Operating atmosphere, sector outlook causing external auditors’ concern
THE operating atmosphere and sector outlook are the root cause of the unqualified audit opinions given by external auditors on several listed companies recently.
JF Apex Securities Bhd head of research Lee Chung Cheng said companies in the hospitality, retail, oil and gas, construction/property development are the commercial segments that could be facing some stress.
He believes the Covid-19 pandemic acted as a trigger point of expediting the deterioration of the financials of companies.
“We could see more external auditors raising concern but before that, we could witness more cash calls via private placements and/or rights issues,” he told The Malaysian Reserve (TMR).
On July 9, AirAsia Group Bhd announced it was in talks to raise more than RM1 billion capital either from debt or equity sale amid concerns raised by its external auditor over its status as a going entity. Group CEO Tan Sri Dr Tony Fernandes said the lowcost carrier had received indications from certain financial institutions to support its request for more than RM1 billion fund.
Transport Minister Datuk Seri Dr Wee Ka Siong on Tuesday said the Malaysian aviation industry is projected to lose RM13 billion this year as air travel plummeted in the face of the Covid-19 pandemic and international travel restrictions that are still in place.
KPMG PLT audit partner Lee Yee Keng said the group expects uncertainties to prevail as industry players continue to adapt to the new norm.
She said most industries had to regroup and reset as the pandemic has raised certain risks that were not considered significant in the past.
Assessment of going concern of entities is an area that auditors will focus on, she added.
“The Movement Control Order and the already dampened economy have resulted in cash constraints and less visibility of future performances, raising concerns over the ability of companies to fulfil their obligations as and when they fall due.
“Gathering audit evidence is challenging given the restrictions on movement and standard operating procedure on distancing,” she told TMR in an email reply.
Hence, among action required by management is to update forecasts and sensitivities as considered appropriate, as well as take into account the risk factors identified and the different possible outcomes.
Lee pointed out that it is important to consider reasonably plausible downside scenarios and consider the impact of a “lockdown”, when relevant.
“Assess plans to mitigate events or conditions that may cast significant doubt on the company’s ability to continue as a going concern.
“In particular, management would be expected to reassess the availability of cash inflows. The company needs to assess whether its plans are achievable and realistic,” she said.
Management may conclude that it is not possible to provide clear answers to some questions given the level of economic uncertainties that exist at present, hence the need to make certain assumptions in preparing the forecasts.
The disclosure of the basis of preparation and assumptions used in the forecasts will be disclosed in the financial statements, Lee added.
For companies that were already struggling, the unknown impact arising from Covid-19 could be a risk factor considering the magnitude of unknowns regarding future Covid-19 impacts.
Sunway University Business School economist Prof Dr Yeah Kim Leng said the external auditors’ concerns are a reflection of the financial distress faced by firms and businesses hit hard by the Covid-19 pandemic.
“With poor sales and revenue, firms with high overheads and large borrowings, therefore, are facing liquidity as well as solvency issues that threaten their survival.
“The warnings by the external auditors are an indication of the ongoing restructuring needed by the firms to survive the current crisis,” he told TMR.
The list of affected issuers continues to grow. Rimbunan Sawit Bhd on July 17 announced it is contemplating the sale of other non-profitable oil palm plantation estates as part of the group’s rationalisation plan.
Its external auditors, Messrs Crowe Malaysia PLT, has included a statement of material uncertainty relating to going concern in respect of the group’s financial statements for the financial year ended Dec 31, 2019 (FY19).
The group incurred a net loss of RM62.8 million for the FY19 and, as of that date, the group’s current liabilities exceeded its current assets by RM319.4 million.
“These conditions indicate that a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern,” it stated.
Konsortium Transnasional Bhd’s (KTB) external auditors also stated their concerns about its financial situation and operations certainty as the transport service operator filed its FY19 results.
In a filing to Bursa Malaysia on July 14, external auditor Messrs Al Jafree Salihin Kuzaimi PLT drew attention to KTB’s current liabilities exceeding its current assets by RM70.33 million and cast doubt about the liability of the group to continue as a going concern.
Ikhmas Jaya Group Bhd’s external auditor KPMG has expressed an unqualified opinion with material uncertainty related to the going concern ability of the group in respect of its FY19.
In a filing on June 30, the construction company said the auditor drew attention to the group and company’s incurred net losses of RM159.5 million and RM161.8 million respectively for FY19.
At the same time, it also noted that the group’s current liabilities had exceeded its current assets by RM21.6 million. Other companies flagged include Sarawak Cable Bhd and Cymao Holdings Bhd to name afew.
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