1 MDB audit: AG must & will find that loss of RM 7 billion in cash was in accordance with proper procedures,accepted accounting practise

by Ganesh Sahathevan


The outcome of the 1 MDB audit ordered by the Prime Minister,and which is to be undertaken by the Auditor-General must and will conclude that the loss of some RM 7 billion in cash from or via 1 MDB was really in accordance with proper procedures,accepted accounting practice ,and therefore the company and its directors are free of blame.

The reasons are simple.

First, the RM 4 billion borrowed from the KWAP and  funneled  by 1 MDB into its FORMER  subsidiary , SRC International Sdn Bhd.

Now, this is really a non-issue,for SRC was "de-merged" and is no longer a 1 MDB subsidiary, so really it is no longer of any concern to anyone

auditing 1 MDB. However, for those who insist, really, can you say that 1 MDB's directors have been negligent in getting rid of a RM 4 billion liability?

Did the de-merger not add value to the company,and hence in its best interest?  Need we explain the basics of good governance? 

(See reports below) 

Next, that USD 700 million (about RM 3 billion) that is supposed to have been funneled via Petrosaudi to one Jho Low. The dealings of some Saudi company are beyond jurisdiction ,and in any case, that entire transaction has been accounted for in the 2013 financial statements. That the public and others with no knowledge of accounting and who cannot otherwise understand English and basic arithmetic  cannot see this and choose instead to rely on website reports is not of concern. The accounting of that transaction is so straightforward:  

a) In the Notes to the Accounts,in particular  Notes  18,19 and 30 ,the details of the 1 MDB PetroSaudi loan are provided,and it is clear that the transactions were all executed and completed in the year ended 31 March 2013

Therefore, everything about that transaction ,or series of transactions, should be detailed in the 2013 financial statements

b)Note 18 on Page 86 says that in 2012 there was a revaluation loss of  RM 516 018,000.This is due to an accounting procedure ,where cashflows from the notes are revalued according to current market interest rates (which is different from the interest payable on the notes) .So,in 2012 applying that procedure the notes had to be devalued,hence therevaluation loss of  RM 516 018,000.

This however is a paper loss (ie no money has been lost selling the notes),so in the Statement Of Cash Flow, that figure is backed into profit,to reflect the fact that no cash was lost.

c) However, also in  the cash flow statement on page 17 a sum of RM 510,578,000 in Mudaraba profits has beenbacked out..Note that this is not the opposite of the above, and note  that there is a difference in terminology, ie "Mudaraba revaluation loss" vs  "Mudaraba profits". 

d)So, what are these  "Mudaraba profits"?

They are, as explained in Notes 18,19 and 30,  and are clearly the profits from the Mudaraba notes issued by 1 MDBPetroSaudi .

However, Arul Kanda and 1 MDB all say that the profit was RM 1.78 billion ,that is about  RM 1.2 billion short of what is implied in the Statement of Cashflow,

e) In addition,this is a PAPER profit .So, it does appear that  no cash profit was  generated from the transaction.That would explain why 1 MDB is having trouble showing us the money from that deal.

f) Could it be, for the sake of argument,  that the RM 510,578,000 in Mudaraba profits was only the paper portion of the profit,and that the actual profit included a RM 1.78 billion cash profit,for a total profit of approximately RM 2.3 billion?

g) To confirm if that is true, we look at the Net Cash From Operations (ie cash from running the business) on Page 18-and we see that the number is only RM 762,930,000.We also know  that almost all of that came from the power stations. 

h)Then,perhaps, 1 MDB considers the profit from the notes to be profit from investment activities. To test that proposition we look at Page 19,and there is nothing there to support that proposition. Instead what we do see is  that in 2012,1 MDB contributed a RM 1,018,000,000 to an investment in a Mudaraba facility -one assumes this is the same 1MDB PetroSaudi facility.

So, in conclusion, it does seem  that no  cash was ever received from PetroSaudi,and that the profit from the Notes,was only  a paper profit,,and that profit  was only RM RM 510,578,000.

Meanwhile, books must balance,and anything lost must be accounted for.

So far we know that the "investment" in PetroSaudi was "converted" into Murabaha Notes. To support that assertion one can see from the  Balance Sheet  on Page 13 , that 1 MDB held RM 5,710,215,000 in Murabaha Notes as at 1 April 2011.

However, while Note 19 says that the Murabaha Notes are now classified "investments held for sale", there is no such item on the balance sheet.

