Petaling Jaya MP Tony Pua has urged the auditing firm KPMG to explain its failure to red-flag allegedly suspicious transactions between 1Malaysia Development Berhad (1MDB) and its then joint venture partner Petrosaudi International Limited (PSI).

He said international and professional auditing standards both require auditors to evaluate the business rationale of "significant transactions that are outside the normal course of business for the entity" for possible fraudulent financial reporting or misappropriation of assets, and to report such incidents if fraud is suspected or found.

"In this case, unless they (KPMG) were convinced after a thorough audit process that there has been no suspicious element of fraud or the misappropriation of direct or indirect government funds, the auditors are obligated report the matter to the relevant authorities, such as the police or even the Malaysian Anti-Corruption Commission (MACC)," he added in a statement today.

KPMG was the auditor of 1MDB's accounts for its 2010 financial report, which is the state investment company’s first financial report.

Its reporting period includes the time from when the joint venture was signed in September 2009, and when it was terminated in March 2010.

The news portal Sarawak Report had disclosed the supposed joint venture agreement last week, alleging that the venture had a pre-existing debt of US$700 million (RM2.55 billion), and 1MDB had to fork out money from its US$1 billion (RM3.65 billion) initial investment to repay its partner's debt.

In response to the allegation, 1MDB president Arul Kanda had issued a statement saying that details of the transactions are publically available as well as a FAQ on the company’s website.

However, the FAQ only mentions that the joint venture with PSI was formed in 2009 but the investments were converted into a loan when the deal fell apart.

It did not mention that 1MDB invested US$1 billion into the venture, or that it had a pre-existing US$700 million loan. The rationale for the investment into a debt-laden venture was also left unexplained.

Pua claimed that the transaction was suspicious because 1MDB had converted its shares in the venture - then valued at US$1.2 billion - instead of withdrawing it outright.

"In other words, if 1MDB did not believe in the business model any more, then why did it still lend money to the venture, where 1MDB would then have no representation nor control over the funds?

"The question must therefore be asked if the Auditors for 1MDB, KPMG Chartered Accountants who signed off the accounts on Oct 4, 2010, had abetted 1MDB in covering up the above Petrosaudi scam," he said.

He said if KPMG fails to explain itself, it would necessitate an investigation on the firm by the Malaysian Institute of Accountants.