KPMG managing partner: Najib ordered me to have 1MDB 2013 audit signed; but we didn't as 1MDB did not give info requested for months

KUALA LUMPUR, April 21 — Former finance minister Datuk Seri Najib Razak had instructed audit firm KPMG to complete and sign off on its audit of 1Malaysia Development Berhad’s (1MDB) 2013 financial statements within two weeks, even as KPMG had yet to receive crucial documents and information on a US$2.318 billion purported investment by 1MDB, the High Court heard today.

KPMG’s managing partner Datuk Johan Idris said this while testifying as the 14th prosecution witness in Najib’s trial over the alleged misappropriation of more than RM2 billion of 1MDB funds.

Johan was today recounting what had taken place during a meeting on the night of December 15, 2013 at Najib’s private residence in Taman Duta. The 45-minute-long meeting was between KPMG with Johan as its sole representative, 1MDB and Najib himself.

At that time, KPMG had yet to sign off on the audit for 1MDB’s financial statements for the financial year ending March 31, 2013, as 1MDB had yet to provide the information that KPMG had been asking for since April 2013.

Based on minutes of the meeting that Johan had typed out himself, he noted that Najib had asked for KPMG to sign the audit by December 31, 2013.

“Before the meeting ended, Datuk Seri Najib stated that he wished to see the 1MDB account signed by KPMG before or on December 31, 2013, but I did not give any response to him.

“I also did not understand why 1MDB refused to disclose information about the underlying assets that were said to be confidential. Furthermore, there were also no supporting documents presented to me at that time to show that information is confidential,” he told the High Court today.

Deputy public prosecutor Deepa Nair Thevaharan then asked: “You said Datuk Seri Najib wanted to see the account signed before or on December 31, 2013. What was his reaction at that time?”

Johan, who was testifying in Malay, then said: “Reaksi beliau macam seolah-olah arahan kepada saya.” (His reaction was as if it was an order to me.)

Johan however explained that KPMG did not sign off on the 2013 financial statement for 1MDB in the end, as the information required was still not provided to the auditors.

Johan said 1MDB’s sole shareholder Minister of Finance (Incorporated) (MoF Inc) on December 31, 2013 terminated KPMG as the auditor for 1MDB with immediate effect, and replaced it with Deloitte KassimChan.

“But KPMG did not know what was the main reason that KPMG’s services as auditor were terminated,” he said today.

MoF Inc is owned by the Finance Ministry, and Najib as the then finance minister was the representative for 1MDB’s shareholder MoF Inc.

What happened before and after the December 15 meeting

KPMG Malaysia was the auditor for 1MDB from 2010 to 2013, with KPMG Malaysia partner Ahmad Nasri Abdul Wahab heading the engagement team that dealt directly with 1MDB and handled the auditing of 1MDB.

Johan was head of audit for KPMG Malaysia from January 2011 to December 31, 2013, and became the managing partner in January 2014 until now.

Johan said he was not part of the 1MDB’s audit and only became involved in 2013 when the audit sign-off became an issue.

At that time, KPMG needed further information from 1MDB on 1MDB’s alleged investments purportedly worth US$2.318 billion in fund “units” and needed to know more about the investment’s underlying assets before the auditors could sign off on the audit of the company’s finances.

The alleged investment by 1MDB — via six promissory notes claimed to be worth US$2.3 billion but now known to be worthless pieces of paper — were “invested” through 1MDB’s special purpose vehicle Brazen Sky Limited in the purported Cayman Island-based hedge fund Bridge Global Absolute Return Fund SPC, with the Singapore branch of Swiss bank BSI Bank acting as the “fund manager” of the purported investment. This is now said to be a sham investment.

Typically, 1MDB’s finances would have to be audited within six months from the end of the financial year or by September 2013, but KPMG in November 2013 was still pursuing for the information requested months ago from 1MDB and could not sign off the audit as representing a “true and fair view” of the company’s finances.

According to Johan, both he and Ahmad Nasri had on November 29, 2013 attended a meeting arranged by 1MDB to discuss the Brazen Sky investment, with this meeting held at the Royale Bintang Damansara hotel.

Johan said KPMG had informed 1MDB that the auditors could not rely solely on confirmation by Brazen Sky’s investment custodian BSI Bank as it was a third party report and that auditors needed evidence about the “existence, accuracy, completeness and valuation” for the purported US$2.318 billion investment.

After 1MDB then chairman Tan Sri Che Lodin Wok Kamaruddin and then 1MDB director Tan SRi Ismee Ismail left due to other engagements, the two KPMG auditors continued with a meeting on the same morning on November 29 with then 1MDB CEO Mohd Hazem Abd Rahman and then 1MDB chief financial officer Azmi Tahir who had also attended the earlier meeting.

