Bursa’s suit sheds more light on Serba Dinamik’s financials

This article first appeared in The Edge Malaysia Weekly, on November 29, 2021 - December 05, 2021.
The court documents state that the financial impact on the company from the findings under the SIR amounted to RM1.438 bil as at Oct 22, 2021. (Photo by Shahrill Basri/The Edge)

The court documents state that the financial impact on the company from the findings under the SIR amounted to RM1.438 bil as at Oct 22, 2021. (Photo by Shahrill Basri/The Edge)

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IF the troubles at Serba Dinamik Holdings Bhd had not yet piqued the interest of the public, then the legal action taken by frontline regulator Bursa Malaysia against the company last week would have caught the attention of even the least curious investor.

On Nov 23, Bursa announced that it was seeking a court order to compel the oil and gas firm, which has diversified into the IT business, to disclose the factual findings of the special independent review (SIR) conducted by Ernst & Young Consulting Sdn Bhd (EY Consulting) on its financial accounts for the 12-month financial period ended Dec 31, 2020 (FY2020).

The stock exchange brought the matter to court because Serba Dinamik insisted that EY Consulting had not completed the SIR and there was no material information that required it to reveal to the investing public when Bursa gave the directive to provide updates on the SIR to the company.

To penalise Serba Dinamik’s failure or refusal to make public the Factual Findings Update prepared by EY Consulting, Bursa suspended the trading of its securities from Oct 22.

Since the audit issues were exposed to the public, Serba Dinamik group managing director and CEO Datuk Dr Mohd Abdul Karim Abdullah has held firm that the company “has done nothing wrong”.

In a press conference on May 29, Abdul Karim, the single-largest shareholder with a 21.23% stake, stressed that the audit issues raised by its former external auditor KPMG were not about genuineness or legitimacy of contract value.

While Serba Dinamik had earlier responded by suggesting that the findings of the SIR were “preliminary and inconclusive”, the court documents sighted by The Edge show that Bursa thinks otherwise.

EY Consulting’s findings update recorded in the court documents highlight the same concerns that KPMG had over the company’s transactions. The court documents state that the financial impact on the company from EY Consulting’s findings under the SIR amounted to RM1.438 billion as at Oct 22, 2021.

To recap, the SIR by EY Consulting was conducted to assess the accuracy and veracity of the matters highlighted by KPMG. The scope had been agreed upon by the company, EY Consulting and Bursa according to a bourse filing on July 2.

The four areas that EY Consulting was tasked with assessing are:

(i)    The validity and veracity of the transactions and balances with respect to 11 identified customers on sales transactions, trade receivables and materials on site and to quantify the possible financial impact, if any;

(ii)    The validity and veracity of the purchases from six identified local suppliers;

(iii)    The validity and veracity of the IT contracts/transactions entered into with the six identified customers and two identified suppliers as well as to assess the appropriateness of the revenue and costs recognised in the financial year in relation to the identified customers and suppliers; and finally

(iv)    The existence, where possible, and validity of the transactions and balances of one identified customer and one identified supplier located in Bahrain.

Findings of SIR consistent with KPMG’s doubts

The court documents detailed that following its investigation, EY Consulting, like KPMG, had doubts on the veracity of the transactions with 11 identified customers, in relation to its first scope of work. EY Consulting estimates the total sum involving nine out of the 11 identified customers to be more than RM435 million.

KPMG came to doubt the veracity of the transactions with the 11 identified customers because of the suspicious external confirmation letters received from Serba Dinamik’s clients.

It is a standard procedure during the course of auditing for auditors to send out external confirmations to selected customers and suppliers of its client to provide confirmation on transactions such as sales, receivables and payables.

In a report to the board of directors prepared by KPMG sighted by The Edge, the auditor highlighted that only one out of 12 external confirmations sent to its clients were returned based on the auditor’s confirmation request.

Interestingly, the 11 other customer companies did not reply to KPMG’s request initially. However, these customers responded when an individual named “Encik Hafiz” sent them the requests later.

