Overview & Background
Serba Dinamik Berhad is an engineering service provider company focusing mainly on the Oil & Gas segment. Its key business unit includes Operation and Maintenance (O&M), Engineering, Procurement, Construction and Commissioning (EPCC).
Ever since its IPO, the stock has been on a bull run, going up as high as 300%. Sadly, a recent audit issue raised by its appointed external auditor KPMG has led to a massive share selldown. Serba Dinamik’s stock price tank down 75% as of the time of writing.
Even though the events have not reached a conclusion, there are some pointers and lessons for a retail investor to take note of. This will not be the last real-life example of a company raising red flags from its auditor. Hence, here are some pointers to take note of if you spot a similar case in the future.
We would go through the entire chronological events in order to pinpoint a series of red flags.
Auditors are and should be neutral
Auditing is a check in place to ensure that a company’s financial statements are free of material misstatements, whether due to fraud or error. In fact, for all listed companies, their appointed auditors are certified by the regulatory authorities or possess certain specified qualifications.
A fraction of the shareholders of Serba Dinamik might be furious by KPMG’s action and decision. But being one of the Big Four accounting firms, KPMG’s concern should always bear some weight. This is especially true when it comes to auditing opinions and issues.
So whenever an audit red flag is raised in the future, always take the side of the auditor. Auditors are independent, acts in the interest of the truth and in a retail shareholder’s best interest. Sure, they might not always be right. But their credibility and status, especially being globally recognized, means that issues raised should be something to be wary of.
Directors should never threaten to remove an external auditor
Whenever an external auditor raises their concern, the directors of the company should focus on closing the gaps. Going against that and even threatening to remove the auditor triggers yet another red flag that something could be amiss.
The board even requests for KPMG to resign after the initial threats, which further impairs the corporate governance structure of the company. Such cohort to escape the negative limelight raised by a neutral external party should pre-empt the board might not be acting in favour of the retail shareholders.
Newly-appointed independent directors and chairman are not so independent?
Independent directors are crucial pillars to safeguard the corporate governance of a company. Hence, all independent directors must maintain neutrality with company executives and also among other directors.
According to a deep dive on the recent independent directors’ appointment by TheEdge, all 3 new appointments seem to be linked with each other. This further raises more questions on whether the 3 appointments can strengthen the corporate governance of Serba Dinamik.
Derogatory remarks on auditors
The newly-appointed Chairman spare no time to challenge the concerns raised by the auditors, by making derogatory remarks.
Branding KPMG as “shop lot auditors” in a press conference instead of assuring that the company will cooperate in addressing auditing concerns is alarming. Since the company share price has already been plagued by auditing issues, offering reassurance of a way forward would be a better way.
Instead, going head on to stamp his authority which ultimately led to the resignation of KPMG. This led to a bigger share price correction.
The management executives of all companies would have to deal with external auditors on an ongoing basis to ensure the accuracy of the company’s statements. Hence, it is best for the Executives of a company to revert to the public on its efforts to rectify any concerns, instead of giving derogatory remarks.
Suing and forcing the resignation of auditors
Since receiving legal threats from Serba Dinamik, KPMG has resigned due to its inability to independently discharge its duties.
A series of unwanted events continue to transpire. From the auditing issues made known to the public, to derogatory and legal threats that eventually forced the resignation of KPMG.
External auditors are key stakeholders that ensure corporate governance and that retail shareholders’ interests are intact. This is done by ensuring that results reported by the company tie back to the daily business growth and prospects of a company.
Now left without an external auditor in place, Serba Dinamik faces yet an uphill battle to appoint one, and also to appoint another auditor as an independent reviewer.
No one could have foreseen the initial blow to the stock prices of any company that gets embroiled in an auditing issue. But how a company react and reassures the public is an ongoing event that most of us can gauge and judge accordingly.
Accounting can be dynamic according to various circumstances and industries. But with a regulated and licensed external auditor coming in place to ensure the right metrics and standards are used, little can go wrong.
Furthermore, it is always crucial to take unaudited quarterly results with a pinch of salt, especially for newly IPO companies. Hence, this is also the main reason that Kaya Plus always analyze based on audited statements for a true reflection of a company’s prospects.
However, this does not mean that auditors will always be right. But the chances of them purposely stirring up unwanted attention and issues seems ludicrous.
How Serba Dinamik reacted, serves as a reminder of how company Executives should respond to similar events in the future.
Do you think that Serba Dinamik responded well? Or they could have done better?
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