Johan said it was in this second meeting on November 29 that Hazem said the four 1MDB officials had together with BSI Bank Singapore’s managing director Yak Yew Chee met with Najib previously to explain the US$2.3 billion investment in the Cayman Islands where BSI was the custodian for the investment.

Johan said Hazem had also said 1MDB subsidiary Brazen Sky had signed a custodian agreement with BSI Bank, and that 1MDB would obtain information on the investment from BSI Bank.

Johan said 1MDB still could not provide the information required by KPMG, despite Ahmad Nasri having requested repeatedly for the information on the Brazen Sky investment for audit purposes.

Johan said that even before the November 29 meeting, KPMG had asked 1MDB management to arrange for a meeting with Najib as the representative of 1MDB’s shareholder, in order for the auditors to be able to share the issues that prevented the audit report from being issued and in order to hear from Najib himself whether he knew about the investment.

Johan said the December 15, 2013 meeting with Najib was then held under 1MDB’s arrangement, explaining that the meeting was held in Najib’s capacity as finance minister and not prime minister as he was responsible to represent the company’s shareholder on the Finance Ministry’s behalf.

While three KPMG representatives including its then outgoing managing partner Mohamed Raslan Abdul Rahman and its current head of audit Foong Mun Kong had went to Najib’s house at around 9.30pm on December 15 for the meeting, Johan said Azmi had said that Najib only wished to meet with the incoming managing partner which was Johan himself.

With the other two instructed to wait outside Najib’s house, Johan who would be KPMG managing partner from January 1, 2014 then went to the living room for the meeting where Najib, Lodin, Hazem and Azmi were present.

Following that meeting, Johan then went home to type out the notes of the meeting with Najib and 1MDB management on his personal laptop at around 2am, before sending it off in an email at 3.26am to KPMG officials.

Among other things, Johan said the meeting notes recorded Najib as having said 1MDB could not provide details on the investment as it was allegedly confidential and had asked whether the explanation given would be enough for KPMG to issue an unqualified audit report on 1MDB finances.

The meeting notes recorded Johan as having said that KPMG needed evidence to complete the audit process according to international auditing standards and financial reporting standards which were also part of the Companies Act, and that failure by 1MDB to comply with the accounting standards would result in the company’s non-compliance with the law.

Among other things, Johan had in the December 15 meeting also told Najib that KPMG would have to issue a qualified audit report in the form of a “disclaimer of opinion” on 1MDB’s accounts if the auditors were unable to complete the audit process on 1MDB’s investment.

Asked by Najib in the meeting why KPMG could not accept BSI Bank’s confirmation of the US$2.3 billion funds, Johan had also explained that BSI Bank did not give the full details required for the audit on the investment’s underlying assets and which meant KPMG could not carry out audit procedures to confirm the investment’s valuation was appropriate.

Johan had also recorded himself as having said that KPMG had asked for the information since April 2013, and that Najib had then asked 1MDB’s management to deal with investment manager Bridge Partners Investment Management (Cayman) Limited to provide the information required for the audit and had also asked KPMG to go to Hong Kong to complete the audit process and expressed his wishes for the audit to be done professionally and consistent with good governance.

Johan confirmed that the December 15 meeting was the first time he had ever met Najib.

While 1MDB had tried to arrange a conference call between KPMG and Bridge Partners on 5pm on December 20, Johan said KPMG did not join the call as it felt there was no need to attend as the auditors had yet to receive the required documents.

He said KPMG was of the view that the conference call would not be helpful at all to complete the 1MDB financial audit as 1MDB had already said that Bridge Partners could not provide the information required.

Johan today verified a 1MDB letter to KPMG on December 31, 2013 along with the finance minister’s letter to 1MDB on the same date, noting that the latter was a notice from the 1MDB shareholder that stated the termination of KPMG’s services as 1MDB auditor with immediate effect and its replacement being Deloitte KassimChan.

Johan said KPMG on January 6, 2014 then wrote a letter to 1MDB to explain why the audit firm could not sign off on the 2013 financial statement, including repeated requests to 1MDB to provide further details and BSI Bank failing to provide further information on the underlying assets for the investment which prevented KPMG from determining whether the investment’s valuation was “reliable and appropriate”.

Johan today said that KPMG no longer had dealings with 1MDB after the January 2014 letter, and noted however that it had in writing explained to 1MDB’s subsequent auditor Deloitte about why KPMG could not carry out professional clearance or complete the audit for 1MDB’s financial statements for the financial year ending March 31, 2013.

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