Audit finds seven financial irregularities with LTAT, including dividend overpayment

The Malaysian Royal Army Regiment marches during the Trooping the Colour ceremony at Dataran Pahlawan Negara in Putrajaya September 12, 2019. — Picture by Shafwan Zaidon
The Malaysian Royal Army Regiment marches during the Trooping the Colour ceremony at Dataran Pahlawan Negara in Putrajaya September 12, 2019. — Picture by Shafwan Zaidon

KUALA LUMPUR, Sept 26 — The Armed Forces Fund Board’s (LTAT) assessment for financial years ending December 31, 2017 and December 31, 2018 has found numerous financial irregularities and weaknesses, including the overpayment of dividends.

Among the findings by audit firm Ernst and Young was that LTAT’s earnings were affected by the overpayment of dividends, even when its five-year asset returns from financial years 2014 to 2018 were actually lower than the declared dividend rates.

“This has resulted in LTAT paying dividends at a higher rate than it could afford. To manage this situation, LTAT will develop a reasonable dividend policy, which includes determining a minimum rate of return on its investments.

“LTAT will subsequently establish a strategic asset allocation framework to meet its minimum expected dividend rate,” said the statement.

There was also an overstatement of the fund’s assets between 2015 and 2017, due to one of its large investments — LTAT could not be certain it could recoup the funds after the seller, that guaranteed the buyback of shares, was declared bankrupt in 2015.

As a result, an impairment of RM55 million had to be made for its 2018 results.

Another weakness was that financial and technical due diligence exercises were not properly undertaken by LTAT prior to investing the abovementioned company.

“The assessment also found some issues with unsold property assets worth RM45 million. It relates to 88 condominium units that remained unsold as at December 2018, despite having been completed in FY2015.

“LTAT is looking to expedite the sale of the remaining unsold units. Moving forward, LTAT will carefully consider potential returns and its own expertise in property development,” it said.

Another long-term issue facing the fund was heightened risk of overreliance and liquidity issues since 2014 due to significant sales of profitable shares, which led to a significant increase in LTAT’s shares in Boustead Holdings Berhad and its subsidiary, BHB Group.

LTAT’s amount of shares in BHB rose by more than 83 per cent from 833 million units in 2014 to 1.525 billion units in 2018 — with the investment rising almost 50 per cent from RM2.1 billion to RM3.1 billion.

This comes as the high dividends declared for 2017 by a number of subsidiaries were not paid in full and are still outstanding to date.

LTAT said it is re-assessing the ability of its subsidiaries to pay dividends, taking into consideration their respective performances and cash positions.

Another problem plaguing the fund was that its practice of buying unit trusts for its members to receive a special bonus. This was found to be detrimental to LTAT’s ability to control and manage the fund.

“Neither LTAT nor the members were able to manage their unit trust holdings until the point of retirement. Moving forward, LTAT may consider other avenues of investment that will allow the LTAT Board to better fulfil its key objective.

“The assessment finds that prior to 2019, LTAT accumulated an investment portfolio with substantial risks and asset quality issues. There were also certain past transactions that contained potential irregularities and weaknesses in operational, accounting and legal areas,” said the statement.

In response, the fund’s chairman General (Rtd) Tan Sri Mohd Zahidi Zainuddin said the assessment has allowed it to find gaps in LTAT’s operations while seeking ways to strengthen the fund for the benefit of serving and retired members of the Armed Forces.

Although it did not outright lay the blame on its previous chief executive, the statement did mention that the irregularities and weaknesses took place when LTAT was under the leadership of Tan Sri Lodin Wok Kamaruddin who stepped down on September 7, 2018.

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