Securities Commission's (SC) uphill task to successfully charge Serba Dinamik (Part 2)

By Pearlwhite 31^st December 2021 8.18PM

RM1.438 billion of audit discrepancies that cannot be verified in the Special Independent Review (SIR) is the basis for the false statement in relation to the revenue figure of RM6.014 billion contained in Serba Dinamik’s Quarterly Report on Consolidated Results for the Quarter and Year ended 31^st  December 2020.

1. Determining the corresponding financial item sharing the false statement in relation to revenue

What could that RM1.438 billion be?  What does it consist of?

Accounting, in its most rudimentary form, is called the “double entry system” where a recording of a financial transaction requires two entries (A Debit entry and A Credit entry).  The key take-away for the purpose of this article is that if false statements were to be committed, it requires two entries for that fraud to happen.

For example, if one were to record fictitious revenue from a RM100 million sale from a customer, it must record a RM100 million fictitious payment from the customer or any other corresponding entry.

The initial audit discrepancies highlighted by KPMG were

• Customers
• Local suppliers
• Bahrain customer & suppliers and
• IT Contracts involving multiple customers and vendors. 

Through the process of elimination by considering the following,

1. KPMG and Bursa’s Originating Summons did not raise any audit discrepancies with Cash and Cash Equivalents

Below is the financial information pertaining to revenue,  trade debtors & contract assets for Serba Dinamik for the financial years 2016 to 2020.  Bear in mind, the same analysis can be applied to Payables (suppliers and vendors).

Source : Serba Dinamik Annual Report and Quarterly Report

Based on the above information, it can be deduced that trade debtors & contract assets owed by customers of Serba Dinamik have all been settled within the stipulated timeframes.  Which is to say, with Revenues of RM20.5 billion for the financial years 2016 to 2020, only RM2.6 billion remain outstanding as at the end of the financial year 2020.

Granted, there would be cases where customers are unable to pay and there would be instances where customers’ assets would be used for partial repayments and/or bad debts are provided or written off.  Serba Dinamik had none of that and it was not a discrepancy for KPMG.

Moreover, Debtor’s payments to Serba Dinamik would be scrutinised and reviewed and the accuracy and completeness of the cash and cash equivalents would further be confirmed by Serba Dinamik’s panel bankers the likes of HSBC, RHB, and etc.,.  with bank confirmations which are initiated by the auditors themselves and reverted to by the banks directly.

2. KPMG did not raise audit discrepancies in relation to revenue and trade debtors being re-classified as expenses

As part of the external audit and SIR, auditors would scrutinise the accounting transactions pertaining to each of the trade debtors.  In cases of false statements, typically transactions of moving debtor transactions to expense requires detailed review and explanations.

3. SC’s charge relates to “exclusively” false statement is in relation to the revenue figure of RM6.014 billion contained in Serba Dinamik’s Quarterly Report on Consolidated Results for the Quarter and Year ended 31 December 2020

SC’s charge against Serba Dinamik did not mention of any involvement with the National Financial Crime Centre (NFCC), the Malaysian Anti-Corruption Commission (MACC), as well as from Bank Negara Malaysia and the Inland Revenue Board.

In this respect, Serba Dinamik did not breach Malaysia’s Anti–Money Laundering, Anti–Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) and commit tax evasion.

In conclusion, by mutual exclusivity, the only false statement in relation to revenue arise corresponding to trade debtors & contract assets which have not been fully settled with payments.

2. Determining the extent of false statement contained in SC’s charge against Serba Dinamik

In determining the extent of false statement contained in SC’s charge against Serba Dinamik, depends to what kind of documents that SC had seized.  The type of documents can be categorised into the following according to the activities within Serba Dinamik.

1. Sales and Marketing (S&M)

Typically, most documents under S&M consist of Invoices, Service Orders (from clients), Bid documents (and quotations), Letter of Awards and Contracts.  Invoices are the only document that can be reproduced by Serba Dinamik from the Enterprise Resource Plan (ERP) system. 

2. Projects, Operations and Procurement (POP)

Here is where the main activities of Serba Dinamik are conducted for its clients.  Examples of such documents are work/service requisitions (from Projects and Operations), Delivery/Receipt Orders, Purchase Requisitions (and Vendor Quotation).  There are also reports on Project and Operations statuses.  Typically, these documents exist for the purposes of Board of Directors (BOD) and Management use, Approving Committee use and/or Statutory use.  These reports contain signatures of the approving personnel.

3. Finance and accounting

Under finance and accounting, documents like payment vouchers (which would also contain in bundle the S&M and POP documents), bank-in-slips, customer/vendor/bank statements, Bank Negara and banking related forms, customs declaration forms, tax forms and etc.,.

