This article first appeared in The Edge Malaysia Weekly on June 30, 2025 - July 6, 2025

THE Audit Oversight Board (AOB) of the Securities Commission Malaysia (SC) says it suspended the registration of Chengco PLT for two years effective June 12 due to “serious audit quality issues”.

It also imposed sanctions on five partners at Chengco, who were the engagement partners and engagement quality control reviewers (EQCRs) of three public interest entities (PIEs).

Without question, the suspension of the auditor’s registration and sanctions imposed on five of its partners have cast doubt on the home-grown firm that was founded in 1993.

Matters ranging from not verifying fixed deposits placed with the co-operative to not obtaining banks’ confirmation on outstanding loans, and absent-minded staff forgetting to properly file documents have resulted in the suspension of Chengco and the loss of 36 clients, which are mostly micro-cap companies with a market capitalisation of less than RM50 million.

“We admit that there are weaknesses in the audit process. This is the reason the SC has imposed sanctions on us. But it is not a failure on audit. And we were not compromised [in terms of audit work],” Chengco managing partner Tan Wae Leng tells The Edge.

“It is not the case where we know someone in the companies and were compromised with the audit of their accounts [for Chengco] to make more profit. We are totally independent.”

Tan is one of three partners prohibited by the AOB from auditing any PIEs or scheduling funds for a year.

He explains that the AOB’s remark “failures to obtain sufficient audit evidence” in certain areas indicates that Chengco was not up to mark in certain parts of its audit procedures. He points out that it is definitely not the case of “non-existent assets”, or having assets on the balance sheet that could not be verified.

It should be noted that this is the second time that the AOB has taken action against Chengco. The audit firm was sanctioned by the board in 2019 on the grounds that it had failed “to demonstrate an improvement in overall audit quality”, the SC says in its statement. It was sanctioned for a year and had to resign from 10 public-listed companies.

This time around, the AOB suspended Hong Thuan Boon and Yap Peng Boon for two years. They were sanctioned by the board in 2019 as well. The AOB also prohibited Tan, Kong Tung Sam and Ng Kee Siang from accepting as clients and auditing any PIEs or scheduling funds for a year.

It has to be said that the previous sanctions did not seem to have jeopardised Chengco’s business, considering that 38 public-listed companies had hired the auditor prior to the latest sanctions.

The sanctions came after the AOB found multiple breaches in relation to Chengco’s failure to comply with the relevant requirements of the International Standards on Auditing (ISA), which were adopted by the Malaysian Institute of Accountants (MIA) when auditing the three Bursa Malaysia-listed companies.

The findings were in fundamental and key audit areas. These included failure to obtain sufficient audit evidence in areas such as bank borrowings, opening balances and prior year adjustments, use of going concern assumption, other payables and accruals, revenue, cost of sales, redeemable convertible preference shares and goodwill, the SC said in the June 12 statement.

In addition, the regulator noted that the audit firm’s EQCRs had failed to sufficiently review key audit documentation, particularly those related to significant judgements and risk areas. This had an adverse effect on the overall audit quality. “Recurring audit deficiencies were also found in the areas of property development costs and fixed deposits,” it said on June 16.

Tan explains that some of the clients had placed fixed deposits with the co-operative, instead of financial institutions, for higher returns. And to make matters worse, the cash was placed in the directors’ names rather than that of the companies.

“AOB found that we didn’t do enough checking on the matter such as the legality of the koperasi (co-operative) taking deposits from corporations. This is an issue that the AOB has picked on us the second time. The first sanction on Chengco in 2019 was also because two clients had placed their fixed deposits with the koperasi,” he says.

“We merely obtained confirmation from the koperasi like normally we did for deposits with the banks. We did not do extra verification to sit through with the koperasi since it is a non-financial institution.”

Another matter that the AOB was not satisfied with was the banks’ confirmation document on the outstanding balance of Chengco clients’ loans. “We signed off on the financial accounts before we got the bank’s confirmation due to the tight audit deadline,” says Tan.

The other example he cites is that the auditor who signed off on the accounts did not explain in the disclaimer issues such as how the development costs were derived and the justifications for that. “There are judgement calls made, which are subjective,” he says.

Filings and documentation are tedious but they are an important part of the audit process. “Without proper documentation, [the audit process is] considered not done,” says Tan, pointing out that as work piles up, audit officers tend to delay doing the filings.

The sanctions imposed by the AOB have also raised the question of whether Chengco’s clients would need to have their financial accounts re-audited since the board claims that the audit firm’s quality of work does not meet international standards.

“They do not need to re-audit their accounts. This is mainly because auditors are responsible for carrying out an audit to express our audit opinion as to whether the financial accounts are true and fair. The deficiencies found in our audit process do not necessarily mean the financial accounts of the PLCs are wrong or not reliable,” says Tan.

In response to The Edge’s query on whether the financial accounts of companies that had hired Chengco as auditor are in question, the AOB says it is the primary responsibility of the board of directors and management of the PIEs to ensure that their financial statements are “accurate, reliable and presented fairly in accordance with applicable accounting standards”.

The AOB’s decision to suspend Chengco from the list of registered audit firms for PIEs, including Bursa-listed companies, is rather harsh, says Tan, adding that such sanctions are usually on auditors, not audit firms. “We have appealed to the SC.”  

The SC has dismissed the appeal and affirmed the AOB’s decision.

In the next 24 months, Chengco will have to update the regulator on its efforts to improve the audit process on a quarterly basis. “We have to improve our audit procedure. We will also automate our system to improve our documentation,” says Tan.

“We hire professional auditors, not just juniors. We have about 30 to 40 MIA members on our team. There are also ACCA (Association of Chartered Certified Accountants) members,” he adds.

Chengco has a workforce of slightly more than 200. 

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