The figures for investments and other assets held do not reflect anything near RM 5 billion,EXCEPT for one item, and that is "Amount Due From Subsidiaries". 

As one can see that figure , compared to the previous year, has grown by approximately RM 5 billion, suggesting that there has been a BOOK ENTRY moving the  RM 5,710,215,000 in Murabaha Notes to "Amount Due From Subsidiaries". 

Note 28 which provides details of the item  "Amount Due From Subsidiaries" does not say which or what subsidiaries, but there is a clue in the the currency exposure profile, where it is disclosed that the US dollar exposure (in Malaysian Ringgit) is RM 7 118 578 ,000 ie the bulk of that sum.

I cannot think of any other 1 MDB subsidiary except 1 MDB PetroSaudi that has been extended a facility of that size.Note also that 1 MDB PetroSaudi appears to still be a subsidiary, even if it is dormant.There is nothing to suggest that it has been liquidated. 

Therefore, the  above taken together suggests  that the Murabaha Note "redemption" was nothing more than a series of book entries. In other words, whatever cash was contributed to 1 MDB PetroSaudi is lost for good.

The 2013 financial statements were audited by Delloites ,who have certified that the statements have been prepared in accordance with accepted account practice, and provide a true and fair view of 1 MDB's financial position.

END

NOTES

Where did RM4 billion for Putrajaya’s SRC International go, asks DAP


Published: 16 October 2014 1:52 PM


Tony Pua said it was puzzling that the finance minister could not be specific about the business SRC International was involved in. – The Malaysian Insider pic, October 16, 2014.Prime Minister Datuk Seri Najib Razak must explain what has happened to a RM4 billion loan secured by a wholly-owned subsidiary of the Ministry of Finance, which failed to submit its annual accounts on time, a DAP lawmaker said today.




Petaling Jaya Utara MP, Tony Pua said SRC International Sdn Bhd had secured a RM4 billion Islamic loan from the government's pension fund, Kumpulan Wang Amanah Persaraan (KWAP), and which was guaranteed by the federal government.




The loan was disbursed in two tranches in August 2011 and March 2012.




However, Pua said that despite the size of the loan, SRC's financial accounts were last filed for the year ending March 2012.




He said the accounts for March 2013 which were due by September 2013 have yet to be submitted.




"Why is it so difficult for a company with hardly any activity other than a mega loan to submit its financial statements to the authorities?” he asked in his statement today.




Pua said the reply to from the Finance Minister to his parliamentary question stated that the company was set up to handle a “few stragetic national infrastructure projects”.




It also stated that “SRC was a strategic company with a long-term view to implement strategic infrastructure projects that will double the country's efforts to spur sustainable, long-term growth”.




Pua said it was puzzling that the finance minister could not be specific about the business SRC was involved in.




"There were, however, no reasons given for the delay in submitting the accounts, other than to say that the financial statements for both March 2013 and 2014 will be submitted before the end of October," he added.




Pua said another cause for suspicion was the fact that SRC was hastily acquired from 1Malaysia Development Bhd (1MDB) in February 2012, after the RM4 billion was fully disbursed.




"Why did 1MDB raise the RM4 billion government-guaranteed loan via SRC, and then why did MOF take over SRC so soon after the RM4 billion loan was fully disbursed?," he asked, adding that the same question did not get a reply from the finance minister.




Pua added that failure by the government to provide transparent answers could only lead to speculation that there was serious financial breach or misappropriation of the RM4 billion loan to SRC, which could not be reflected in the consolidated accounts of 1MDB.

"What has happened to the RM4 billion since March 2012?




"Datuk Seri Najib Razak, who is both the finance and prime minister, as well as the chairman of 1MDB, must answer this question," Pua said.




He added the lack of governance, transparency and accountability from the wholly-owned government corporation chaired by the prime minister himself was shocking and disgraceful.




"Such behaviour serves as a terrible example to all other government agencies," he said, adding that this could also have caused the delays in the submission of 1MDB’s March 2013 accounts and the resignation of its auditors then, KPMG Malaysia.




"To resolve this conundrum, MOF “acquired” SRC so that problems in SRC will not be reflected in 1MDB’s books.




"However, as the problems in SRC remain, the company is unable to submit its financial accounts since March 2012," he added.




It was reported that 1MDB only submitted the annual report for financial year ended March 2013 in April this year and the accounts were only finalised after 1MDB dropped its auditors KPMG just months before that, and appointed Deloitte to complete the annual audit.




