ACT4161

PUBLIC SECTOR ACCOUNTING

INDIVIDUAL ASSIGNMENT

TOPIC:
1MDB SCANDAL: THE DEATH OF TRUST IN
GOVERNMENT AUDITORS

PREPARED FOR:
DR. ZAIDI BIN MAT DAUD

PREPARED BY:
NAME MATRIC NO.
MUADZ BIN KAMARUDDIN 191264

DATE: 19/10/2018
Table of Content
No. Items Page

1. Introduction On 1MDB Scandal 2

2. National Audit Department and Auditor General of Malaysia 3

3. Relation Between 1mdb and Government Auditor and The Reasons for 4

Death of Trust

4. Implications of Death of Trust in Government Auditors 5

5. Solutions to Gain the Loss Trust On Government Auditors 6

6. References

1
Introduction On 1MDB Scandal
In 2015, Malaysian was shocked by the bizarre news of 1MDB scandal, a scandal that
is not only spoken by Malaysian, but also by other countries. 1Malaysia Development Berhad
(1MDB) is a strategic company established in 2009 that is located in Malaysia and is wholly
owned by the Minister of Finance. The purpose of the establishment of this company was to
drive strategic initiatives for long-term economic development for the country by building
partnerships globally and to promote foreign direct investment.
The 1MDB scandal, which is still undergoing its investigation is a political scandal that
occurs in Malaysia. Back then, in 2015 former Malaysia’s Prime Minister Dato' Sri Haji
Mohammad Najib bin Tun Haji Abdul Razak was accused of money laundering for over RM
2.67 billion to his personal account. That money was believed to come from a government
strategic company, the 1Malaysia Development Berhad.
The issue of this scandal is, how did the money flowed through the company and around
it, and eventually channelled into personal accounts, illegally. The United States Justice
Department says that about half a billion of U.S. dollars flowed from the company’s fund,
following through a complex line of transaction that is said to be opaque, and through
fraudulent offshore or shell companies. The fund was said to be used to finance the spending
sprees by corrupt officials. Meanwhile, Swiss investigators say that up to 7 billion of U.S
dollars slipped pass through 1MDB and one of this unit. It is believed that a businessman named
after Jho Low and a group of Malaysians led by him, diverted money from 1MDB into personal
accounts disguised to be looked as legit businesses, then transferred some of the money to the
group while some of them are suspected to end up in Najib and his family’s accounts. The
interesting part is, the money was said to be a donation from the Saudi Royal family, yet United
States investigators believed that the money instead came from an offshore company controlled
by one of the central figure, Jho Low.
Despite the fact on Najib’s accusation, the people and companies who involved behind
the scene were actually quite a number. Even though not all of them were accused of involving
in the money laundering or channelling activity, these financiers and financial companies have
found themselves as being a part of this scandal saga. The first to make in the list is Jho Low,
the one who consulted 1MDB was said to be the central figure behind this bizarre scandal.
Secondly, Riza Aziz, stepson of the main figure of this scandal, accused of funding a sum of
money that is believed to be channelled from 1MDB. While there were other persons who
involved in this scandal saga, the mentioned names were said to be the most likely to be
involved in this scandal, after the former Prime Ministry.
This scandal saga was believed to actually began from 2009, back then when Najib took
over as the sixth Malaysia Prime Minister where he launched the 1MDB. But to this scandal,
it was only known by the world in 2015, after six years of the ploy took place. It was when a
Switzerland whistle-blower Xavier Andre Justo leaked documents of a joint venture between
PetroSaudi International, an oil and gas company with 1MDB. Then, it is the moment of truth
where the scandal saga started to expose toward investigations, reports, accusations, and many
more. To make it worse, United States attorney general describes the 1MDB scandal as
“kleptocracy at its worst” in 2017 and labelled as the world’s biggest financial scandal by
journalists. Despite all that, this scandal is still undergoing its investigation, until to this date.

