CASE STUDY 1 Corporate Governance Conundrum



Corporate Governance Conundrum – Putting 1MDB Under the Microscope


Instructions: Read the case study and write a report based on the case study requirements in page 11.


CASE STUDY 1 Corporate Governance Conundrum

The recent interview Arul Kanda had with Ibrahim, BFM DJ over their Breakfast Grill emphasized the weak governance in 1MDB. The same issue was also published in the Business Times article that top management, directors of 1MDB should be blamed for its muddled financial state was one of the many questions raised by Ibrahim. Arul Kanda explained to BFM how 1MDB follows similar governance processes of other companies.

“1MDB is a company under the Companies Act 1965, so the day-to-day management is done by the management team, who reports to the Board. Our Board meets at least one a month or more if necessary, and then certain board’s resolution under the Companies Act require shareholders’ approval, the shareholder in this case is the Ministry of Finance”. He goes on to say that “there is a committee every two weeks or so and present updates to the committee from which shareholders’ decision were made’.

From the interview, Arul seemed confident that 1MDB is on the right track and the rationalization plan put in place are able to repay its huge debts obligations Arul Kanda emphasized to Ibrahim that for any news on 1MDB, the public should, “only rely on the lawful authorities, particularly the Public Accounts Committee (PAC) who reports to the Parliament. In my view, that is a comprehensive professionally prepared process and I am sure that report when it comes out will show the facts of what has happened.”


1MDB is a strategic development company, wholly owned by Ministry of Finance Malaysia. The company was established on 1st January 2009 with the objective of bringing strategic efforts for long-term economic development for Malaysia by establishing global partnerships and promoting foreign direct investment. 1MDB focuses on strategic investment companies which major in energy projects and strategic properties in line with its mission to drive sustainable economic development. 1MDB is Malaysia’s second sovereign wealth fund after Khazanah Nasional Berhad.

Over the years, 1MDB has made several business agreements with foreign counterparts in achieving their business missions. 1MDB has a joint venture agreement with Petro Saudi International Limited (PSI) as well as an agreement with Grid Corporation of China (GCC) to handle various energy-based projects in Sarawak Corridor of Renewable Energy (SCORE), making it a major investor for SCORE. It also signed agreements with Abu Dhabi Future Energy Company and Qatar Investment Authority (QIA) for the energy-related investment projects.

On the local scene, the company is involved in several high-profile projects namely Tun Razak Exchange (TRX), Bandar Malaysia as well as the acquisition of three independent

power producers. In its strategic properties sector, 1MDB has acquired a piece of land costing RM2 billion for mega property development (known as Tun Razak Exchange) to build office towers for finance and banking, residences and retail spaces for Kuala Lumpur International Financial District (KLIFD) project. 1MDB is also investing in multi-billion-ringgit project on redeveloping Sungai Besi old international airport to become Bandar Malaysia, a mixed integrated, development of commercial residential with hi-tech green environment. Both KLIFD and Bandar Malaysia are two of the many high-impact public-private partnership (PPP) projects aimed to drive the economic transformation agenda.

1MDB has a three-tier check-and-balance system comprising Board of Advisors, Board of Directors and senior management team (see Figure 3.1), of which of the Board of Advisors is chaired by the Dato’ Sri Najib Tun Abdul Razak, the Prime Minister of Malaysia, in his capacity as the Minister of Finance. On May 4, 2016, the advisory board was dissolved owing to transactions amounting to billion ringgits that had not been accounted for. The decision on the investment is on the Prime Minister was also being abolished by the Ministry of Finance.

Board of Advisors

-Chairman is the Prime Minister of Malaysia, Datuk Sri Najib Razak

-Special advisor is a foreigner (whom 1MDB has strategic partner with)

Board of Directors

-Chairman is YBhg. Tan Sri Dr. Mohd Irwan Serigar Abdullah

-Other members are from different background with different expertise

Senior Management Team

-Headed by Arul Kanda, President and Group Executive

-Azmi Tahir – Chief Financial Officer

Figure 3.1: 1MDB Three Tiers Governance System


Various reports were written describing business practices within 1MDB. The Wall Street Journal (WSJ) published a lengthy report in a government probe into allegations surrounding 1MDB, alleging the probe has traced nearly $700 million flowing from the fund to Malaysian Prime Minister’s personal bank accounts.

