KUALA LUMPUR: The Sabah government, along with its chief minister, state owned Sabah Development Bhd and SDB Corporation Sdn Bhd filed a RM2.4 billion lawsuit late last month against accounting firm Ernst & Young PLT (EY).
The suit alleges negligence in planning and conducting audits for Sabah Development Bank Bhd (SDB) accounts between the financial years ended Dec 31 in 2011 and 2022.
It was filed at the Kuala Lumpur High Court on July 30 by Messrs Gan Partnership. The plaintiffs allege that EY breached its statutory duties under the Companies Act 1965, Companies Act 2016, Capital Markets and Services Act 2007 and the Financial Reporting Act 1997 when auditing the bank’s accounts, directly resulting in financial losses for the bank.
They are also seeking a declaration that EY breached its common law duty of care.
They are seeking RM2.4 billion worth of compensation from EY, structured as follows:
- RM650 million to the Sabah government for fixed deposits forfeited on Nov 14, 2023;
- RM90 million to the state government for capital injections paid on Dec 13, 2023 and Oct 3, 2024;
- RM660 million both to the government and the chief minister for fixed deposits the government agreed to convert into redeemable shares;
- RM1 billion being continuing and future losses due to the projected shortfall between the bank’s outstanding liabilities and expected recoveries.
In addition to the financial compensation, they are seeking punitive and exemplary damages, interests, and legal costs.
SDB’s insolvency
In the statement of claim sighted by The Edge, the Sabah government said SDB was formed in August 1977 to carry out public development functions for the benefit of its people, and that it operated as a development financial institution (DFI) funded by Sabah’s public resources.
At all material times, the Sabah government was the ultimate beneficial owner of SDB, either directly or through the chief minister, Sabah Development and SDB Corp.
The suit claims that SDB was insolvent by no later than the financial year 2018, noting EY’s own reports recorded that 85.94% of SDB’s loan portfolio were non-performing loans.
“A reasonably competent auditor could not have concluded that SDB was a solvent going concern or that SDB’s financial statements gave a ‘true and fair view’ of its financial position without qualification.
“Yet, EY continued to issue unqualified audit opinions for each of the financial years ending 2018 to 2022 and caused SDB to accumulate further debt,” the document read.
These debts included a RM3 billion bond programme issued in FY2021, which the state is currently still repaying.
The plaintiffs argue that EY’s breaches kept them completely unaware of SDB’s true financial position until 2023, causing them to incur heavy losses and face up to RM1 billion in remaining liabilities due by September 2029.
Deficiencies and inaccuracies found
EY served as SDB’s auditor from 2011 until September 2024, when it was replaced by Forvis Mazars PLT.
The plaintiffs highlighted that Sabah had committed over RM8 billion in financial support to SDB, comprising RM7.5 billion in letters of support and RM1 billion in fixed deposits, making the state uniquely vulnerable to auditing failures. EY’s failure to undertake a proper audit and provide a proper report, they claimed, created a risk that the Sabah’s letters of support would be called upon, that its fixed deposits maintained with SDB would be lost, and that they would continue to provide financial support to SDB on terms which would not have been provided had the true financial position been known.
The claim noted that as of October 2025, EY audited about 187 public interest entities in Malaysia, including 87 listed companies, 47 financial institutions and 52 capital market licence holders.
This means EY is duty-bound to adhere strictly to approved Malaysian auditing standards.
After the election of a new board of directors and the appointment of a new management team at SDB in 2023, an internal review of accounts from FY2017 to 2022 uncovered deficiencies and inaccuracies, including:
- SDB’s non-performing loan (NPL) was approximately RM5 billion, representing almost 70% of the value of SDB’s total loan portfolio — a ratio so extreme that the bank could not have continued as a going concern without financial support from the state;
- out of RM6.8 billion in total security assets reported, RM5.195 billion were of doubtful value as they were based on unreliable valuations;
- some outdated and dubious valuations, including those based on construction costs provided by contractors or architects on projects that had been abandoned, as well as unrealistic assumptions that grossly inflated the value of the assets by hundreds of millions.
- substantial parts of SDB’s funds had been deployed outside of Sabah — as of 2023, 45% of SDB’s loan portfolio comprised loans made to counterparties in Peninsular Malaysia, with only around 55% of loans made to parties in Sabah.
- of the total RM5 billion NPLs, about RM3 billion or 60% originated from Peninsular Malaysia.
The plaintiffs claimed that had EY’s audits been accurate, corrective actions would have been taken prior to July 2023, and SDB would have ceased to provide loans under risky circumstances, initiated aggressive recovery of NPLs earlier, averted massive losses.
The case has been scheduled for case management before a High Court senior assistant registrar on Sept 4.