4. Registered Address / Company Secretary

The registered address (usually the Company Secretary’s Office) would contain all the documents pertaining to BOD and Management in the form of the meeting registers which contain all the deliberations and approval of all contract awards (legal/commercial arrangements, entities structure and financial arrangements and financial appraisals), projects (details of project statuses, issues) and Operations (details of operation statuses, issues).

3. Why SC faces an uphill task to successfully charge Serba Dinamik

1. Contract Assets (Project Works, Project Assets and Inventories)

IFRS 15 Revenue from Contracts with Customers (superseded IAS 11 Construction Contracts from 1^st January 2018) defines a contract asset as an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).

In simple terms, a contract asset arises when an entity has done work for a customer that has been recognised as revenue to date but has not yet issued an invoice or received payment for that work.

The contract assets will pose a challenge to be verified because what is verified is the work in progress (WIP) and finish product since 31^st December 2020.  The inventory and labour have been used in the process of construction.  It is a monumental task to review the weekly project reports and all the other inventory and work records, delivery and receipt documents to confirm.

The assets which may have been part of the construction, like gensets, topside equipment can be tracked easily.  However, items like piping cannot be traced accurately as they have used in the construction and not so visible.  In addition, machinery can be in different locations then and now.  The requires a complete documentation verification, review delivery/receipt logs etc for material items, but there are some that cannot be traced since it is not visible now, either lost or junked.

Why SC has no basis to charge Serba Dinamik

What is of concern is, are the project works, assets and inventories that are to be verified (wherever possible) the same ones as highlighted by KPMG?  Based on this, the review by SC no matter how successful, will be inconclusive for those that cannot be verified because it has been consumed or lost in the process of executing the work.

2. Trade debtors

The amounts owing trade debtors were initially questionable as highlighted by KPMG because the customer didn't respond to confirmation of balances, its offices could not be found or lead to a different location to which Serba Dinamik responded were due to misinterpretation with the Arabic letters and punctuation.

So why would physical place and location verification be so important then?  Physical sighting as auditors calls it, is important because it confirms “existence”.  Existence is the objective reality or being visible to our eyes.  Existence is what gives credibility and legitimacy to the to what are stated in the financial statements. 

If existence cannot be verified, whatever that is stated in the financial statements can be fictional, no matter the documentation and signed confirmations.

Why SC has no basis to charge Serba Dinamik

The parties involved in the SIR previously were un-willing to cross Malaysia’s borders which was re-affirmed in a letter dated 29^th October 2021 from EY to Serba Dinamik that the factual findings update was subject to verification and collaborativeness.  If EY (and KPMG) had used its international affiliates in those countries, there would not have been issues pertaining to verification in the very first place with KPMG and EY completing it up to 29^th October 2021.

The question is, did SC conduct its own verification with the required parties?

Furthermore, inability to verify confirmations and/or physical/site visits of customers can be cross examined against bank receipts / export credit notes / transfer documents subsequent to the financial year to determine once and for all, who the actual customer was, the actual location and in some instances confirmation of amount owing in the event that payments are for the outstanding balance.

3. The types of documents seized by SC from Serba Dinamik does not provide the complete details in relation to revenue, trade debtors & contract assets

Based on SC’s statement regarding the seizure of documents at various Serba Dinamik offices previously, it can be deduced that documents pertaining to finance and accounting were seized.  This deduction is corroborated when the vice-president of accounts and finance of Serba Dinamik was additionally charged with creating fictitious sales; i.e.  without other charges levied on other vice presidents not related to accounts and finance.

These accounting and finance documents are deemed “operational/working” documents as it pertains to day-to-day activities of Serba Dinamik.  Such documents would typically involve low to mid-level employees of Serba Dinamik with occasional approval from the BOD and Management based on the Limits of Authority (LOA). 

Why SC has no basis to charge Serba Dinamik

It is deeply concerning when documents pertaining other areas of Serba Dinamik were not seized.  Additionally, of all the documents, documents held by the registered address/Company Secretary are the most crucial because it gives Serba Dinamik the legitimacy and rational for all its accounting entries.

These documents consist meeting registers, deliberations and approval of all contract awards (legal/commercial arrangements, entities structure and financial arrangements and financial appraisals), projects (details of project statuses, issues) and Operations (details of operation statuses, issues).

When these documents are reviewed in tandem in relation to revenue, trade debtors & contract assets, it may not be false statements when you consider client contracts, client legal and financial entity arrangements, client bid documentation, client work orders and etc.,.

In addition, when this is cross-examined against the yet to be completed physical place, location verification and subsequent payments from customers, it potentially nullifies SC’s charge on Serba Dinamik.