A Malaysian task force, led by the then-Attorney General (AG), the then Central Bank Governor and the then Chairman of the Malaysian Anti-Corruption Commission (MACC), which was assigned to handle 1MDB’s investigation already investigating the 1MDB developments, freezes bank accounts related to the scandal. Malaysian police raid the offices of 1MDB. It was eventually dismissed as the AG’s office decided that as a non-case, resulting in all investigations were put to a stop. Similarly report done by MACC was also dismissed by the AG. These reports contents were not made available to the public as they were claimed as official secrets.

In a more recent development, the US Attorney General has issued a media released on investigation currently undertaken in 1MDB and was described as “the largest kleptocracy case” in US history. On 27th July 2016, Department of Justice (DoJ) in the USA has filed for a lawsuit alleging that at least $3.5billion has been stolen from 1MDB found its way to numerous associates of Prime Minister of Malaysia, who subsequently went on a lavish spending spree across the world; including purchase of mansions in Los Angeles, painting by Monet, a corporate jet, and even financed a major Hollywood movie.




Former chief executive officer (CEO), Datuk Shahrol Azral, was dismissed for taking actions without the approval of from the Board of Directors. Datuk Shahrol used low capitalization and huge borrowings to finance 1MDB’s investments. He borrowed RM5 billion from the banks without getting the Board of Directors’ approval. In addition to that, he has failed to notify the Board of Directors about his intention to borrow that significant amount of money as well. High borrowings meaning high interest rates to be paid. This is illustrated in the case where Goldman Sachs sold three bonds totaling US$6.5 billion to 1MDB between year 2012 and 2013. 1MDB paid 10 percent commission to Goldman for raising a loan with a 5.9 percent interest. This means that 1MDB will receive 90 percent of the load only but has to pay interest on the 100 percent. The money borrowed was used to buy power plants. The power plant bought was at an excessively exceeding the market price. To make things worse, some of the plant’s licenses were due to expire and if the purchases were delayed until the expiration of the licenses, the price would be far less than the market price. But the management seemed not to be disturbed about that, instead, they sold the plants to the Chinese which caused 1MDB to lose more that RM1 billion.



Datuk Shahrol has again, acted without the approval of the Board by entering into a joint venture with Petro Saudi before any proper and intensive due diligence was carried out. He invested in the venture for US$1 billion, also without the approval of the Board. This investment is significant enough that thorough and extensive due diligence should had been done before the agreement.


The Boards Activities


The Recent Public Accounts Committee Report published in April 2016 has identified a number of weaknesses in the governance and decision-making of 1MDB. Following a Parliamentary Inquiry into the company, the previous Board of Directors was dissolved resulting in the appointment of three new Directors – Irwan Serigar Abdullah, Secretary-General of Treasury, Ministry of Finance, Dato’ Norazman Ayob, Senior Private Secretary to the Chief Secretary of the Government; and Dato’ Kamal Mohd Ali, Chief Operating Officer of Prokhas Sdn Bhd. Mr Arul Kanda continues as the President of the company.


Many parties have criticized the role played by 1MDB Board of Directors. PAC has stated in their report that a few major investments and loans were approved by the management of 1MDB without detailed evaluation and proper studies such as the impact of those investments and loans on 1MDB’s cash flow. Moreover, most of the big decisions had been made through written resolutions based on discussions at previous meetings. It is also reported by the PAC that 1MDB board of directors has approved a total of 425 written resolutions that mostly consists of important investment decisions. This include the decisions on new investments, extending or terminating investment which involve investment amounts of between USD1 billion and USD2.2 billion. Following the tabling of the PAC report. Transparency International Malaysia (TIM) was of the opinion that 1MDB Board of Directors has demonstrated lack of diligence as several major decisions undertaken by the management on behalf of 1MDB were not informed to the Board of Directors. There were also situations where the management did not comply with the instructions given to them by the Board. For example, there was no justification made for how the RM42 billion was used for, which seemed to have gone off the radar of the management and the Board of Directors. Calls for the company to be more transparent and a more effective Board of Directors made by TIM in the prior year appear unheeded.