2
National Audit Department and Auditor General of Malaysia
National Audit Department is an independent government agency in Malaysia that is
responsible to carry out the audits on accounts for Federal Government, State Government and
Federal Statutory Bodies. Apart from that, it also carries out the audits for the activities of the
Ministry, Department, Agency and Companies under the Federal and State Government. The
reason is that it is their role to provide and aid the accountability of those accounts. In Malaysia,
the head of government or general auditors in the National Audit Department is named as
Auditor General of Malaysia.
According to the National Audit Department, the definition of the audit can be as a
systematic examination or check, continuous evaluation and analysis of financial statements,
records, operational and administration of organisation to determine whether the general
accounting principles, management policies, regulations and procedures and being followed
and complied with.
The reasons why an audit must be carried out are to ensure all rules and regulations are
being complied with, to expose any unwarranted factor or element which can lead to
inefficiency, ineffectiveness and uneconomical procedures.
The responsibilities of the Auditor General is to audit the accounts of the Federal and
State Governments, Government Agencies, Public Authorities and other bodies as ordered by
His Majesty, the Yang di-Pertuan Agong. With that, the Auditor General has the full power to
request all information and explanation to fulfil the duty of audit. The Auditor General also
have the rights to examine all documents and can ask the individual person to give an
explanation by oaths as well as giving power to any individuals to investigate and examine on
the behalf of Auditor General. Furthermore, the Auditor General can also get a consultation in
order to pertain the duty. With all that, all the information and statements gathered by the
Auditor General that are related to the duty are deemed as confidential.
The scope of auditing that the Auditor General covers are the Financial Statements
Auditing, where it certifies the annual financial statements submitted by the Federal and State
Governments or Government Agencies as in accordance to the accepted accounting standards
and as required by the law. The Auditor General will give his opinion on the financial
statements whether those are prepared in a true and fair view and the records are updated and
maintained properly. Second, the Compliance Auditing to determine the Ministries,
Departments, Government Agencies’ financial management complies the laws and financial
regulations and procedures. Third, the Performance Auditing to assess whether the execution
of Government programmes and activities are held in an effective, efficient, and economical
manner, and whether their intended objectives of the programmes are achieved or not.
The National Audit Department has the responsibilities for carrying out the audits on
26 Ministries and 96 Departments, 13 State Governments Agencies, 124 Financial Statements
and 12 Consolidated Finds of Federal Statutory bodies, 144 Local Authorities and 15 Islamic
Councils, Government Agencies and 496 companies which received grants from the
Government or more than 51% of its share capital is owned by the Government.

3
Relation Between 1mdb and Government Auditor and The Reasons for Death of Trust
The relation between 1MDB and the government auditors began with a series of events.
Back then, in October 2010, during a parliamentary session, 1MDB explained that it accounts
are fully audited and signed by Klynveld Peat Marwick Goerdeler (KPMG). Other audit firms
such as Deloitte was involved in the valuation and analysis of the portfolio, while Ernst &
Young provided tax advice for 1MDB, as to counter on the criticisms and controversies for
lack of transparency given by 1MDB accounts, and on behalf of the criticism of profit of
RM425 million.
Not stopping its reign on that criticism, 1MDB once again raised attention by asking
for a six-month extension on the annual report meant to be filed on 30th September 2013. On
the other hand, three auditors are changed since the commencement of its activities in 2009
was already considered suspicious.
The story of this scandal saga did have a lot of stories behind it. In 2011, the transfer of
Sungai Besi Airport land to develop Bandar Malaysia took place. It is not about the transfer of
the land that is questioned, but the progress of the Bandar Malaysia and the performance of
1MDB after accruing a whopping RM3.5 billion of debt on loans and Islamic Bonds for the
purpose of funding the project and the acquisition of the land. Following the series of
suspicious plot, 1MDB awarded an RM2.1 billion contract to Perbadanan Perwira Harta
Malaysia (PPHM), a subsidiary of Lembaga Tabung Angkatan Tentera (LTAT) to develop
eight sites for the relocation the military base in Sungai Besi. To rationalise its debt, 1MDB
signed an agreement with a consortium comprising Iskandar Waterfront Holdings and China
Railway Engineering Corporation to sell 60% of its stake in Bandar Malaysia Sdn. Bhd.
Just to make it even worse, 1MDB has been reported of having a proper external audit
since 2013, the year where it asked for a six-months extension on the annual report. This is as
of the result from Deloitte Malaysia, their respective auditors since the beginning of the period
of 1MDB’s commencement, issued a statement in July 2016 stating that their audit reports of
1MDB financial statements, dated on March 2014 and November 2014 covering financial years
of the extended year 2013, and 2014, are no longer reliable for users.
In early 2015, the year where the public discontent started to spread out wide across the
nation at the seemly lack of financial transparency at 1MDB, the Prime Minister at that time,
who is also happened to be the Chairman of 1MDB’s Board of Advisor, ordered the Auditor
General of Malaysia to carry out an audit of 1MDB, the day where 1MDB scandal saga began
to relate with the Auditor General of Malaysia. However, after the audit had been carried out
and performed completely, the final report was classified as an Official Secret and are only
available to the Public Accounts Committee (PAC) for the purpose of investigating any
improprieties at 1MDB. Even with the secrecy and confidentiality, the copies of the reports
somehow leaked on the internet. It was also reported that 1MDB has accumulated debts with a
sum of nearly to RM42 billion, caused by the selling of bonds at a very low price in 2013. As
even after the appointment of the Auditor General of Malaysia, 1MDB once again made its
move. This time, on 2015, an amount of RM2.6 billion had been banked into Najib’s personal
account, claimed to be a fund from donors in Saudi Arabia and not from 1MDB, stated by the
Malaysian Anti-Corruption Commission.
With all of the events and series of channelling of money and the lack of financial
transparency, yet the Auditor General of Malaysia elected to retain the financial reports as
classified. From this action taken by the Auditor General of Malaysia, we can see the reason
why does the public have lost their faith and trust towards the government auditors.

