Monday, July 28, 2008

Basics of Investing - Part VIII

The Oil Corp Saga: A Vexatious Variation Order!

Before investing, it is important for one to understand the role of external auditors and regulators. Since most people base their investment on the Annual Audited Financial Statements, there must be integrity in these reports.

Here’s an intriguing case on a dispute between Oil Corp Berhad, a public listed company in Bursa Malaysia and its’ auditors, Messrs. Baker Tilly Monteiro Heng (BTMH).

The Issues:

BTMH was adamant in its' stance that the value of the contract awarded to one of Oil Corp's subsidiaries by PBC was only worth RM90 million despite Oil Corp's insistence that it was worth RM110 million.

To resolve this dispute, Oil Corp then engaged Messrs. Horwarth (also an auditor of PBC) of to carry out an Independent Verification Report on this contract. Messrs. Horwath agreed with the valuation of RM110 million on the contract, subject to several disclaimers.

However, BTMH refused to budge and insisted on issuing a disclaimer of opinion on the audited financial statements of Oil Corp Berhad. A disclaimer of opinion means the auditors are unable to form an opinion on the truth and fairness of the audited financial statements. Such an opinion basically mean something is *VERY* WRONG with the audited financial statements.

As a consequence, Oil Corp's shares are suspended from trading as they are under PN17 status.

Timeline of the Oil Corp Saga…


The Implications:

1. External Auditors Taking a Stricter Stance towards Clients
It is very rare for external auditors to take such a strong stance against their client. I believe that the perception in Malaysia is that external auditors often take a very soft stance towards their clients. Where there is a benefit of a doubt, they would tend to agree rather than antagonize their audit clients. Surprisingly, BTMH here is willing to take such a strong stance against its’ former clients. Does this herald a change in the mindset of auditors? Or is this just a one-off case?

2. Corporate Governance Safeguards do not appear to be working
It is puzzling that Oil Corp's Independent Directors and the Audit Committee failed to act to prevent this issue from imploding. The Audit Committee is established for the very purpose of ensuring a frank and clear communication channel between the Board of Directors and external auditors. The various contentious issues highlighted should have been brought up much earlier and resolved. Do you think further improvements are necessary? If so, what do you suggest?

3. Importance of Mutual Trust and Communication
The document available on Bursa Malaysia suggests that mutual trust and communication between BTMH and Oil Corp had diminished substantially. On one hand, Oil Corp did not endear itself to BTMH as they submitted the relevant documentation at the very last minute, leaving BTMH very little time (or indeed, none at all) to vet through and perform an independent review on the contract. As for BTMH, perhaps the issues could have been communicated more clearly to the Audit Committee and the Board of Directors. If they had foreseen that this would have resulted Oil Corp being placed in a PN17 status and followed by bad publicity, this may have encouraged them to act more quickly and avoid this traumatic episode. What do you think?

Conclusion:
I invite you to comment on this rather contentious issue.

8 comments:

Avatar

Dear All,

Here's the link to the report issued by BTMH to the shareholders of Oil Corp.

BTMH!

And here's the reply by Oil Corp.
OilCorp!

Michael Lim

may I have your email address? Wish to know if you can blog for us? - Michael (www.jobo3.com)

Better Interpersonal Communication

Thanks for the well wishes...

Wenbin

wonder

Dear Michael,
My e-mail is wonderwealthwisdom[at]gmail[dot]com.

Dear Wenbin,
Thanks for dropping by and leaving a comment. Appreciate it :)

Life is Fun!!! ^_^

i. This is off course very rare case i.e. one off case. Your guess is as good as me. Remember this is BolehLand!!!

ii. Audit comm is just not working ("properly") unless the PLC is one of the MNC subsi. Wrong? Okay..okay,only those Cinabeng co lor. I can't put the rest, else you might censor my comment for being too racist?

iii. Very fishy. Hanky panky things by Tom Dick and Harry.

Avatar

Dear KK,

Thanks for your comments. Yalor, our Corporate Governance is not up to par.

Have to be cautious when investing here.

Andrew Chua

i think it was not a good move by the client to engage a second team of auditors.

the moment there is a second team on the scene, the issue becomes about 'face'.

if the first team defer to the second team, definitely will lose face.

so, the moment Horwath arrived, the situation was destined to become a stalemate.

no one will budge.

i believe that if Oil Corp. continued talking to BTMH, the technical issues would not be too big of a problem and a compromise would have been reached.

Avatar

Dear Andrew,

Thanks for dropping by. I think the relationship between BTMH and Oil Corp went totally sour. Probably there was a lack of trust on both sides leading to the whole saga.

The follow-up audit is taking a long time though. There seems to be no further news on this saga.

Rgds

  © Blogger template 'Minimalist G' by Ourblogtemplates.com 2008

Back to TOP