Using Management Estimates To Determine TH Asset Value Raises Financial Risks - Economists

By Shaidathul Suhana Ros

KUALA LUMPUR, Aug 18 (Bernama) -- The Royal Commission of Inquiry (RCI) report’s disclosure that RM4.044 billion of Lembaga Tabung Haji’s (TH) property asset valuations for 2017 was based solely on management estimates posed a significant risk to the institution’s financial position, according to economists.

The RCI’s findings on TH’s management and operations from 2014 to 2020 showed that only RM556 million of the RM4.6 billion total valuation was supported by professional valuers’ reports.

Prof Emeritus Dr Barjoyai Bardai of Malaysia University of Science and Technology (MUST) said using management estimates to determine Realisable Asset Value (RAV) exposed the institution to the risk of “overly optimistic” asset values, as management had a direct interest in how its financial position was presented.

He said this did not necessarily prove manipulation had occurred, but internal estimates did not provide the same level of assurance as valuations by independent professional valuers.

“If assets are valued above the amount that can actually be realised, the RAV will appear higher, and TH’s financial position may look stronger than it really is,” he told Bernama when commenting on the report.

Barjoyai said this could potentially allow hibah, or dividend, distributions above prudent levels. He recommended that high-value properties be independently valued using consistent methods and supported by clear market evidence.

He said RAV calculations should also be governed by clear standards, independently audited and verified by a special committee comprising investment experts and qualified accountants.

“Figures used to determine the capacity to distribute hibah must comply with basic principles of financial governance: they should be conservative, verifiable and not overly reliant on estimates by parties with an interest in the outcome,” he said.

Meanwhile, Putra Business School MBA Programme Director Prof Dr Ahmed Razman Abdul Latiff said the board of directors and audit committee had a governance duty to scrutinise management assumptions and ensure sufficient evidence supported the figures before they were used.

“Material estimates with significant implications for the financial position and hibah decisions should go through several layers of review,” he said.

Ahmed Razman said the level of scrutiny should have been higher because RAV was used to determine compliance with Section 22 of the Tabung Haji Act 1995, directly affecting depositors.

He also questioned the role of previous auditors and why concerns over TH’s financial position and hibah distributions had not received greater scrutiny during earlier audits, as highlighted by the RCI.

He said further examination was needed to establish whether there had been failures in internal controls, misrepresentation or deliberate manipulation of figures.

According to a PricewaterhouseCoopers (PwC) audit report cited by the RCI, the RAV calculations were based on management estimates rather than market prices for listed shares or independent professional valuations of properties.

The RCI also revealed that RM2.294 billion relating to TH Plantations Berhad had been included in the RAV calculation based on the RM4.6 billion property asset valuation.

The report said TH management did not use the asset and liability values reported in the institution’s financial statements when calculating profit distributions. Instead, it used RAV to meet the requirements of the Tabung Haji Act 1995.

This resulted in higher asset values in the RAV calculation, while no adjustments were made to investments whose market prices had fallen to very low levels.

TH management argued that Section 22 of Act 535 did not clearly define assets and therefore claimed it had the right to determine how those assets should be valued, the report said.

The 252-page RCI report was made public on July 29 and debated at a special sitting of the Dewan Rakyat on Aug 11.

-- BERNAMA