This article first appeared in The Edge Malaysia Weekly on June 23, 2025 - June 29, 2025

CHENGCO PLT has resigned as the auditor of 35 public-listed companies over the past three months. Many of them are small-cap companies with an average market capitalisation of between RM30 million and RM50 million, and not doing well financially.

Interestingly, many of these companies seem to have had a penchant for cash calls via private placements and rights issues, as well as large employee share option schemes (ESOS). Many of them have also changed their financial year end very often.

Chengco is in the spotlight because the Securities Commission Malaysia’s (SC) Audit Oversight Board (AOB) on June 12 suspended the registration of the auditor for two years due to “serious audit quality issues” and imposed sanctions on five partners at the firm.

With Chengco’s audits coming under scrutiny, what should minority shareholders and investors make of the financials of its previous clients?

An auditor who spoke on condition of anonymity says it is not common for all audit partners to be reprimanded. “Then again, just because Chengco and the audit partners have been reprimanded, it doesn’t mean there is something wrong with the [35] companies’ accounts,” she adds.

However, a market watcher, who also spoke on condition of anonymity, says: “It does seem odd that so many of these smallish companies have the same auditor … and some of the companies are related by way of shareholding.” (See table on the companies’ financials and shareholdings.)

It is worth noting that similar action was taken against Ernst & Young PLT and one of its auditors but the regulator only issued a press release on the action taken against Chengco.

Only three of the 35 companies — Nova MSC Bhd (KL:NOVA), Evergreen Max Cash Capital Bhd (KL:EMCC) and Magna Prima Bhd (KL:MAGNA) — have a market capitalisation of more than RM100 million.

Nova MSC’s market capitalisation is above the RM100 million band, at RM150.7 million, with a huge share base of 2.15 billion. The company, which is involved in software research and development, has not been profitable since FY2019. Its share price closed at seven sen last Thursday.

Meanwhile, one of the other companies on the list, medical device and laundry equipment distributor BCM Alliance Bhd (KL:BCMALL) has a market capitalisation of just above RM10 million. Its share price closed at one sen last Thursday.

BCM Alliance has suffered seven straight quarters of losses and last had a profitable financial year in 2020, when it made a net profit of RM2.66 million on revenue of RM68.13 million.

All 35 companies from which Chengco resigned as auditor in the last three months are penny stocks, trading below RM1. Only 10 of them managed to make a profit in their most recent financial quarter.

For example, MMM Group Bhd (KL:MMM), which is involved in advertising, managed to register a net profit of RM115,000 from RM2.98 million in revenue in its fourth quarter ended March 31, 2025. But for the full year, it saw a loss of RM615,000 from RM7.96 million in revenue.

MMM was previously known as Asia Media Group Bhd, whose former managing director and CEO Ricky Wong Shee Kai is on the run after a warrant of arrest was issued for him in September 2021. The counter, which has been in the doldrums for years, closed at seven sen last Thursday.

Then, there are companies such as Fintec Global Bhd (KL:FINTEC) which show a profit every few quarters after booking a “fair value profit on marketable securities” which offsets the losses from their businesses.

For the nine months ended March 31, 2025, technology incubator Fintec suffered a net loss of RM37.85 million from only RM3.9 million in revenue. While the company had little in terms of borrowings and RM9.58 million in cash and bank balances, it had RM221.42 million in accumulated losses.

Another company that stands out is Metronic Global Bhd (KL:MTRONIC), which explained that the resignation of Chengco “was due to the suspension of the firm’s registration status with the AOB of the Securities Commission Malaysia”.

The company has not had a profitable financial year since 2016. For its first quarter ended Jan 31 this year, it suffered a net loss of RM2.66 million from RM7.68 million in revenue.

In a span of eight years, Metronic has changed its financial year end three times. In November 2017, it changed its financial year end to March 31 from Dec 31. In June 2018, it changed its financial year end to June 30. And in April last year, it changed its financial year end to Oct 31.

Chengco has been in operation since 1993 and has 14 offices across the country. It has 60 AOB-registered audit professionals, more than 200 audit professionals and in excess of 3,000 active clients. According to industry sources, the firm had hired a number of junior auditors.

For Chengco, the AOB’s move to suspend its registration could trigger a serious loss in clientele. This is already playing out based on the announcements made by Bursa Malaysia-listed companies on the firm’s resignation as their auditor.

Audit partners Hong Thuan Boon and Yap Peng Boon were suspended for two years, while managing partner Tan Wae Leng, audit partner Kong Tung Sam and audit partner Ng Kee Siang were prohibited from “accepting as clients and auditing any public interest entities (PIEs) or schedule funds for one year”.

The SC’s definition of PIEs includes publicly traded companies, banks and insurers.

“The sanctions followed the AOB’s findings of multiple breaches in relation to Chengco’s failure to comply with the relevant requirements of the International Standards on Auditing as adopted by the Malaysian Institute of Accountants when auditing the three PIEs,” the AOB says in its June 12 statement.

“Further, the findings were in fundamental and key audit areas. These include failure to obtain sufficient audit evidence in areas such as bank borrowings, opening balances and prior year adjustments, use of going concern assumption, other payables and accruals, revenue, cost of sales, redeemable convertible preference shares and goodwill.”

It adds, “These findings were prevalent across the audit engagements inspected and some were recurring from the AOB’s past inspection of Chengco. Despite being sanctioned by the AOB in 2019, Chengco failed to demonstrate an improvement in overall audit quality. Hong and Yap were also sanctioned by the AOB in 2019.”

Chengco had appealed against the AOB’s enforcement action taken early this year, but the SC dismissed the appeal and affirmed the AOB’s decision, ensuring that the suspension took effect from June 12 this year.

Emails to Chengco from The Edge asking for comment on the AOB’s suspension were not delivered by its system and bounced back.

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