Two lawsuits filed within days of each other in late July and early August have renewed a question that matters to every investor. When financial statements rest on estimates that could go either way, what does a “clean” audit opinion actually guarantee?
The liquidators of Serba Dinamik Holdings Bhd are seeking at least RM1.56 billion from KPMG, alleging that unqualified opinions between FY2016 and FY2019 failed to detect revenue overstatements of up to 87%. The suit claims the misstatements would have been uncovered earlier, before the group paid RM1.795 billion in dividends, which the claim links to the alleged audit failures. Around the same time, the Sabah government, together with other plaintiffs, sued Ernst & Young for RM2.4 billion over its audits of Sabah Development Bank, alleging that EY issued unqualified opinions for years even though, according to the claim, 85.94% of the bank’s loan portfolio had been recorded as non-performing loans by FY2018.
Both claims remain before the courts, and the allegations have not been tested at trial. The cases will turn on negligence and evidence. But they expose a deeper structural tension that the courts cannot resolve. There is a gap between what an audit opinion actually asserts and what investors assume it guarantees.
The lawsuits concern alleged audit failures. The broader issue, however, exists even where there is no allegation of failure. To see that tension clearly, it helps to separate alleged audit failure from the routine judgements in every set of audited accounts. Serba Dinamik and Sabah Development Bank are outlier cases. The structural issue is visible in ordinary audits of Malaysia’s largest companies, whose auditors have not been accused of anything.
Maybank’s FY2025 audited accounts provide one illustration. The auditors identified expected credit losses on loans, advances and financing as a Key Audit Matter (KAM). These assets represent 64.3% of the group’s total assets. The auditors stated that measuring expected credit losses (ECL) “requires the application of significant judgement and increased complexity”, involving forward looking factors, probability weighted scenarios and management overlays. They tested models, challenged assumptions and engaged credit modelling specialists. They found no material exceptions. The opinion was unqualified.
Tenaga Nasional Bhd’s FY2025 statements offer another. Post employment benefit liabilities of RM13.3 billion at group level were valued using actuarial assumptions on salary increases, medical cost inflation and discount rates. The auditors “focused on this area because of the significant estimates made by management”, checked assumptions against historical data and compared discount rates to market yields with valuation experts. They found no material exceptions. The opinion was unqualified.
These are not presented as cases of audit failure. The system is working as designed. Yet TNB reports that a one percentage point movement in the discount rate can change its defined benefit obligation by more than RM1 billion. Maybank’s KAM similarly describes extensive audit procedures without showing investors the range of possible outcomes. The KAM explains the judgement, but not how sensitive the number may be.
International Standard on Auditing (ISA) 701 requires auditors to communicate KAMs and allow them to highlight matters requiring significant auditor attention, while the opinion remains on the financial statements as a whole. But the framework is binary while uncertainty is not. Two competent valuers may reach different estimates, and a figure can be reasonable without being the only supportable answer. KAMs can therefore become lists of procedures rather than explanations of risk. Estimation uncertainty exists on a continuum while audit reporting remains categorical. The question is not whether KAMs should exist, but whether they tell investors enough about how uncertain the most consequential numbers really are.
Malaysia’s Audit Oversight Board has identified “failure to sufficiently review significant risk areas and significant judgements” as a recurring enforcement concern. The International Organization of Securities Commissions (IOSCO) highlighted in its November 2025 statement the importance of high-quality valuation practices, appropriate use of valuation experts and rigorous audit assessment. The International Forum of Independent Audit Regulators (IFIAR) has likewise identified accounting estimates, including fair value measurement, as an area where audit regulators have consistently found deficiencies.
When auditors use KAMs to flag a valuation without qualifying the opinion, they are telling investors that the matter involved significant judgement but that the financial statements nevertheless met the requirements for an unmodified opinion. That may be technically correct for Maybank and TNB. But the Serba Dinamik case illustrates how insufficient that signal can be for investors. The concern is not simply whether auditors get the judgement wrong. Even a sound audit can leave investors unable to see how fragile a reasonable estimate may be. That is the gap the current reporting model should address.
Four reforms would help. First, require sensitivity disclosure in the KAM. Auditors should disclose the reasonable range of outcomes and its impact on the financial statements. TNB’s statements already include sensitivity analysis on discount rate assumptions. This information should be connected directly to the KAM, rather than leaving investors to piece the implications together from different sections of the annual report. Second, consider graduated reporting for significant estimation uncertainty. Such reporting could signal that an estimate falls within an acceptable range but remains highly sensitive, without implying that there is a material misstatement. The existing Emphasis of Matter framework under ISA 706 could provide a starting point. Third, require independent valuation review for specified material Level 3 assets. A second valuation would provide an additional check on management bias. The auditor could assess the divergence as evidence and consider the additional data point when applying professional scepticism. Fourth, strengthen audit committee disclosure. Audit committees should disclose how they challenged management’s fair value assumptions. If the committee accepted management’s numbers without meaningful scrutiny, that should be visible to shareholders.
None of these solutions are radical. Each builds on existing frameworks, including Malaysian Financial Reporting Standard 13 (MFRS 13), ISA 701, ISA 540 and Malaysia’s corporate governance code. They require recognition that the current approach to fair value auditing, while technically sound, is insufficiently transparent for the risks involved.
Judgement is unavoidable. Opacity is not. A KAM should do more than say, “we looked at this”. It should help investors understand what drove the estimate, how sensitive it is and what could change the auditor’s assessment.
A “clean” audit opinion was never meant to guarantee that every number is right. But as financial statements rely increasingly on complex estimates, audit reporting should show more clearly how uncertain the most consequential numbers are.
Hijat A Jabbar and Siti Zabedah Saidin are professors of accounting at Universiti Utara Malaysia.