By Raman Letchumanan
KUALA LUMPUR, Malaysia: If there is one government institution that has earned its respect, integrity and courage among the general public, it has to be the office of the Auditor-General (AG). Year in year out, the public awaits with bated breath and disbelief the national audit reports, as it reveals mismanagement, misappropriation, abuses, wastages, and leakages of public funds that run into millions, and even billions. Very few would question the detailed and meticulously researched reports, except those fingered in the reports.
It is therefore surprising that this year, the AG has been questioned with various allegations thrown against her.
I refer, in particular, to the media articles, “So, who audits the auditor-general?” by Walter Sandosam; “Does the auditor-general’s report provide a true and fair view?” and “Why shouldn’t HRD Corp be allowed to defend its reputation?” both by Ibrahim M Ahmad.
Even ministers and senior politicians have joined in the fray.
In essence, the writers have alleged that; “the failure to provide a balanced report on HRD Corp raises questions as to the credibility and competence of the AG’s function as a whole”, “begins to wonder if those involved (the AG) really understand what it entails to prepare a professional report”, “it appears that HRD Corp was not given the space, latitude or opportunity to provide answers”, among others.
Walter also questioned why the AG’s report differs from the financial audit by BDO, claiming BDO has cleared HRD Corp “without any qualification”. Readers are advised to read the articles for further details.
Any casual reader, without technical knowledge of accounting or auditing, could readily rebut the allegations by the two writers. One just needs to read the AG’s audit reports or at least its summary.
Accordingly, I will draw upon the AG’s audit reports to rebut these gross allegations, which unfairly diminishes the reputation and integrity of this revered institution.
A constitutional duty
As the introduction to the AG’s audit reports points out, the AG is appointed by the YDPA (Art 105) to audit the financial statements of the Federation and States, activities of government agencies, and government corporate entities (Art 106). It should be noted that the audit of government agencies and its corporate entities involves a performance audit - whether an objective, program, or activity has been carried out in an economic, efficient and effective manner.
The scope and duties of the AG are spelled out in the Audit Act 1957. The Act authorizes the AG to audit any corporation or company that receives government grants or loans, and those which are majority owned by the government. These entities are usually incorporated under the Companies Act, and therefore are also subject to statutory audits of their annual financial statements by private qualified auditors.
Hence, a distinction should be made between statutory audits of annual financial statements, and the constitutional performance audits by the AG. Necessarily, the AG’s performance audits may cover several years and is focused on achievement of objectives and compliance with rules and regulations. Nevertheless, the AG takes into account the findings of the financial audits of recent years to make an informed decision.
Therefore, the financial audits and performance audits complement - and indeed should reinforce - each other. It is certainly irresponsible to pit the two audits against each other. The findings of the financial audits may result in a ‘true and fair’ view - a judgment arising from sampling of critical financial activities; whereas the performance audits are factual and conclusive evidence of any violations of rules or mismanagement, based on the ‘duty of care’ principle.
Most scrutinized audit report
The AG’s Report is presented to the YDPA and then tabled in Parliament for discussion (Art 107). Parliament may also refer any material adverse findings to the Public Accounts Committee for further scrutiny. The AG’s report comes under heavy scrutiny in Parliament from all sides – due to partisan politics and ruling-class malfeasance. The only defense the AG has is a factually accurate and objectively prepared report. The AG has admirably proven its mettle, even after extreme pressure like in the case of 1MDB.
In conducting its audit, the AG submits the draft findings to the auditee for any rebuttal or clarification before finalizing the report. The clarification or reply is reproduced in the audit report, before the final recommendation. Furthermore, the AG conducts an exit conference to allow all parties to share their views on the draft report. To say auditees are not given the space and opportunity is indeed mischievous.
The writers seem to have based their allegations solely on a loss-making investment, termed Company A, but ignoring many other serious findings such as misappropriation of HRD funds or improper transactions in purchase of property.
Company A is an investment that has lost its value from 62.2 cents per share on purchase, to about 12 cents three years later, incurring a potential loss of RM48.42 million. The key finding was that HRD Corp has held on to the shares against the investment panel’s advice; and that without going through the investment panel, the Minister was approached directly for approval to renew the investment, but without full information being provided. These are blatant violation of rules, regulations and ethics.
One cannot defend such abuse by saying the loss can be covered up by gains in other investments. In fact, BDO should have qualified this matter based on the extraordinary decline in value, where losses incurred or anticipated should be immediately booked in the accounts, based on the prudence accounting principle.
Ministers’ retort
It was reported that the human resources minister ordered a ‘professional third-party auditor’ to ensure transparency in the audit of HRD Corp. This probably arose from the adverse findings of the AG, verses BDO’s unqualified financial audit. I wonder whether the minister realizes this would mean a private entity taking over the constitutional duties of the AG. As explained, there can be no contestation of the financial audits and performance audits being functionally different, though complementary, in terms of scope and findings.
