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.