In order to make good strategic decisions for 1MDB such as important investment decisions, a constructive consideration should be made between the management and the Board of Directors of 1MDB such as a thorough study about the investment, its implications and its cost and benefit considerations prior to the decision-making on the investment as to guarantee a good future for 1MDB. This is also the answer on the role of the BOD. The constructive considerations between the board of directors and in-depth evaluations before deciding important investment decisions did not often take place. Seems were hardly happened. The Green Book has recommended the Board of Directors of a company to hold meetings at an average of eight times annually based on the needs of the firm as a practice of good corporate governance. However, it is found by the National Audit Department that 1MDB directors only held meetings between eight and 16 times from the year of 2009 till August 2015. Table 3.1 outlines selected list of key guidelines on enhancing Government Linked Companied (GLC) Board effectiveness from the Green Book.



Table 3.1: The Green Book-Selected Details


Guidelines for Effective GLC Board Details  
Challenging management’s strategicOnce   the   strategic   direction   has   been
planestablished,  management  is  responsible  for
 translating  this  into  a  strategic  plan.  Once
 developed,  Board  and  management  hold  a
 dedicated session – typically a one to two day
 offsite meetings to minimize any distractions –
 where the Board challenged the assumptions,
 priorities and options put forth by management
 can  have  a  rich  and  deep  discussion  which
 ultimately  allows  the  Board  to  co-own  the
Make every Board meetingAs most Boards meet only several times a year, it
productiveis  critical  that  every  Board  meeting  counts.
 Boards should meet regularly – and the actual
 number of meetings will depend on the nature of
 the company’s business and the stage of its
 development. However, on average, Boards tend
 to meet six to eight times a year, potentially
 adding several more offsites for specific topics
 such   asstrategicplanning.The   Code
 recommends  that  the  Directors  disclose  the
 number of Board meetings held each year to
 enable shareholders to evaluate if the Board is
 adequately  in  control  of  the  company.  In
 addition, Directors who are absent from more
 that 50 percent of Board meetings in a financial
 year will have to vacate office as stipulated in
 Burse Securities Listing Requirements. 
Board papers are clear and relevantPapers that are prepared by management for the
 Board should be set out logically and contain
 synthesized  information  and  pertinent  critical
Board papers are clear and relevantThese papers should be preceded with a one-to-
 two-page  summary  that  lays  out  what  is
 requestedfrom  theBoard   –forexample,
 whether it requires an approval or endorsement
 of if it is for the information only; the key issues,
 rationale,  risks  and  decisions  required;  and
 actions  required  with  timelines  and  account-
 information  might  be  necessary  –  such  as
 background on competitors or industry trends –
 so that the Board can understand the issues
 clearly and have the information necessary to


 make a decision.   
Board decisions communicatedAll Board decisions should be clearly recorded in
promptly to managementthe minutes, including the rationale foreach
 decision,  clear actions  to be taken with  the
 agreed timeline, and the individuals responsible
 for   implementation.   Thisensuresthat
 management understands the decisions made
 and are able to execute against the decision.
 Note that this will be subject to any legal or
 regulatory restrictions which could limit the level
 of detail of minutes.   
 communicated verbally to management within 1
 working day of the Board meeting and relevant
 extracts of the minutes should be distributed
 within 3 working days.   






Transparency International Malaysia (TIM) in a press statement had urged 1MDB to report its actual financial position in time and to be more transparent as to display a greater accountability to the public arising from 1MDB’s failure in submitting its audited accounts on time to the Companies Commission of Malaysia (CCM) for two consecutive years in the financial year ended March 31st, of 2013 and 2014. For example, 1MDB have asked for the 6th month extensions for 2013 annual report. In recent events, the audited financial statements for these two years were unreliable. This was announced in the latest press release by one of 1MDB’s director in July 2016, “As a precautionary measure, the 2013 and 2014 audited financial statements of 1MDB should no longer be relied upon by any party, pending final and conclusive determination by a court of law by any party, pending final and conclusive determination by a court of law of certain alleged facts, as described “in the US civil suit”, with Deloitte, the audit form that signed off these financial statements, has expressed their intention to resign as auditor of the company too. As of August 2016, 1MDB is still looking for a new auditor. Table 3.2 outlines formers auditors of 1MDB and significant issues arising during their respective appointment.


This recent auditor resignation has raised another major concern about 1MDB. Since 2009, 1MDB has changed auditors three times, these auditors were three of the Big Four accounting firms (Ernst & Young, KPMG and Deloitte). The resignations of KPMG, Ernst & Young and Deloitte as auditors had compounded the intrigue over the state of accounts of the strategic investment company. 1MDB reiterated that changing auditors are done in the normal course of any business.



