The government of Sabah, a state in East Malaysia on the island of Borneo, has filed a RM2.4 billion (approximately US$587 million) lawsuit against Ernst & Young PLT, alleging negligence in the audits of state-owned Sabah Development Bank Berhad (SDB) over more than a decade.
The action was filed in the Kuala Lumpur High Court on 30 July 2026 by the State Government of Sabah, the Chief Minister of the State of Sabah as a corporation sole, Sabah Development Berhad and SDB Corporation Sdn Bhd.
The plaintiffs allege that EY breached professional, statutory and common-law duties when conducting audits of SDB’s financial statements for the years 2011 to 2022. During this time, they allege, EY continued to issue unqualified audit opinions as the quality of SDB’s loan portfolio deteriorated.
According to the statement of claim, by 2018, 54% of SDB’s gross loans were non-performing, with a further 32% showing a significant increase in credit risk. This meant that almost 86% of the loan portfolio was either non-performing or showing significant credit deterioration.
The plaintiffs argue that the scale of the deterioration should have prompted greater scrutiny of the bank’s impairment provisions, collateral valuations and ability to continue as a going concern.
The claim also alleges that, of RM6.8 billion in reported security assets, collateral valued at RM5.195 billion was of questionable value because it was based on outdated or unreliable valuations or unrealistic assumptions. The allegation is that EY was aware of weaknesses in collateral valuations.
The claim further alleges that the bank engaged in loan “evergreening”, extending new facilities to distressed borrowers which were then used to service existing debts, thereby preventing or delaying the existing facilities from being classified as non-performing.
The plaintiffs also link the audit opinions to SDB’s ability to raise further debt. They allege that a RM3 billion commercial paper and medium-term note programme launched in 2021 was issued in reliance on EY’s unqualified opinion on the bank’s 2020 accounts. Their case is that, had EY qualified its opinion or otherwise disclosed the alleged problems, SDB’s financial condition would have become apparent earlier and the state would not have continued supporting SDB’s additional financing.
The plaintiffs make a further allegation: that EY knew additional impairment was required but did not insist that the full amount be recognised after representations from former management concerning the impact that higher provisions could have on SDB’s ability to raise financing.
In 2022, the bank reported a net profit of RM64.4 million. The following year, a new board and management were appointed and carried out a review which revealed that the bank had approximately RM5 billion of non-performing loans: nearly 70% of its loan portfolio.
After recognising substantial provisions against non-performing loans and reductions in asset values, SDB reported a loss before tax of RM878.05 million and a net loss of RM683.96 million for 2023.
The losses are mainly due to provisions for Non-Performing Loans (NPLs) and reduced asset values over the years. SDB had reported yearly profits for past years. Had proper accounting and appropriate provisions been followed from the outset, the Bank would have reported successive significant annual losses in previous financial years.
Sabah Development Bank Berhad press release, 22 August 2024
The plaintiffs rely on that deterioration as part of their case that impairment should have been recognised in earlier audited financial statements.
The bank has been giving out loans to borrowers, and when the borrowers were unable to repay, creative accounting was applied.
New loans were created to pay for the overdue repayments so that these loans would not be classified as non-performing.
This forced the bank to borrow more to repay the bonds, resulting in ballooning debt.
As the scale of SDB’s financial problems emerged, the Sabah government provided substantial financial support to the bank. According to the lawsuit, the state relinquished its rights to RM650 million of fixed deposits held at SDB in November 2023 to support the bank, followed by a RM40 million equity injection the following month and a further RM50 million injection in October 2024. The state also agreed to convert RM660 million of deposits into redeemable preference shares.
The plaintiffs allege that without this support SDB risked defaulting on its debts and potentially being wound up. At the end of 2023, the bank reportedly had approximately RM4.29 billion of outstanding bonds, RM1.91 billion of fixed deposits and RM260 million of bank facilities.
Those interventions, together with the anticipated remaining shortfall, form the basis of the RM2.4 billion being claimed from EY. The damages sought comprise RM650 million relating to the relinquished deposits, RM90 million in capital injections, RM660 million of deposits being converted into preference shares, and approximately RM1 billion representing the anticipated shortfall between SDB’s outstanding liabilities and expected recoveries.
EY had been SDB’s auditor since 2011 and remained auditor through the 2023 financial year. It was not reappointed at the bank’s September 2024 annual general meeting and was replaced by Forvis Mazars for the 2024 audit. At the time, SDB said it was conducting a comprehensive review following its unprecedented 2023 loss.
EY Malaysia subsequently said it would vigorously contest the claims. In a statement reported by Bloomberg, the firm said the proceedings concern matters already raised in ongoing Sabah Development Bank litigation and that its work had been conducted in accordance with professional standards.
This is not the first lawsuit brought against EY over the SDB audits. In 2025, SDB itself filed a separate negligence claim seeking nearly RM2 billion concerning EY’s audits from 2017 to 2022. EY has said the new proceedings concern matters already raised in that ongoing litigation, although the precise procedural relationship between the two actions is not clear from public reporting.
The allegations against EY described above are contained in court proceedings and have not been proven. This article will be updated as the case progresses.
This article is part of the Big4News Case Watch series. Case Watch tracks significant regulatory investigations, enforcement actions and litigation involving Deloitte, PwC, EY and KPMG, focusing on matters that shed light on internal culture, governance and accountability.
About Claudine Cassar
I’m a corporate anthropologist and former Deloitte equity partner. I sold my technology business to Deloitte in 2016 and led the Malta Consulting team for five years. I am the founder and editor of Big4News, which provides independent, clear analysis of PwC, Deloitte, EY, and KPMG — free from corporate spin.
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