4
Implications of Death of Trust in Government Auditors
With the loss of public trust towards government auditors, unwanted implications may
and will arise. To be said, these implications are directly related and indirectly related to our
main topic. There are several implications that have already happened and can happen if no
further actions are taken.
First, the public will no longer rely on the government auditors. This is a simple and
general rule of breach of trust, where people will no longer believe and rely anymore on the
person who breached a trust before. Not to deny, but this general rule or understanding does
apply even for the government itself as well as its departments which includes the audit
department and other agencies. With this scenario happening, it can lead to an even bigger and
worse impact on the government, and ultimately an impact on the nation.
Secondly, the loss of trust in government auditors may indirectly affect the nation. With
the actions by the government auditors on hiding the information of the still ongoing money
laundering scandal in 1MDB, it may repel foreign investors from investing in the nation. We
do know that even the activity of money laundering itself will affect the interest of foreign
investors from investing in the nation, but with the involvement of government auditors who
tried to disguise the activity to be a legit business activity, it leads to even worse. Imagine a
country which the politicians are accused of corruption, and the persons whom we presumably
trust are supposed to audit the documents with a full disclosure and fair understanding hid that
information from the public, who would want to invest in such country.
Third, the loss of trust in government auditors will affect the reputation of the nation
itself. It is like a double trouble for auditors to falsely produce an audit report and stated that
the company disclose its financial statements in a true and fair view, from the perspective of
business. But how about government auditors which not to falsely produce an audit report, but
to hide it from being known to the public. In the perspective view of the public, where
government auditors work for the government, and the government governs the nation, how
does actually the nation is performing? The public might wonder whether the auditors are
actually performing its duty in an honest manner or otherwise towards the government, its
departments and agencies. While they may have hidden the information on a company which
is wholly owned by the Ministry of Finance, have the auditors did the same on the reports of
the government? With that, speculations and assumptions will rise from the public. To say, if
the assumptions and speculations are in favour of the government auditors, it may not seem to
be a problem at all. The case is, what if the speculations and assumptions are in the oppose of
them? would not that be bad for the auditors and eventually affect the reputation of the
government and also the nation itself?