Table 3.2: Auditors-Significant Issues


Financial Year   Significant Issues
2009-2010 Ernst  &  Young  was  appointed  by  1MDB’s  predecessor,
Ernst & Young Terengganu Investment Authority on 25 March 2009 but had its
  contract  terminated  on  15  September  2010  before  1MDB
  submitted its first financial statement for the financial year
  ending 31 March, 2010, the report said. According to the audit
  company’s  planning  memo  dated  26  March  2010,  it  had
  requested for documents and made queries pertaining to 1MDB
  Petro Saudi Ltd, a joint venture between the state fund and
  Petro Saudi International Ltd.
2010-2012 KPMG issued unqualified with emphasis of matter for financial
KPMG statements year ended 2011. The emphasis of matter focusing
  on valuation of receivables as at 31 March 2010
 KPMG issued standard unqualified audit report for financial
  statements year ended 2012
 KPMG was sacked by 1MDB in December 2013
2013-2014 Deloitte issued standard unqualified audit report for financial
Deloitte statements year ended 2013 and 2014
 1MDB announced that its 2013 and 2014 audited financial
  statements  should  no  longer  be  relied  on  following  a  US
  Department of Justice (DoJ) complaint last week alleging an
  international scheme to siphon more than $3.5billion for the
 Deloitte,which notified 1MDB of its intention to resign in
  February, said the DoJ complaint contained information that, if
  know at the time of the 2013 and 2014 audits “would have
  impacted  the  financial  statements  and  affected  the  audit
 The professional services firm has been drawn into a dispute
  over $1.4bn mismatch in dealings between 1MDB and an Abu
  Dhabi investment fund
 Abu Dhabi’s International Petroleum Investment Company (IPIC)
  said last year that it never received $1.4bn that 1MDB said had
  been paid out
 1MDB said last September that Deloitte had made “specific and
  detailed enquiries” on these payments to IPIC before signing off


  on the Malaysian fund’s accounts
  Source: https//
2015-2016Deloitte, which has previously notified 1MDB of its intention to
  resign on 26 February 2016. Until a new auditor is appointed,
  Deloitte will remain as auditor on record
 1MDB unable to issue audited financial statements for year 2015
  and 2016
20171MDB is pleased to announce that it has submitted forms 11 and
  52 to the Companies Commission of Malaysia of 3 January 2017,
  confirming the appointment of Parker Randall as auditor for


The resignation of KPMG as 1MDB’s auditor was also controversial. There were claims that KPMG was terminated as opposed to them resigning in the normal course of business. This ‘resignation’ was allegedly due to failure on the part of 1MDB to provide requested 1MDB’s auditor had quit in 2010 without signing off the accounts.


Following a complaint lodged by a Member of Parliament calling for Malaysian Institute of Accountants (MIA) to investigate on two major discrepancies omitted from the financial statement namely details of 1MDB’s joint venture (JV) with Petro Saudi International Limited (PSI) including the USD700 million (RM2.58 billion) and the 1.5 billion PSI shares was converted into an Islamic loan. It was claimed that KPMG failed to make material disclosures of transactions that took place during the joint venture in the 2010 financial statements, rendering the joint venture in the 2010 financial statements, rendering the report not reflecting the true state of accounts in the company.


The audited accounts of 1MDB had raised a number of questions. Both KPMG and Ernst & Young failed to report the “highly dubious and potentially fraudulent transactions” in 1MDB to alert the relevant authorities. This had resulted in 1MDB being able to maintain a façade of financial strength and viability, despite accumulating RM41.9 billion debts as of March 31 last year.


Review by PAC indicated other pertinent issues. Following an inquest held by the PAC, some accounting and auditing issues regarding several major accounting principles and



performance of the external auditors that seemed to have been stretched to achieve the unqualified opinion in 1MDB’s 2014 accounts. Appendix 3.2 highlights some of these accounting issues and concerns of the respective PAC members over conduct of the auditors. The chairman of PAC had called for regulators like the MIA and the Audit Oversight Board to step up and enforce the law in monitoring conducts of the external auditors.