A common theme of the confirmation replies in KPMG’s findings was that the representatives signing the confirmation were not identifiable and may not even exist in the database of the various customer companies.

KPMG told the board in its report that it could not verify the authenticity of the confirmations received as it was unable to determine the existence of the individuals signing the confirmation replies.

Scope 2: Local suppliers

Under the second scope of EY Consulting’s findings for the SIR, in respect of the concerns raised by KPMG regarding six identified local suppliers, EY Consulting similarly raised concerns on the veracity of the transactions with the six, stated the court documents. The recorded transactions and other amounts were found to be more than RM638 million.

The concerns raised by KPMG’s report regarding the six local suppliers were similar to that of the 11 customers. KPMG was unable to ascertain the existence of the suppliers in question as well as the appropriateness of the purchases made during the year.

In its findings, company searches on Serba Dinamik’s local suppliers raised several common red flags. Two of the suppliers had the same incorporation date of April 23, 2019, while five suppliers with a paid-up capital of RM100,000 have the same registered office.

What is more concerning is that KPMG noted that each supplier was owned by an individual shareholder with transactions ranging between RM60 million and RM96 million.

The two suppliers that were incorporated on the same date also share the same business address. However, when the auditors paid a visit to determine the physical existence of the suppliers, they were unable to locate the suppliers at both their business and registered addresses.

KPMG then embarked on extended procedures on selected suppliers based on the contacts provided by the management. Out of the 10 suppliers, the management only provided the auditor with two contacts.

One supplier, Kekal Jitu Sdn Bhd, had only one employee, who confirmed that she was the administrative executive of the company and had just joined the company on March 1, 2021.

Scope 3: IT contracts

Meanwhile, in scope three of the SIR, EY Consulting found anomalies with respect to the IT contracts entered into by the company’s subsidiary, SDIT International Ltd, with five of the identified customers and one of the identified suppliers.

The court document stated that EY Consulting also found other anomalies with respect to other customers and suppliers that had not been identified by KPMG. It said that the total sum involved was in excess of US$76 million.

KPMG in its report highlighted that SDIT had recognised revenue amounting to US$102.5 million and a net profit of US$16.1 million since its incorporation in 2019.

However, the amount of net profit yet to be received from customers stood at US$15.2 million, meaning that it only received US$0.9 million in receipts from its customers.

The auditor highlighted that the respective contracts contained neither the company registration number nor the registered business address of the contract customers.

KPMG pointed out that six out of seven of the customers would make direct payments to subcontractors and the Serba Dinamik group received the net amount — the share of profit — arising from the arrangement between the parties. This is odd given how the contract agreement was between SDIT and the customer.

The auditor also noticed discrepancies between the names as well as addresses contained in the legal contract and the invoices and customers’ website.

KPMG said it was unable to determine the appropriateness of the transactions entered into with the customers and as such could not determine the revenue and cost recognised in 2020 for these IT contracts.

Scope 4: Bahrain customer and supplier

As for the final scope of the SIR, EY Consulting’s investigations into the matter found that the Bahrain customer could be related to the company. Likewise, EY Consulting also cast doubts on the veracity of the transactions with the Bahrain supplier. In the court document, EY Consulting estimates that the invoices and delivery orders of the Bahrain customer amount to more than US$12 million.

In KPMG’s audit, a physical visit to Serba Dinamik’s Bahrain supplier Spectrum Oilfield Solutions WLL’s commercial registration address led the auditor to a supermarket while the address provided in the statement of accounts could not be located.

Meanwhile, Serba Dinamik’s Bahrain customer LATA International’s commercial registration address brought the auditor to what seemed to be a workers’ accommodation. The auditor also found it unusual that the fax number indicated on the official website of LATA was registered under the group’s regional general manager.

KPMG said that it was not able to ascertain the existence of the supplier or the customer and the appropriateness of the respective purchases and sales transactions that took place during the year.

While Serba Dinamik and the regulators alike are not backing down in the fight, the ones on the losing end are the minority shareholders — left out of the goings on behind the scenes but unable to exit the company given the suspension of the shares.

 

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