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Auditors should avoid ditching companies midway on audit work
IT had seemed like a standard boilerplate event in October last year when Singapore's mainboard-listed Mirach Energy announced a change of external auditors from Ernst & Young to BDO, citing, among other things, a potential savings of up to a quarter in audit fees.
The change got the nod from the Accounting and Corporate Regulatory Authority (Acra) as well as Mirach's shareholders.
Barely a year later, investors must have been aghast when Mirach announced that BDO was planning to ditch the company following unresolved differences or disagreements with the management since March over the accounting treatment, chiefly relating to revenue recognition, of a Malaysian subsidiary undertaking durian cultivation on land formerly used for logging in Kelantan.
This was no benign development - especially for Mirach, which is en route to logging its fifth year on the Singapore Exchange's dreaded Watch-List with no visibility of an exit.
Left in the lurch
When auditors quit before their engagement ends, and with unresolved key audit matters, investors can be left in the lurch.
Evidently, Acra agrees. Last week, Mirach disclosed that the accounting body has rejected BDO's bid to resign as auditor on the premise that it was "premature" and had serious public interest implications.
Acra also stated that it wasn't satisfied that the reasons provided by BDO constitute exceptional circumstances to justify the premature resignation.
With that, BDO's duties as auditor of Mirach and its subsidiary will continue until the term ends.
As a result of the disagreement, Mirach's audit for FY2019 was put on hold. In turn, the company's annual general meeting is delayed and so is its first-quarter report card.
Mirach is also seeking to kick the can down the road for the issue of its second and third-quarter financial statements.
Based on Mirach's unaudited figures, it made a loss of US$379,000 in 2019 versus a profit of US$383,000 in 2018. This was on the back of a 7 per cent fall in revenue to US$3.4 million. Almost all - 96 per cent to be exact - of that revenue came from RCL Kelstar. This is the subsidiary over which BDO has raised questions. The revenue was reported as coming from "management services provided to agriculture business partners in Malaysia".
Mirach's other businesses across the causeway are disparate, from construction of low-cost houses in Perak to a delayed residential townhouse project in West Malaysia.
Last November, it acquired a stake in an e-commerce and trading firm in China. It has whittled down its exposure to the oil and gas industry to a minority interest in an Indonesian marginal oil field, and has been trying out a diversification strategy since.
But its attempts have underwhelmed, to say the least.
That context makes it even more crucial for investors to be provided with an audit conclusion - clean or otherwise - on Mirach's FY2019 statement.
As much as possible, auditors should avoid quitting on firms midway through their audit work. Investors rely on and expect auditors to be sceptical over the assertions and information provided by company's management as they vet the financial statements.
As the corporate landscapes here and abroad are beset by accounting scandals, auditors are understandably keen to distance themselves from companies with weak or doubtful standards.
But it is especially in this context that they should step up their game, and more so given that the profession is now drawing heightened scrutiny.
By doing so, more pressure can be piled on where it counts the most: on company management, boards and audit committees, whose responsibilities to provide information must be absolute.
Besides, washing one's hands off a firm's audit as doubts loom may unwittingly make it too convenient for company management.
Such a move is - rightly - to be avoided.