KUALA LUMPUR: The legal tussle between Serba Dinamik Holdings Bhd and KPMG may well end up being termed as a "shoplot auditor" case, according to industry insiders.
With a strong message sent by the company's new chairman Datuk Ilyas Pakeer Mohammed on the capabilities of KPMG and the engagement of Tan Sri Muhammad Shafee, a lawyer who has a track record of taking auditors to task in defence of his high-profile clients, one cannot help but to pay a little attention to the claims of Serba Dinamik and the nature of the suit.
Citing publicly available court filings, the insiders said Serba Dinamik's case did not seem to be solely on the fact that KPMG had asked for an independent review, or the fact that it had filed a report to the regulators which resulted in a drop of the share prices and market capitalisation.
Instead, Serba Dinamik has trained its sights on KPMG's audit process which it claimed amounted to professional negligence and ultimately breached its contract of engagement.
Serba Dinamik alleged that KPMG had owed and breached its statutory duty under Section 320 of the Capital Markets and Services Act 2007.
Section 320(2) of the Act has traditionally been used to protect auditors from liability when they lodge reports to the regulators.
But in the context of the claim, Serba Dinamik challenged that the requirements under Section 320 had not been complied with and therefore actionable against KPMG.
Serba Dinamik's lawyers, the insiders said, had weaponised a law auditors generally seek refuge under, against KPMG. This was quite possibly a situation where the hunter had become the hunted.
Looking at key timelines presented in Serba Dinamik's statements of claim, problems between the company and KPMG arose on May 3 this year at a special board of directors meeting where "key issues" of the auditor were presented to the board.
While KPMG took the position that these matters required a third-party independent review to assess the veracity of its concerns, Serba Dinamik, on the other hand, claimed that the issues were trivial in nature and could have been resolved on an auditor/management level.
The veracity of the "key issues" aside, ultimately, with KPMG taking the position that a third-party independent review was required, the audit firm was implicitly saying it could not conclude nor form an opinion on the audit until the outcome of the review was completed, the insiders said.
However, despite the position taken on the independent review, KPMG allegedly then filed a report to the Securities Commission (SC) against Serba Dinamik a few days later.
"KPMG taking this position where they themselves are unable to make up their mind on the issues raised pending the independent review, later went to the SC to lodge a report. This on its own is very peculiar as to what state of mind they were in," said an insider familiar with the situation.
The two seemingly contrary positions taken by the audit firm forms the basis of the breach of statutory duty Serba Dinamik is taking KPMG to task.
Under Section 320(1) and (2) of the Capital Markets and Services Act 2007, an auditor is only immune from a court action arising out of a report to the regulators if it forms a "professional opinion that there has been a breach or non-performance" (of securities laws) and that they have acted in good faith when doing so.
"How could KPMG have formed a professional opinion as required under Section 320 of the CMSA to justify their report to the SC if they themselves are waiting for the outcome of the third-party independent review? These are two irreconcilable positions," said the insider.
"To make matters worse, after taking a professional view that there is a breach of the securities laws, KPMG then wants to continue with the statutory audit. This does not make sense because they have pre-judged the issue and therefore their audit report will no longer be independent."
"In my view (Serba Dinamik's second largest shareholder) Datuk Abdul Kadier Sahib was right in seeking an EGM to remove KPMG as auditor way back then. It's unfortunate this was not communicated effectively in his notice," said the insider.
The civil suit between Serba Dinamik and KPMG appears to turn on the question as to what parameters are drawn towards an auditor's duty of confidentiality during the audit process versus a conflicting duty to report any irregularities, an uncharted territory in both law and audit practice.
"There is of course a duty for auditors to report any irregularities to the SC, but the act specifically requires professional judgement to be taken beforehand. This is because a report or the SC investigation on its own has the potential to cause adverse speculation in the market that has irreparable consequences.
"If KPMG is ultimately held responsible for causing this without legal basis, Serba Dinamik must be entitled to some compensation," he said.