5
Solutions to Gain the Loss Trust On Government Auditors
With all of the bad implications arise, corrections and improvements must be executed.
Government have to play an important role in order to gain back the trust of the public that
they have lost. There are several solutions that can be made in order to gain back the trust.
First, the government can reorganise or reform the structure of government auditors. In
the sense of the public, they may have to appoint a new head of general auditor, replacing the
current one. this is because the Auditor General of Malaysia is the one who audited the financial
statements of 1MDB after being appointed by the former prime minister and decided to conceal
the information to the public. From this action, we can see that the Auditor General of Malaysia
is practising a dishonesty manner and this practice among auditors is the worst among of all.
Second, political influence must be separated from the general auditors. From this
scandal, we can see that political influence play a very crucial role in the government auditors’
behaviour. They concealed the information of 1MDB to protect the key persons in the
company, speaking of which, these key persons have strong political influence and it affects
the behaviour and decisions made by the auditors. Like the practice of independence of auditors
from the directors in companies in order to prevent any self-interest manner, the similar practice
can be made between government auditors and people with strong political influence.
Third, the implementation of rules and regulations need to be more efficient and
effective. To make new rules and regulations does not seem like a good action to take for the
reason that the regulations and rules have already exist, but somehow the implementation of
those rules and regulations are not being properly applied. The decision for concealing the
information of 1MDB to obscure the information from the public is actually a wrongdoing, yet
no legal actions were taken.
From there, we can see that government auditors played an important role in auditing
the government related accounts, and as general, would be trusted by the public. Eventually,
once the trust had been breached and broken, it is not that easy to gain their trust back. Even
for the worst case scenario, when the public has lost their trust in the government auditors,
which involved the government itself, in the end, the public would have wanted a significant
change and that change can be the change of the ruling government itself.

6
References
1. https://en.wikipedia.org/wiki/1Malaysia_Development_Berhad
2. https://en.wikipedia.org/wiki/1Malaysia_Development_Berhad_scandal
3. https://www.scmp.com/topics/malaysia-1mdb-scandal
4. https://www.bloomberg.com/news/articles/2018-05-24/how-malaysia-s-1mdb-
scandal-shook-the-financial-world-quicktake
5. http://www.theedgemarkets.com/article/how-malaysias-1mdb-scandal-shook-
financial-world
6. https://www.reuters.com/article/us-malaysia-politics-najib-timeline/timeline-the-
1mdb-scandal-that-led-to-the-arrest-of-former-malaysian-pm-najib-idUSKBN1JT1CZ
7. https://www.malaysiakini.com/news/443044
8. https://www.cnbc.com/2018/09/27/billion-dollar-whale-an-inside-look-at-jho-low-
and-the-1mdb-scandal.html
9. https://www.theguardian.com/world/2016/jul/28/1mdb-inside-story-worlds-biggest-
financial-scandal-malaysia
10. https://www.thestar.com.my/news/nation/2018/06/27/justo-returns-to-help-in-1mdb-
probe-exclusive-swiss-whistleblower-provides-macc-with-vital-informati/
11. https://www.astraitstimes.com/asia/se-asia/former-director-of-saudi-energy-firm-
linked-to-1mdb-joint-venture-met-pm-mahathir
12. https://www.audit.gov.my/index.php/en/component/content/article/9-
uncategorised/210-soalan-lazim
13. https://en.wikipedia.org/wiki/Auditor_General_of_Malaysia
14. https://en.wikipedia.org/wiki/National_Audit_Department_(Malaysia)
15. https://www.thestar.com.my/business/business-news/2017/02/25/new-
auditorgenerals-demanding-mandate/
16. https://www.thestar.com.my/news/nation/2017/07/31/auditor-general-report-2016-
series-1-353-recommendations/
17. http://www.anm.gov.my/index.php/en/khidmat/kelulusan-juruaudit-dan-penyelesai-
syarikat
18. http://repository.um.edu.my/33955/1/Radiah%20Othman%20Public%20Sector%20A
udit%20A%20Century%20and%20Beyond%20final.pdf
19. https://www.freemalaysiatoday.com/category/nation/2018/05/11/open-up-1mdb-
audit-report-ph-government-urged/
20. https://www.thestar.com.my/business/business-news/2016/08/27/auditors-find-it-
tough-to-unmask-corporate-fraud/
21. https://en.wikipedia.org/wiki/List_of_scandals_in_Malaysia