Deloitte has entered into an $80M out-of court settlement with Malaysian Authorities over its role as an auditor to 1Malaysia Development Berhad (1MDB).
The Malaysian government announced on Wednesday that this agreed settlement with Deloitte will resolve all claims linked to the auditor’s fiduciary duty when auditing accounts for 1MDB (the Malaysia state investment fund that was involved in a multibillion-dollar international embezzlement scandal) and 1MDB’s former subsidiary SRC International from 2011 to 2014.
“This marks another success in the Malaysian government’s continuing recovery efforts against parties involved in 1MDB, SRC and its related entities. The Malaysian government is determined to ensure that appropriate actions are taken against all individuals or entities involved, directly or indirectly, in the global 1MDB scheme,” Malaysia’s Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said.
The settlement would “expedite the payment of monies to fulfil 1MDB and SRC’s outstanding obligations, which would otherwise be delayed by potentially protracted and costly court battles”.
Malaysia and the U.S. have jointly tried to recover the losses suffered in the 1MDB scandal over the last few years. The Deloitte settlement is the largest linked to 1MDB by an audit firm in south-east Asia.
In 2016, Deloitte resigned as 1MDB’s auditor after the US Department of Justice filed lawsuits in the US to recover assets acquired with misappropriated 1MDB funds. In 2019 Malaysian authorities fined Deloitte $535,000 for reportedly failing to report irregularities related to 1MDB.
The Malaysian Securities Commission had said in a statement then that Deloitte failed to report irregularities which “may have had a material effect” on the ability of 1MDB subsidiary Bandar Malaysia Sdn Bhd (BMSB) to repay bondholders under an Islamic bond program issued in 2014. In its 2015 and 2016 reports for 1MDB Real Estate, Deloitte stated that the ongoing investigations of 1MDB indicated the existence of material uncertainty which may cast significant doubt about the group’s and the company’s ability to continue as a going concern”.
In short, Deloitte was reportedly aware that BMSB was on the road to bankruptcy, but failed to disclose this in their report.
A string of Auditors
Many auditors have been associated with 1MDB. EY which was 1MDB’s first auditor resigned. KPMG was fired for asking for information on the fund’s assets. KPMG is now reportedly attempting to negotiate a deal with the Malaysian authorities. Deloitte quit after the U.S. started looking into the matter. Parker Randall became the auditor after Deloitte left. This high turnover of the auditors was indicative that something was seriously wrong with the financial accounting of 1MDB. Last year auditor known to date is PwC.
Increased Scrutiny on Auditors
While auditors are certainly dependent on the demands of the client and more often than not would not want to report something that would jeopardize their appointment as auditors, recent scandals with Big Four accountants are giving us some food for thought.
PwC, KPMG and EY have all faced regulatory scrutiny after a series of corporate collapses and accounting scandals in different jurisdictions have led to serious questioning of their audits. Last November, Deloitte itself was fined approx. $506,137 in the UK over failures in its audit work for newspaper publisher Johnston Press, just a few months after it was ordered to pay a record $20.9M for serious misconduct in its audits of technology company Autonomy.
More serious questions were raised about the role these Big four firms played in corruption and money laundering cases. KPMG and PWC took a center stage in South Africa’s state capture. EY was the subject of the Dubai Kaloti money laundering debacle. The Luanda Leaks also revealed the extensive role Big Four firms played in the looting of Angola.
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