High level of debts and interest payment against its cash flow in 1MDB has also raised concerns. According to 1MDB Governance Management Control Report, Pac had repoted “the debt began at RM5 billion in 2009 and increased to RM42 billion, compared with the assets of RM51 billion in the financial year ended 31.03.2014, in which 1MDB spent RM2.4 billion for interest payment on debt” (page 94). Such amount is high when compared against assets of RM51 billion in the same year ended. The financial statements of 1MDB for billion in the same year ended. The financial statement of 1MDB for the years 2010-2014 are shown in Appendix 3.3. Table 3.3 list down major loans of 1MDB as at financial year 31 March 2014. In January 2016, 1MDB;s debts reached RM50 billion together with a spending of RM3.3 billion for interest payments on debts when compared with assets of RM53 billion.


Meeting its financial obligations has been an issue in 1MDB – Both 1MDB and IPIC are locked in a battle over repayments on bonds issued by 1MDB. Last year, IPIC entered into an agreement with 1MDB, which


Table 3.3: List of Major Loans as at March 31, 2014


   (RM Mil)(RM 
Medium Bank Bhd  Guarantee
Islamic1MDBAffin Islamic3737 
Revolving Bank Bhd   
BridgingInvestment/Alliance/  Corporate
LoanHolding SdnHwang DBS  Guarantee
Syndicated1MDBAffin Bank/7004521MDB
BridgingEnergyAffin Investment  Corporate
Loan(Langat)Bank Bhd/Ambank  Guarantee
 Sdn Bhd(M) Bhd   
Term Loan1MDBAmbank (M) Bhd6006001MDB
 Energy   Corporate
 (Jimah) Sdn   Guarantee


Term Loan-1MDBPerkeso800800Government
Gevernmen    Guarantee
t Guarantee     
Term Loan1MDB RealAmbank (M) Bhd5505501MDB
 Estate Sdn   Corporate
 Bhd   Guarantee
SukukBandarAminvestment Bank2,4009201MDB
MurabahaMalaysiaBhd  Corporate
  Total Loans Within15,25713,95 
  Malaysia 2 
USD1MDBGoldman Sachs1,7505,2351MDB &
GuaranteeEnergy Ltd   IPIC/Aabar
USD1MDBGoldman Sachs1,7505,4601MDB &
GuaranteeEnergy   IPIC/Aabar
 Sdn Bhd    
USD Notes1MDBGoldman Sachs3,0009,067Government
(Bond)Global   Letter of
 Investment   Support
 s Ltd    


provide 1MDB with $1 billion and an interest obligation on $3.5billion of loan. IPIC accused 1MDB of defaulting on this loan obligation. However, 1MDB denied that it ever defaulted on the payments of this loan, instead 1MDB claimed that money was paid to IPIC subsidiary, Aabar Investment PJS Ltd, located in the British Virgin Island. But, IPIC denied Aabar Investment PJS (BVI) as its related company and its subsidiary Aabar Investment PJS, never received any of the $3.5 billion. It seems that IPIC’s subsidiary has a slightly different name to the one that 1MDB transferred money too. In June 2016, IPIC is pursuing its claims in arbitration due to “the failure of 1MDB and [Malaysia’s Ministry of Finance] to perform their obligations, cure their defaults or put forward acceptable proposals.


Mr Arul Kanda admitted that 1MDB may have paid to the wrong company. But still, 1MDB insists that IPIC should pay the interest of US$50 million as it is the guarantor of the loan. Logically, IPIC, as guarantor of the loan is obliged to pay the interest if 1MDB is not able to pay, not when 1MDB refuse to pay. Since both parties would not pay the interest, there would be a default in which it will cross default other loans taken is a fully government-owned company. Therefore, government may be unable to borrow money in the market which results in financial deficits and thus, lead to bankruptcy.




After nearly two years of assuming his current post, has Arul Kanda made enough and necessary changes on 1MDB’s governance issues? Or, is the company now in deeper mess – has he put too much on his plate? More than he can chew?

CASE STUDY 1 Corporate Governance Conundrum





  1. Prepare a report on the governance issues which affect the 1MDB’s financial management.


  1. Assess how the professional accountants in this case managed the ethical conflicts and threats, whether it complies with the relevant regulation in Malaysia.


  1. Assess how the professional accountants in this case managed the issues on client acceptance and continuance, whether it complies with the relevant regulation in Malaysia.