4. SC’s charge against Serba Dinamik stems from the required evidence which were subject to verification and collaborativeness when EY made no representation to the accuracy and completeness of the information contained in the Factual Findings Update

It is remarkable that SC was able to complete in its own SIR within 1.5 months of putting in additional resources, as disclosed by SC in an email reply to The Edge on 12^th November 2021.  SC has achieved what EY couldn't accomplish over 4 months.  The reasons for this are

• The reliance on previous work done by KPMG and EY; EY made no representation to the accuracy and completeness of the information contained in the Factual Findings Update
• Incomplete review of client contracts, client legal and financial entity arrangements, client bid documentation, client work orders and etc.,.
• Incomplete review of documents pertaining other areas of Serba Dinamik and
• Incomplete review of physical place, location verification and subsequent payments from customers

Why SC has no basis to charge Serba Dinamik

For the past 7 months, there was no disclosure of SC requesting co-operation and evidence pertaining to the conduct of its own SIR.  What was disclosed by SC was on its denial that the then Chairman of Serba Dinamik was in communication with SC and that SC was availing additional resources to conduct its own SIR.

Furthermore, as disclosed by the recent now resigned 4 Independent Non-Executive Directors, the communication between Serba Dinamik and the capital market regulatory bodies were more interested with

• Imposing requirements for premature and unfair actions due to the incomplete SIR by EY that was still on-going and inconclusive (as re-affirmed in EY’s letter dated 29^th October 2021) and
• Imposing biased regulatory prosecution aimed towards Serba Dinamik

If SC was not in communication with Serba Dinamik with respect to its own SIR and EY made no representation to the accuracy and completeness of the information contained in the Factual Findings Update, how then will SC arrive to a conclusion without the possibility of doubt of errors or omission, notwithstanding the reliance place on previous work done by KPMG and EY and incomplete review in documents and verification?

4. The consequences to Serba Dinamik with SC’s charges

1. SC’s interference with Serba Dinamik’s Annual Report 2020 disclosure nullifies the opportunity to clear the SIR and false statements in relation to revenue

Serba Dinamik had consistently decided to uphold the compliances with the approved auditing and accounting standards by allowing its auditor, Nexia, to perform their duties without interference and time constraints.

With SC’s charge, the Serba Dinamik’s Annual Report 2020 would be considered invalid, no matter the opinion of the auditors, unless with the exception that the auditor’s opinion was that the financial statements were not true and fair.

Consequently, this indirectly means that Nexia is being subjugated into adhering to the false statement charges by SC when as auditors conducting the 2020 audit for Serba Dinamik, would have had completed

• The review of client contracts, client legal and financial entity arrangements, client bid documentation, client work orders and etc.
• The review of documents pertaining other areas of Serba Dinamik and
• The review of physical place, location verification and subsequent payments from customers

to arrive to an opinion to the financial statements of Serba Dinamik without the possibility of doubt of errors or omission.

2. Continued contempt for Serba Dinamik fuels greater negative publicity of Fraud and Financial Transgressions (FAFT)

Serba Dinamik will invariably continue to suffer negative publicity and reputational loss.  Such contempt continues to be evidenced with endless cycle of

• Spreading of misinformation for contempt for Serba Dinamik
• A myriad of unsubstantiated allegations of FAFT on Serba Dinamik
• Insinuation that the Board and Management of Serba Dinamik were deceptive, malicious and were due for incarceration
• Insinuation that Serba Dinamik will not continue as a going concern
• Seeking to harm, intimidate, or coerce those who wish to engage to eliminate confusion and/or seek clarity and
• Seeking to harm, intimidate, or coerce those who wish to those who provided facts, reason, methods and evidence contrary to unsubstantiated allegations of FAFT. 

5. Concluding SC’s uphill task to successfully charge Serba Dinamik

Based off all publicly disclosed statements, originating summons and charges from KPMG, EY, Bursa Malaysia and SC and various media companies, it can be reasonably concluded without doubt that the charge levied against Serba Dinamik when non-mutually exclusive factors in the following are not being adequately addressed individually and as a whole

• Contract Assets (Project Works, Project Assets and Inventories)
• Trade debtors
• The types of documents seized by SC from Serba Dinamik does not provide the complete details in relation to revenue, trade debtors & contract assets
• SC’s charge against Serba Dinamik stems from the required evidence which were subject to verification and collaborativeness when EY made no representation to the accuracy and completeness of the information contained in the Factual Findings Update
• SC’s interference with Serba Dinamik’s Annual Report 2020 disclosure nullifies the opportunity to clear the SIR and false statements in relation to revenue
• Continued contempt for Serba Dinamik fuels greater negative publicity of Fraud and Financial Transgressions (FAFT)

it is very likely SC faces uphill task to successfully charge Serba Dinamik.