Keep the explanations coming - Krayon

by **Cals** Sun 22 Sep 2013, 19:18

Published: Saturday September 21, 2013 MYT 12:00:00 AM
Updated: Saturday September 21, 2013 MYT 7:16:46 AM
Keep the explanations coming
OPTIMISTICALLY CAUTIOUS BY ERROL OH

SO NOW we know why two large shareholders and board members of Karyon Industries Bhd have requisitioned for an extraordinary general meeting (EGM) to boot out the company’s auditors.
The shareholders say they “have reservations” as to whether Karyon should stick with the auditors, claiming that the auditors had given wrong advice on certain disclosure requirements.
As a result, the ACE Market company, which makes products from polymers and oleochemicals, had to issue statements amending its audited financial statements and annual report for 2012.
The two shareholders also say the audit firm had been reconstituted following a merger but Karyon was told this only two days before the audit committee was scheduled to meet to approve the company’s 2012 audited accounts. The shareholders contend that the short notice meant that the company didn’t have the opportunity to assess the auditors’ reappointment.
(At Karyon’s annual general meeting on June 26, the shareholders passed all the resolutions tabled, including the one proposing the reappointment of Raki CS Tan & Ramanan as auditors for the financial year ending Dec 31, 2013.)
The explanation is a step forward for transparency, albeit one taken grudgingly, judging from the two shareholders’ joint letter to the Karyon board on Wednesday.
“It has always been our intention not to cause any embarrassment to the external auditors or highlight this matter in the public domain,” wrote the duo, Karyon chairman Loh Chen Yook and his son, Loh Fatt Chong, a non-executive director of the company.
“However, due to speculation by the media, we have decided to provide further information on the proposed removal of the external auditors.”
This is an odd thing to say. The mere fact that the Lohs have asked for an EGM to be held so that shareholders can vote on resolutions to replace current auditors Raki CS Tan & Ramanan with CAS & Associates, is already a highly undesirable development for Raki CS Tan & Ramanan.
The audit business is very much based on reputation and credibility; when auditors are likely to be dropped in this manner, people are bound to have questions about what could have gone wrong.
Furthermore, Karyon is a listed company. Like it or not, a bid to oust its auditors via shareholder vote has to be disclosed to the investing public.
That in itself isn’t necessarily a problem. It became an issue because the Lohs initially didn’t offer a reason for seeking the termination of Raki CS Tan & Ramanan.
This puts the other shareholders, especially the minorities, in a tight spot. How can they properly weigh the importance of attending the EGM (and subsequently, how to vote) if they’re not supplied the rationale for the proposed removal?
The Lohs’ silence on the matter was made awkward when Raki CS Tan & Ramanan responded with a letter that was posted on the Bursa Malaysia website.
The audit firm says it was blind-sided, claiming it doesn’t know what prompted this attempt to switch auditors, and that neither the Lohs nor the Karyon audit committee has engaged with it.
Naturally, these unusual developments and the lack of information have led to the “speculation by the media”, including in this column (“A confusing Karyon picture”, Sept 14).
The Lohs, who have a combined 14.3% stake in Karyon, may have more explaining to do. Their nomination of CAS & Associates as the new auditors leads to another audit concern – Does the firm fulfil the independence criterion?
This arises because until 10 months ago, one of its partners had been a director of Karyon and chairman of the audit committee. Dennis Lye Ghee Kang was appointed to the Karyon board in May 2009. He stepped down on November 23, 2012.
According to a notice to Bursa Malaysia, this is the reason for his resignation: “He wishes to spend more time expanding his public practice business.”
His occupation is stated as partner of an audit firm he set up five years ago. The Johor Baru-based G.K. Lye & Co is a member firm of CAS International, a network of accounting and consulting firms with a Singapore headquarters.
The CAS International website says each of its 12 member firms is “an independent legal entity in its own territory”. CAS & Associates is also a member firm.
The link between Lye and CAS & Associates, which has a head office in Puchong, Selangor, goes deeper still.
In the latter’s website, Lye is identified as the firm’s “chief partner for southern region of West Malaysia”. It mentions as well Lye’s directorship in Karyon.
CAS & Associates has two partners registered with the Audit Oversight Board (AOB). If Karyon becomes the firm’s audit client, only these two persons can issue an independent auditors’ report on the listed company’s accounts. Lye is one of them.
Given Lye’s previous association with Karyon and the fact that his firm operates in Johor as does Karyon – its principal place of business is in Masai – it’s easy to imagine that he will be the engagement partner if CAS & Associates is appointed as the company’s auditors.
The alternative, of course, is for the firm’s other AOB-registered partner to take on that role.
Either way, there’s room to argue that Karyon may be better off appointing another firm.
The Malaysian Institute of Accountant’s By-Laws on Professional Ethics says: “A professional accountant in public practice who provides an assurance service shall be independent of the assurance client.
“Independence of mind and in appearance is necessary to enable the professional accountant in public practice to express a conclusion, and be seen to express a conclusion, without bias, conflict of interest, or undue influence of others.”
The by-laws are clear about a partner or employee of a firm serving as a director or officers of an audit client; that’s not allowed. This isn’t the case here because Lye is no longer a Karyon director.
The by-laws do recognise that the auditors’ independence is at risk if a member of the audit team was recently a director of the client. However, this probably won’t apply at all if Lye won’t be involved in the audit.
Furthermore, the audit will cover 2013, which is after his tenure on the Karyon board. In this case, the by-laws say the auditors should evaluate the threat and if needed, introduce safeguards “to reduce the threat to an acceptable level”.
Then there’s Section 9(1) of the Companies Act 1965, which lists situations that disqualify a person from acting as auditors of a company. These include if the person or his partner is a director of the company.
Section 9(2) deems a person to be a director of the company if he had held that position any time within the past 12 months.
It thus appears that CAS & Associates can’t be Karyon’s auditors until at least Nov 23 this year, the first anniversary of Lye’s departure from the Karyon board. After that, the path looks clear for CAS & Associates to accept the appointment. After all, the audit will only happen next year.
Yes, there are a lot of ifs and buts in judging the wisdom of appointing CAS & Associates as Karyon’s auditors. Independence can be a slippery concept.
But perhaps the EGM doesn’t have to be a difficult affair. Maybe all it takes is for the Lohs and the rest of the board to answer this question: Among the dozens of accounting firms in Malaysia that are permitted to have listed companies as audit clients, why is CAS & Associates the best choice for Karyon?

Executive editor ERROL OH took a while before finally understanding the definition of “independence in appearance” in the audit context. But he thinks it’s a cool idea.