Yesterday, the government confirmed the award of the 2,000mw combined cycle gas power plant in Malacca to the sovereign wealth fund via direct negotiations.




Earlier this year, 1MDB won the RM11 billion, 2,000mw coal-fired power plant project known as 3B, which was renamed Jimah East, in a controversial open tender.




It also secured a 50mw solar project on a direct award basis.




On Tuesday, Pua lambasted the third successive award of the multi-billion ringgit power contract to 1MDB this year, conveniently ahead of its planned listing.




“The rapid succession of the multibillion power producing contracts awarded to 1MDB proves that the government is pulling all stops to ensure the viability of the initial public offering (IPO) of 1MDB Energy Sdn Bhd, which was postponed twice due to unattractive valuations.




“Basically, what it means is that there is not enough value in 1MDB. [So] the government keeps giving [it] new contracts to create value in 1MDB to make sure 1MDB Energy Sdn Bhd becomes a viable listing option,” Pua said. – October 16, 2014.




- See more at: http://www.themalaysianinsider.com/malaysia/article/where-did-rm4-billion-for-putrajayas-src-international-go-asks-dap#sthash.GxHrsQ4U.dpuf





















SRC International no longer subsidiary, 1MDB tells PKR’s Rafizi


BY EILEEN NG


Published: 14 January 2015 3:36 PM





PKR's Rafizi Ramli claimed that SRC International took a RM4 billion loan in 2011 from the pensions fund to purchase a mining company in Mongolia. – The Malaysian Insider file pic, January 14, 2015.SRC International Sdn Bhd is no longer a subsidiary of controversial 1Malaysia Development Berhad (1MDB) as it was "de-merged" from the government-linked strategic development company three years ago.


Responding to PKR secretary-general Rafizi Ramli's claim that SRCInternational had taken a RM4 billion loan in 2011 from the Retirement Fund Incorporated (KWAP) to purchase a mining company in Mongolia, 1MDB said since the divestment, its former subsidiary is now an independent company.


"SRC International Sdn Bhd was de-merged from 1MDB in February 2012, almost three years ago, and has operated as an independent company since then.



"We understand that SRC’s audited accounts are filed with Companies Commission of Malaysia,

documents that are available to be viewed by the public, and would refer the honourable MP to these for any information he seeks on the company's financial or operational performance," 1MDB told the Pandan MP in a brief three paragraph response on its blog today.



Yesterday, Rafizi alleged that his investigations into the matter revealed that SRC International did not exist, raising questions of where the money was actually spent.


"Initially, the money was meant for buying a mining company called Gobi Coal & Energy as an investment in Mongolia, as reported in the Business Times," he said at a press conference.


"The investment has not happened until now and it is not known how the RM4 billion was spent."


1MDB has come under fire from Rafizi and other opposition politicians as well as influential former prime minister Tun Dr Mahathir Mohamad over the fund's heavy debts its use of money and its opaque operations.


There were concerns over the firm’s burgeoning debts estimated at some RM40 billion, just five years into its operations, amid softening of the ringgit against the US dollar.


Penang Umno leader Datuk Seri Khairuddin Abu Hassan had also lodged a police report late last year against the company over its alleged dubious financial activities and massive borrowings.





However, the company's newly appointed group executive director, Arul Kanda (pic, right), told The Malaysian Insider that the string of attacks were mostly politically driven and not "grounded in reality".


The high-flying banker said it was quite clear most of the allegations directed at the company were driven more by politics, rather than genuine business considerations.


Without naming them, Arul said "certain individuals" who were not privy to the company's operations, and who do not have the full facts or understand the context of decisions made by 1MDB, have been at the forefront of these attacks.


"I’ve stated this before but, as a banker, I take due diligence very seriously. As such, when considering whether to take on this role, I examined every piece of information I could find about 1MDB, including numerous media reports concerning allegations directed at the company.


"Subsequently, I had the opportunity to hold in-depth discussions with the Board, and I have personally looked into the background of the issues covered by these allegations as well.


"On the back of this, what I can tell you is that whilst there are certainly some challenges that we will need to – and can – overcome, the majority of the allegations directed at the company have no grounding in reality," he said in an email reply to The Malaysian Insider last week. – January 14, 2015.

- See more at: http://www.themalaysianinsider.com/malaysia/article/src-international-no-longer-subsidiary-1mdb-tells-pkrs-rafizi#sthash.S9mjkn9O.dpuf