The HR minister had to belatedly instruct HRD Corp to withdraw its legal letters of demand to parties reporting on the AG’s reports. Threat of legal suit could amount to an extraordinary liability on HRD Corp and would have required the approval of the Board or the Minister beforehand. If this was not done, then it only confirms the regulatory abuses pointed out by the AG. Of course, no one would dispute the right of any individual in HRD Corp to sue in their personal capacity if wronged.
On MRT Corp, it was reported that the transport minister denied any financial mismanagement, claiming “the issue of MRT Corp being financially unstable does not arise given that it is a GLC (government-linked company), and all its financial obligations were guaranteed by the government.” To be fair, the AG has given an overall positive finding on MRT Corp. However, it cautioned against underachievement of ridership and revenue targets (operational financial sustainability) for MRT1/MRT2 and need for prudent spending and accounting of government infrastructure funds. Given the record of several GLCs needed to be bailed out even at the operational stage, this remark was an over-kill.
Former minister Khairy Jamaluddin pointed out weaknesses, errors in audit methodology, and inaccurate findings without providing detailed evidence. He commented about the ‘time range of the audit’, and findings being outdated, without recognizing a performance audit of a program/project can only be carried after a few years of implementation. It is silly to imply past transgressions cannot lead to future corrective actions.
If GLCs have instituted corrective measures immediately, we would have saved billions of public money. Sadly, decision-makers are still in a state of denial and deflection, and tend to explain away their past actions, until tax payers have to step in. And the same modus operandi of abuses repeats every year.
Systemic governance issues enabling abuse in GLCs?
Apart from the findings in each agency, the AG’s report has alluded to systemic governance issues that perpetuate malfeasance across GLCs.
GLCs generally operate under two different governance regimes. Many GLCs are established by law which generally gives more management authority to the minister concerned. But as a company registered under the Companies Act, the GLCs are subjected, under their constitution or memorandum of association to market-based rules such as those of the Companies Act, Securities Commission or Bursa Malaysia. Therefore, in GLCs, there can conflict or confusion in decision making, based on statute and corporate rules. The AG has pointed this out in the case of HRD Corp, being established by the PSMB Act 2001.
The management of GLCs somehow see it easier and convenient to get approvals from ministers if they hit scrutiny at the Board level. We have heard in court testimony how in the case of 1MDB, the Board was incapacitated in its decision-making by the prime minister. The AG has detailed how conflicts in governance are exploited by GLCs to plunder public funds. The situation becomes worse when the Board is stuffed with political appointees.
The AG has suggested that governance based on founding statute, and market-based laws need to be reconciled in all GLCs.
Both the AG and the private statutory auditors are watchdogs of public and private funds, whose certification is used for various statutory and enforcement purposes. They are entrusted to ensure any abuse is brought to the fore early enough. However, what happens generally is that the GLCs obtain clean financial audit findings, whereas when the AG steps in, glaring cases of abuse are exposed. Granted the scope of financial audits are limited, but auditors should be able to discern patterns of abuse from succeeding financial audits. It could be that auditors are comforted that GLCs are funded by the government and would never fail (at which point financial audits are contested or subjected to lawsuits), tend to be lenient to ensure continuing appointment, or succumb to auditor-shopping.
This is an issue that the statutory auditors themselves have to reflect based on their professional ethics and integrity. The Auditor-General needs to reconcile this matter with the professional accounting and auditing standard-setting and oversight bodies, given the failure of many GLCs.
It is heartening to note that, Parliament amended the Audit Act 1957 on 24 July 2024 to include several key provisions, among others, to audit companies receiving government guarantees, to audit based on ‘follow the public money’ approach, to conduct follow-up audits on adverse findings of previous audit reports, and empowers the AG to issue any guidelines on audits.
These are ground-breaking amendments which would necessarily need much more resources and staffing in the AG’s office as it involves more, deeper, and frequent auditing of companies receiving government financial support. This would be a needed investment on the AG’s office which the general public would willing support, to save billions of public funds.
Prime Minister Anwar Ibrahim has been on an anti-corruption crusade during his 25 years in the opposition, and more so when he became Prime Minister. Will he translate his rhetoric into credible punitive measures as regards follow-up actions on the AG’s report?
The general public awaits with bated breath, and hopefully disbelief will turn into relief as those who abuse public funds face due punishment. It is hypocrisy that the public are burdened with additional taxes, reduction of subsidies, and cost-cutting measures, while those in the administration and public service continue to siphon out people’s money.
*Raman Letchumanan is a former senior official (environment) in Malaysia and ASEAN, and Senior Fellow at Nanyang Technological University Singapore. He is an accredited accountant (Malaysia/UK) and has a Ph.D. in environmental economics, among other qualifications.*
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