WITH the drop in oil prices five years ago, Sapura Energy’s financials dropped in parallel too.

For the financial year ending January 31, 2019, the company chalked up annual revenue of RM4.6 billion and reported a net loss after tax of RM2.7 billion with a cumulative retained profit of RM213 million. Cash and cash equivalents were RM8 billion while long and short term debts were RM17 billion.

As at the end of the financial year ending January 31, 2020, annual revenue was RM6.5 billion and net loss after tax was RM4.6 billion. The cumulative retained profit of the previous year was replaced with a cumulative net loss of RM4.5 billion. Cash and cash equivalents were RM770 million while long and short term debts were RM10.2 billion.

In the following year, the company reported annual revenue of RM5.3 billion against a net loss of RM160 million while cumulative net loss remains at approximately RM4.6 billion. Cash and cash equivalents were RM489 million while long and short term debts remained at approximately RM10.2 billion.

For the financial year ending January 31, 2022, the company reported a net loss after tax of RM8.9 billion while the cumulative losses jumped from RM4.5 billion the previous year to RM13.5 billion. Cash and cash equivalents were RM717 million while short term debts were RM10.6 billion.

The subsidiaries of the company was hit with a slew of winding-up petitions by their creditors. According to an announcement on February 18, one of the subsidiaries, Sapura Fabrication was served with a winding-up petition for a mere RM70,598 owed for the purchase of hardware. 

Another subsidiary, Sapura Geotechnics Sdn Bhd, was served with a petition to wind up for a paltry RM214,650.

The company was nearly qualifying for a PN17 company, which has now been averted as it has obtained an order pursuant to Section 368 of the Companies Act to restrain and stay legal proceedings against it so that a scheme of arrangement can be undertaken between the company and its creditors in early March.

In every one of the loss-making years, the board of directors and by extension, the audit committee state the same thing in the statement on risk management and internal control: Sapura Energy is committed to ensuring that it maintains and continuously improves enterprise-wide risk management systems and processes to ensure its strategic goals and corporate governance responsibilities are met. 

The internal audit (IA) will report that it has discharged its role by recommending systematic and disciplined approaches to evaluate and improve the effectiveness of risk management, governance and internal control processes.

And then the external auditor will correspondingly state in its report that it has reviewed the statement which has been prepared, in all material aspects, in accordance with the required disclosures and that the accompanying financial statements give a true and fair view of the financial position of company.

The trinity of the audit committee, IA and external auditor have a distinct and critical role to play. The IA is primarily responsible for monitoring the company’s internal controls; external auditor has the task of ensuring the management’s accountability (financial and non-financial); and the audit committee has a pivotal and unifying role, overseeing and coordinating the internal and external audit functions.

The external auditor is in a unique position. It alone has the statutory right to examine the detailed records and other relevant evidence relating to a reporting entity and to seek the information and explanations it requires to perform its duty as the auditor.  

The external auditor has a primary responsibility, under ISA 570 (Revised) Going Concern, to obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern.

If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists. 

This should, for example, include a detailed and robust review of up to date forecasts, cash flows, sensitivity analyses and reviews of Covid-19 contingency plans and impact assessments conducted by management, taking into account the risk factors and the different possible outcomes. It is important to consider downside situations. 

Even the CEO himself admitted publicly that the debt of RM10.3 billion is not sustainable and that the company has accumulated RM460 million in Covid-related costs. Even though it will be claimed from clients, it is still a negative cashflow for the company as the impact on contract costs to the company was two to four times higher.

In a situation where management concludes that the entity is a going concern but the management of the entity is aware of the existence of a material uncertainty and the auditor concurs that the entity is a going concern and the material uncertainty is adequately disclosed in the financial statements, in the auditor’s report, the “conclusions relating to going concern” section should be removed and instead a “material uncertainty related to going concern” section shall be included.

If management is unwilling to disclose material uncertainties, then the auditor may need to consider issuing a modified auditor’s report. 

The question is, did the external auditor discuss and understand from the management whether there was a need to assess whether the pandemic and low oil prices in the last four years, either individually or collectively, cast significant doubt on the company’s ability to continue as a going concern or if the going concern assumption was still appropriate as a basis for the preparation of the company’s financial statements?

In the economic uncertainty following the outbreak of the pandemic in early 2020, wasn’t it critical for the external auditor to discuss with management to assess what impacts the events and conditions would have on the company’s operations and forecast cash flows, with the key issue being whether the company will have sufficient liquidity to continue to meet its obligations as they fall due?

Disclosures around going concern are especially important to achieve transparency and provide users with relevant information. 

The winding-up petitions by creditors for paltry sums for a company that generates annual revenue in billions merely confirmed that the external auditor and the management had not undertaken their assessment of the company as a going concern with greater understanding of the situation and had failed in its duties. – April 12, 2022.

* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.