Hyflux seeks S$684.6 million from KPMG for alleged negligence

HYFLUX and two of its units are claiming over S$684.6 million from the group’s former external auditor, KPMG, for alleged negligence in auditing the accounts.

The professional services firm has denied the allegation.

According to the statement of claim filed in October, Hyflux, Hydrochem and Tuaspring alleged that Hyflux’s financial statements for the years 2011 to 2017 in relation to the Tuaspring desalination and power plants were materially misstated.

This was because Hyflux had failed to recognise provisions and impairment losses in accordance with financial reporting standards.

Hyflux would not have prepared its financial statements on a going concern basis from 2014 onwards had the misstatements been recognised, charged the plaintiffs.

The plaintiffs said that the desalination plant and the power plant should have been assessed separately for provisions and impairment purposes. In doing so, the embattled Hyflux should have recognised a provision in its 2011 to 2017 financial statements, as well as an impairment in its 2013 to 2017 financial statements.

If a joint assessment was done, Hyflux should have recognised significant impairments for at least its 2014 to 2017 financial statements.

That would have led Hyflux to post a loss in its income statement, said the plaintiffs.

Also, the plaintiffs alleged that KPMG did not obtain sufficient appropriate audit evidence on whether the cash flow analysis Hyflux performed for the Tuaspring project was reasonable, as well as whether the going concern assumption was appropriate.

KPMG should have realised that Hyflux needed to inform the market and lenders of the significant provisions, impairment losses and operating cash losses. The announcement of which would have caused the share price of Hyflux to be significantly impacted, thereby making it difficult to raise further funds by debt or equity. It would then not have been able to continue trading and incurred further losses.

The plaintiffs are therefore asking KPMG for reimbursements of S$684.6 million, which include the dividends paid out to shareholders from 2012 to 2018, and discretionary bonuses paid to directors and senior management.

They are also seeking funding loss incurred during the period when the group continued operating even though it was already not a going concern, with the quantum of compensation to be assessed.

The plaintiffs said in the statement of claim: “The central purpose of a statutory audit is to provide the audited entity and its shareholders with information about the company’s true and fair financial position on which to base management and governance decisions. All of the losses claimed flow directly from KPMG’s failure to discharge its duties with regard to the information provided to the plaintiffs and Hyflux’s shareholders.”

Hyflux and Hydrochem are in compulsory liquidation while Tuaspring is under receivership to realise the security with the sale proceeds to be used to repay debt. This lawsuit is believed to be funded by third-party financiers.

KPMG refuted the allegations of it being negligent, and argued in the defence filed last week that the obligation to prepare the financial statements in compliance with the law and reporting standards lies with the plaintiffs’ management and board.

Hyflux group’s financial statements, KPMG claimed, were audited in accordance with auditing standards and there were no material misstatements. Where judgment calls were required by the auditor, they had conformed with the standards. Therefore, if any judgment was incorrect, it is not an indication of misconduct or negligence.

As at the date of the signing of the FY 2017 audited financial statements in March 2018, KPMG noted, there were no creditors making unexpected demand for payments. It pinned the plight of Hyflux on its seeking moratorium, sparking a crisis of trust and confidence among their stakeholders, when it should have negotiated for standstills or for payment of liabilities to be deferred.

“The manner and delay in which the plaintiffs tried to restructure themselves was a self-inflicted injury. Otherwise, they would have been able to continue as a going concern, and benefit from the uniform Singapore energy price improving in 2021 and 2022,” KPMG said.

The audit report was solely for the use and benefit of the members of Hyflux, and not expected to be relied on by others or for specific transaction, the plaintiffs were also reminded.

And there are limitations on the auditor’s ability to detect material misstatements, thus no questioning in the audit report of the entity’s ability to continue as a going concern is not a guarantee that the entity’s going concern status is not at risk.

There is no causal link between the alleged breaches and the claims being sought by the plaintiffs, KPMG also said, pointing out that, for instance, dividend decisions were made by the plaintiffs’ management and board.

“Fundamentally, the plaintiffs’ claim is an impermissible attempt to make the defendant underwrite the plaintiffs’ own business failures,” KPMG argued.

Noted as well that this case was filed in March, KPMG contended that all claims arising from events before March 2016 fall outside the time limit allowed by law.

The plaintiffs are represented by Tan Kok Quan Partnership’s Eddee Ng, while KPMG is defended by TSMP Law’s Thio Shen Yi and Felicia Tan.

Hyflux has filed a lawsuit against Olivia Lum as well, but her defence is pending.