The Battles SERBA Dinamik Holdings Bhd has been fighting many battles on many fronts over the past month after its former external auditor KPMG flagged what it alleged to be more than RM4.54 billion in questionable transactions. At a press conference on June 29, Serba Dinamik’s legal adviser Muhammad Shafee Abdullah, after questioning KPMG’s processes, said: “It is the auditor (KPMG) that started the issue, the problem, the nightmare that this company is having.” He went on to explain why Serba Dinamik had sought legal redress against KPMG. “We chose to take legal action because first of all, we want to get justice for the company. Number two, we want to stop this nonsense, our reputation being dragged down the drain. 

The relationship with KPMG is no longer tenable.”The legal suit appears to have precipitated KPMG’s resignation, which was announced on June 24, 2021. The audit firm said Serba Dinamik’s legal action against it over the ongoing statutory audit of the company for the financial period ending June 30, 2021, had compromised its ability to independently continue the audit engagement and discharge its professional duties. Interestingly, towards the end of the press conference, Muhammad Shafee claimed that Serba Dinamik had been sabotaged. “And who sabotaged it? We are in the midst of getting to know,” the lawyer said. Many following the press conference were stumped and left trying to recall the last time a lawyer questioned an audit firm’s work. And KPMG is not just any audit firm; it is one of the Big Four accounting firms with offices in some 150 countries and over 227,000 employees worldwide. Other interesting highlights of the press conference include Serba Dinamik maintaining that many of the issues flagged by KPMG were “trivial” and questioning KPMG’s move to alert Securities Commission Malaysia (SC) in May, which led to the SC investigating the company.Serba Dinamik’s accounts are likely to be delayed due to KPMG’s resignation, and another auditor will have to be appointed. One experienced auditor is of the opinion that Many auditors would have been deterred by the red flags raised by KMPG. An oil and gas official says that among the matters the new auditor will have to address is whether KPMG’s flagging of the issues is deemed as an “adverse or disclaimer opinion” of Serba Dinamik’s latest financial statements, which would then place it in the Practice Note 17 (PN17) category for cash-strapped companies. However, an experience auditor says that talk of Serba Dinamik being a PN17 company is premature.While the damages sought by Serba Dinamik from KPMG seem to be huge - they include the loss of RM4.93 billion in market capitalisation, and loss of confidence by investors, financial institutions, shareholders and customers - there are still doubts as to whether the dispute will make it to court. At the press conference, Muhammad Shafee said that Serba Dinamik “had a strong possibility of success in the event the dispute goes to trial”. 

Could Muhammad Shafee’s use of the phrase “in the event” be taken to mean that the legal wrangling may not end up in court? Will Serba Dinamik drop its suit now that KPMG has resigned, considering legal fees for such cases could go into the millions and the proceedings are likely to be long drawn out? Meanwhile, KPMG said, “The potential claim by Serba Dinamik relates to a statutory audit that is still in progress and we are unable to make any comments. The audit is being conducted in accordance with the relevant professional standards. We see no basis for it and will vigorously contest any court proceedings.” Some of the statements made at the press conference by Serba Dinamik officials - chairman Datuk Mohamed Ilyas Pakeer Mohamed, managing director Datuk Mohd Abdul Karim Abdullah, and Muhammad Shafee - could result in KPMG seeking legal recourse as well, but this remains to be seen.

1. What are the characteristics of ethical leaders? Discuss the characteristics that Mohd Karim Abdullah has breached in this story.
2. Is Serba Dinamik’s action of suing its auditor, KPMG PLT a programmed or non-programmed decision? Discuss both the short-term and long-term implications of such a decision on the company’s business.
3. After reading the case and what you have learned from this course discuss the issues surrounding the resignation of four of the seven independent directors from the board of Serba Dinamik.

Answer rating: 100% (QA)

1 Ethical leaders are honest trustworthy and have strong moral principles They are also transparent ... View the full answer