Hyflux Audit Partner Allegations: Exploring the Facts and Debunking Misconceptions

24 August 2023

Hyflux and Audit Partner KPMG

Background of the Hyflux Audit Allegations

Hyflux was a Singapore-based water treatment firm that went into liquidation in 2021 due to severe financial difficulties. KPMG was Hyflux’s former external auditor. In 2022, Hyflux filed a S$684.6 million claim against KPMG, alleging negligence in auditing Hyflux’s 2011-2017 financial statements.

After diversifying into the energy market with Tuaspring in 2016, Hyflux’s financials were strained due to low wholesale electricity prices and external geopolitical issues. Hyflux was also in debt as it had borrowed extensively to fund several projects, including Tuaspring’s power plant. Tuaspring’s power plant subsequently failed to generate profits since its inception in March 2016. These factors significantly eroded Hyflux’s profits. The company announced its first full year of losses in 2017 and filed for bankruptcy in 2018.

Given Hyflux’s deteriorating financial condition from 2016 to 2017, questions were raised about why KPMG had failed to flag out material misstatements during the audits. These formed the basis for Hyflux’s allegations against KPMG.

Facts and Evidence Surrounding the Allegations

“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, it claimed. 

Also, Hyflux 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 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.”
[ This section is an excerpt from the article published in The Business Times, Nov. 30, 2022]

Our blog article: Hyflux News & Updates – Hyflux-KPMG Audit Saga: What You Need to Know summarizes the audit allegations concerning Hyflux & KPMG and provides updates on what happened to Hyflux Singapore.

Debunking Misconceptions

Misconception 1: Auditors Limitations

Auditors are answerable to many parties, including regulators, the client, and their own supervisors. Balancing these different expectations could limit their individual autonomy. 

Misconception 2 – Auditing Standards

Many other factors affect the accuracy of the audit outcome. Internal controls such as management override, fraudulent reporting, and manipulation of financial data could affect the accuracy of financial statements.

Ultimately, auditors are dependent on management representations and rely on financial records provided to them. 

Examination of Auditing Standards and Responsibilities

Audit partners are expected to reassure stakeholders and investors that a company’s financial statements are error and fraud-free. However, as of writing, the Hyflux and KPMG case is still undergoing investigation. 

Impact on Hyflux 

Hyflux declared in February 2018 that doubts about whether the company would remain solvent were completely unfounded. Many investors were led to believe that Hyflux’s financial condition was healthy. When Hyflux filed for bankruptcy protection later that same year, many investors were shocked and frustrated. 

Hyflux’s reputation and business operations took a serious hit, with many investors losing their trust in the company and Olivia Lum.

Conclusion: Lessons Learned and Recommendations

The Hyflux KPMG audit episode displayed the importance of communication and good financial reporting. KPMG’s auditors could have conducted a better quality audit if Hyflux had provided them with accurate financial information that accurately reflected the company’s financial situation. 

To prevent such issues from occurring in future, audit firms and regulatory authorities should aim to enhance transparency and accountability during external client audits. Regulatory authorities such as the Australian Securities & Investments Commission (ASIC) provide recommendations that have helped improve audit quality. 

  • Root Cause Identification: Audit firms should regularly undertake root cause analysis to identify underlying issues that cause audit deficiencies. This review should be conducted by an independent external team and the findings should be shared with other audit firms to help the industry raise its standards.
  • Improving Auditor Independence: Reducing reliance on management experts issued by clients, which could undermine auditor independence. 
  • Improving Communication: Spend more time engaging with client partners and setting clear expectations on the role that clients play in contributing to a clean audit. This ensures transparency between both parties about responsibilities and audit outcomes.
  • Early Review: Engaging earlier Engagement Quality Reviewers (EQR) to assess the client’s business risks before conducting the audit.
  • External Review: Introduce a final stage of review by an external audit team just before finalizing the audit.
  • Better Accountability: Accountability is about clearly defining responsibilities and authority among stakeholders. A better implementation of accountability processes would reduce instances of auditor allegations as clients and auditors understand what is expected of them. 

Clear and open communication between auditors and clients is of utmost importance. This would prevent irreversible financial losses and irreparable damage to investors’ trust.