QUESTION TIME Perhaps - perhaps - the auditor-general may not be able to or have to audit the accounts of scandal-ridden national strategic investment fund 1Malaysia Development Bhd or 1MDB. But surely he can make an assessment of the impact of 1MDB on government finances and the threats it might pose. And more.

It’s easy for auditor-general Ambrin Buang to throw his hands up in the air and say there is no reason for him to audit 1MDB because it has already been audited by a big four accounting firm - Deloitte.

To quote him: “Why are we not auditing 1MDB? My answer is that its accounts have already been audited by one of the ‘big four’,” Ambrin told a town hall meeting session with the media on Wednesday on the third series of the 2013 Auditor-General’s Report that was released on Monday.

“So, there is no reason why we should come in again,” he said, responding to media questions on why it had not taken any audit action on the controversial 1MDB.

“Auditing financial statements is a very labourious examination.”

Indeed it is. But does that mean that the auditor-general sits around and twiddles his thumbs while a major scandal involving a company fully owned by the government’s Minister of Finance Inc unfolds right before his eyes? Surely he has been reading the newspapers.

Don’t highly questionable things like raising funds willy-nilly, underpricing bonds while paying too much for assets, paying high interest rates, keeping billions of ringgit in low yielding deposits while raising even more funds and paying a fortune in fees to Goldman Sachs not pique the auditor-general’s curiosity?

Let’s put down some facts first about 1MDB for the benefit of the auditor-general. It would not have made any profits since its inception in 2009. If not for revaluation of government property sold cheaply to it, its losses to date would have been RM5 billion as at end March 2014.

On the liability side, it is funded by RM1 billion in share capital by the Minister of Finance Inc. But its borrowings as of March 31, 2014 amount to a massive RM42 billion, 42 times the share capital.

The gearing ratio, the percentage of debt to shareholders funds or equity of RM1.7 billion, is a massive 24 to 20 percent which could be among the largest if not the largest for any large company in Malaysia. In the private sector, that kind of gearing will be considered unbearable.

To cap it all, it is doing very little with that kind of borrowings. It has bought power assets worth some RM10.5 billion for which it took a loan despite there being considerable liquidity within the firm. Even if we subtract that RM10.5 billion from RM42 billion, some RM31.5 billion is substantially unaccounted for.

Available for sale assets, a vague term for financial assets which are held for sale and for which there may be no provision for diminution in value, comes up to a massive RM13.4 billion, including RM7.7 billion tied up in Cayman Islands in a mysterious segregated portfolio company which no one knows anything about.

Apart from that, there are various cash or near cash assets which account for a further RM9.1 billion. Add these up and the total amount of assets doing practically nothing comes up to a massive RM22.5 billion. Why keep these assets in near cash and then borrow some more?

In the first few years alone of its life, after stripping out revaluation gains, it is obvious that 1MDB has not been able to earn more than the interest on borrowings as shown by the RM5 billion losses. Why? And why is it continuing to borrow? And can it ever get assets that will earn significantly more than the interest costs?

Loan mispricing

What about 1MDB’s loan mispricing, which is already over RM4 billion and could eventually amount to RM7 billion or more if new loans were made on the same basis? And what about the massive fees paid to Goldman Sachs of over RM500 million for arranging some loans?

Surely the auditor-general can do something about these. After all, the Minister of Finance Inc, is a government company, no different from any company owned by a ministry. 1MDB is that company’s wholly owned subsidiary. Surely the auditor-general has every right to probe any government company which poses a threat to government finances.

Remember that the government originally said that it guaranteed explicitly only RM5.8 billion of loans and denied there was any letter of support for anything more. But now after the support letter came out in the press, it now concedes there was indeed such a letter for a further RM10 billion.

How many more letters of support could there be for 1MDB? And what about other government companies and bodies?

Legal opinion is that the letters of support are in substance no different from guarantees and that the government will have to pay up in the event of default by 1MDB. Surely this is an area which concerns the auditor-general and the amount of contingent liabilities the government has to bear.

The auditor-general plays a role as the watchdog of the government and the public. It is his obligation to publicly highlight potential threats to government finances and to make recommendations to avoid them, and probe them if need be.

He has done this commendably well for other government departments and bodies. Why should any exemption be given for 1MDB? What’s so special about 1MDB?


P GUNASEGARAM is founding editor of business news portal KiniBiz.