This article first appeared in The Edge Malaysia Weekly on April 25, 2022 - May 1, 2022

EAGER to close the long-delayed financial accounts of 1Malaysia Development Bhd (1MDB) for the financial year ended March 2013, yet lacking the answers and documentation needed to do so, KPMG sought a meeting with the one person the audit firm thought could shed more light on the situation: former prime minister Datuk Seri Najib Razak. As the Ministry of Finance Inc (MoF Inc) was the sole shareholder of 1MDB, Najib in his capacity as finance minister was the representative shareholder.

At a meeting on Dec 15, 2013, Najib conveyed that he was aware of 1MDB’s investments in its special-purpose vehicle Brazen Sky Ltd but maintained that 1MDB could not disclose the details of the investment, as it was “confidential”, KPMG managing partner Johan Idris testified last week as the 14th prosecution witness in the ongoing 1MDB-Tanore trial.

Holding up the audit was the lack of information and documentation to allow KPMG to ascertain the value of underlying assets that 1MDB invested in through Brazen Sky in a Cayman Island-based hedge fund called Bridge Global SPC. Subsequently, the investments were revealed to be six promissory notes worth a combined US$2.318 billion that turned out to be worthless, and Brazen Sky, a sham company associated with fugitive-financier Low Taek Jho (Jho Low), who is alleged to be the mastermind behind the theft of billions of dollars belonging to 1MDB.

During cross-examination by Najib’s counsel, Tan Sri Muhammad Shafee Abdullah, Johan said: “The management doesn’t know [the details of the investments]. The board doesn’t know. They want us to sign [off the account].

“We have no alternative but to ask to see the shareholder [Najib]. So, that is what we did — to seek clarification if he knows anything the board does not know.”

Johan was the only partner of the audit firm allowed into Najib’s house that night, as two other senior partners — Foong Mun Kong and former managing partner Mohamed Raslan Abdul Rahman — were informed by former 1MDB chief financial officer Azmi Tahir that Najib wanted to meet with only the incoming managing partner.

The external auditor for 1MDB from 2010 to 2013, KPMG had yet to sign off on the strategic development company’s audit report for FY ended March 31, 2013, and the accounts were already more than six months past due even though the audit firm had requested the pertinent information since April.

Johan recalled typing meeting notes at 2am after he returned home from the meeting with Najib. 1MDB representatives did not keep minutes, as the meeting was supposed to be informal.

In his witness statement, Johan stated: “I also do not understand why 1MDB refused to disclose the information about underlying assets that are said to be confidential. Furthermore, there were no supporting documents presented to me at that time to show that information is confidential.”

At the meeting, Najib asked why KPMG was “still suspicious” about the underlying assets and asked Johan whether he could accept the explanation that the information had to be confidential. Moreover, he wanted to know whether the explanation was enough for the firm to sign off on the accounts.

Johan replied that the evidence was needed, as the audit had to comply with the International Standard of Auditing (ISA) and Financial Reporting Standards (FRS), failing which KPMG would have to add a disclaimer of opinion over 1MDB’s 2013 financial accounts.

“Since accounting standards have the force of law, non-compliance with accounting standards indicates that 1MDB is also non-compliant with the law,” he added.

Voicing concern over the delay, he said Najib also questioned why KPMG could not accept BSI Bank’s confirmation of the information, noting that it was an international bank.

Again, Johan said he pointed out the lack of information pertaining to the “underlying assets” of Brazen Sky’s investment, adding that KPMG needed to obtain evidence “on the existence, accuracy, completeness and valuation of the investment” and that merely relying on third-party confirmation was insufficient — even if that confirmation came from custodian bank, BSI Bank.

At this point, Johan said former 1MDB chairman Tan Sri Che Lodin Wok Kamaruddin requested that KPMG be “reasonable” and not ask for information that 1MDB could not provide. Apart from Azmi, 1MDB’s then CEO Mohd Hazem Abdul Rahman was the third company executive at the meeting.

Johan — KPMG managing partner since 2014 and employee for more than 20 years — said he pointed out that the audit firm was merely following established standards and, by extension, the law.

Najib then suggested that KPMG go to Hong Kong to complete the audit process, adding the audit should be done professionally and consistent with good governance.

As the 45-minute-long meeting came to a close, however, Najib stated that he would like to see the accounts closed by Dec 31. His comment appeared more “like an ‘arahan’ [instruction] to me”, Johan, 56, said in response to deputy public prosecutor Deepa Nair Thevaharan’s question about his impression of Najib’s request.

Johan told the court that he had kept mum at the time. “I did not comment, as I could not commit whether I could sign off by that date unless I can receive the information by [then].”

During cross-examination, Johan said the board and management had conveyed to him that they were “under pressure by the shareholder” to resolve this issue.

Shafee highlighted that Najib had said it was fair for KPMG to have the information needed.

Shafee: PM directed 1MDB management in front of you, correct?

Johan: Correct.

Shafee: [Did he say,] Johan, if you don’t close, you will be sacked?

Johan: [He said] we would like to see the accounts closed.

Shafee then asked, “Isn’t it fair for the sole shareholder to want the pending account to be closed? Until the end, he didn’t put pressure?” There was no audible answer from Johan.

Shafee also asked Johan about a RM340.92 million settlement reached in 1MDB’s civil suit against the firm, which the finance ministry had announced in January 2022. The funds would be transferred to Malaysia’s Assets Recovery Trust Account.

Johan maintained that “a commercial settlement” was reached.

Shafee: You settled on a commercial basis, maybe even without admission of fault or liability, it could be all that. But, the suit itself, wasn’t it a negligence suit?

Johan: That is what they accused us of.

It was previously reported by The Edge that the government, MoF Inc and 1MDB and its subsidiaries had sued KPMG through its 44 directors for US$5.64 billion for alleged breaches of contract and negligence in the audit and certification of 1MDB’s financial statements for FYs ended March 31, 2010 to 2012.

About two weeks after the meeting with Najib, 1MDB’s sole shareholder MoF Inc terminated KPMG’s services with immediate effect. The notice was delivered via a letter, dated Dec 31, from 1MDB to KPMG.

The letter, citing a notice from MoF Inc, did not provide the main reasons for the abrupt action but merely stated that Deloitte Malaysia would be taking over.

Johan said that, in a letter dated Jan 6, 2014, KPMG responded to the termination and reiterated the reasons that the financial accounts could not be signed off.

In his witness statement, Johan also said he did not recall whether Najib was referring to notes at the meeting. Other witnesses had testified that Low had emailed talking points for the meeting, and suggested that Najib “should not talk too much” and should express confidence in BSI Bank.

Earlier in the week, Azmi had testified that KPMG’s request to meet with Najib had taken 1MDB by surprise. “I was surprised along the lines [of] ‘what was the purpose’? The shareholder [had already conveyed that everything was okay]. [But they said] if the PM accepts, then we sign off [on the account].”

Azmi said the request was made in a phone call by KPMG’s engagement partner for the account, Ahmad Nasri Abdul Wahab.

When Azmi called Low to inform him of the request, the latter commented, “Sure ah? Sure ah? [that they will sign off] after the meeting?”

Najib is charged with four counts of abuse of power in enriching himself with RM2.3 billion of 1MDB funds and 21 counts of money laundering of the same amount. He could face a fine and up to 20 years’ imprisonment if convicted.

The trial continues on May 9 before high court judge Collin Lawrence Sequerah.

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