresolved. How?
C6) KPMG should bring the disagreement & matters to the Serba Audit Committee for their attention & assistance. They did indeed.
C7) It is professionally right for KPMG as auditors to report the matters to SC IF they believed they should. So KPMG did.
MIA, SC & Bursa have not reprimanded or questioned KPMG's action so far, so is KPMG wrong or right in this situation? Market replied in share price. What is yours?
As a side note, while I am not sure if any wrong doing in Serba or by Karim just yet (give little bit of benefits la, or else nanti kena sue, how?), I personally strongly doubt on the ability of Serba Group CFO over the whole mess for his failure in advising Karim correctly & competently.