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12-01-2012, 11:51 PM
Business Times - 12 Jan 2012
Special audits can't mend broken companies
Audits commissioned by SGX can also be costly and time-consuming
By JAMIE LEE
(SINGAPORE) Special audits commissioned by the Singapore Exchange (SGX) have sounded the death knell for several listings in recent years. They are also expensive exercises for both the affected companies and their shareholders, but such audits remain one of the few options available to the SGX to uncover possible regulatory lapses given its limited powers.
SGX's regulatory constraints - especially when it comes to foreign listings - have been laid bare in its latest stand-off with China Sky, suggesting that it may have to tighten the way boards review and disclose internal controls, as well as consider more disclosure of its mostly private regulatory dealings with listed companies.
China Sky has resisted SGX's directive for a special audit - one typically made by the regulator over transactions that require more thorough investigation - setting an uncomfortable precedent of outright defiance.
In the case of China Sky, SGX wants special auditors to probe 72 million yuan (S$14.7 million at current exchange rate) worth of repairs and maintenance costs that were incurred in 2009; the purchase and subsequent return of a piece of land in Fujian province; and interested person transactions between China Sky and its independent director, Lai Seng Kwoon, who, together with the two other independent directors, has resigned over the firm's rejection of a special audit.
This has now snowballed into a public spat - especially after notes from recent private meetings between SGX and China Sky have been made public by both parties - with the S-chip defending its non-compliance on the grounds that it had already explained itself to the exchange, and that a special audit is expensive and time-consuming.
The latter point is valid, as FibreChem Technologies' special audit process has shown. The inquiry conducted by nTan Corporate Advisory revealed HK$777 million (S$129 million) in missing cash, among other financial and accounting irregularities.
But the cost was heavy for both the company and the shareholders, who waited three years before the investigations - incurring a staggering $4.64 million in fees - were done.
From 2004, over 20 companies listed here - most of which have businesses based in China - have gone through a special audit process that took up varied amounts of time and money, a compilation by BT showed. More than five special audits were done last year, just about the same number in 2009, when companies were caught naked by pulled credit lines.
The running trend of inquiry findings includes missing cash, questionable transactions and fraud, often with the use of fake bank statements. Some reports take a more dramatic turn, with China Sun Biochem Technology claiming that the truck transporting accounting records had been stolen.
One exception is Fujian Zhenyun Plastics Industry, which went through the process early last year. Special auditors suggested flawed internal control and governance, but no money was found to be missing outright.
The majority of these companies were listed between 2004 and 2006. Some have been delisted, while others remain suspended or lie in wait for white knights.
Mano Sabnani, a shareholder of China Sky, noted that SGX should publish a status report showing the progress of its dealings with the problematic S-chips, as well as the issues that plagued these companies, so that shareholders are kept informed.
'There's a lot of debris out there,' he told BT.
The problem is, like all the king's horses and all the king's men, a special audit cannot put Humpty Dumpty together again.
While market watchers agree that a special audit is still necessary to dig out transactions that may have breached listing rules since SGX has no powers to investigate, they note the limited consequences the report can bring about, especially with a lack of enforcement when it comes to foreign listings.
'It is important to get to the bottom of the issues. If not for anything else, it may help prevent further losses to the company and minority shareholders,' said Associate Professor Mak Yuen Teen from NUS Business School. '(But) would shareholders be able to sue those responsible to recover their losses?'
Yap Wai Ming, a partner at Stamford Law, likened the call for a special audit to 'shutting the door to the barn after the horses have bolted'.
'It is normally too late and if the losses are not recoverable, the company is worst off by the cost of the special audit,' he said, suggesting cheaper alternatives such as a financial review that has a more specific and limited coverage.
'A balance needs to be struck and understandably, from a regulator's view point, it may be easier to go for a full audit to extract the maximum mileage out of such an exercise,' he said.
'The best solution is really to instil vigilance in the independence of the board and having strong internal control processes aided by a capable team of auditors to reduce non-compliance.'
SGX has raised its scrutiny in its latest revision to its listing rules. It wants companies that have a legal representative, typically Chinese ones, to disclose the individual's identity and responsibilities, and have boards ensure a 'robust system of internal controls' by suggesting that the audit committee can commission an independent audit on internal controls.
Robson Lee, a corporate lawyer and deputy secretary of Securities Investors Association (Singapore), suggested making independent audits mandatory.
'While this would inevitably increase the costs of listing, it would be a more proactive and useful measure to minimise corporate failures,' said Mr Lee.
'It would be better for the exchange to have periodic 'health-check' updates by issuers published to the market, as opposed to having a 'terminal-stage' medical report suddenly announced to the market in the form of corporate failures and special audit directives.'
Some say SGX should signal earlier that it has intensified its scrutiny of certain companies, rather than keep discussions behind the scenes or until things come to a boil.
SGX and its regulator, the Monetary Authority of Singapore, have long enjoyed broad discretion in not disclosing dealings with individual firms, a point that has invited criticism. Some see that as favouring business relations over regulation and the public's right to information, and point to China Sky's case, where saving face yields little saving grace.
Notably, SGX had queried China Sky at end-April over the discrepancies in the value of interested person transactions, and over non-disclosure relating to a sale of land in Fujian (China Sky said this was part of a non-disclosure agreement). Some feel more could have been done then to address the issues facing the company, rather than resorting to a special audit later. Such dissatisfaction will likely harden calls for SGX to separate its regulatory function from its profit-making role, market watchers say.
'To borrow a legal maxim - 'nemo judex in causa sua', or 'no man should be a judge in his own cause',' said Mr Yap.
Special audits can't mend broken companies
Audits commissioned by SGX can also be costly and time-consuming
By JAMIE LEE
(SINGAPORE) Special audits commissioned by the Singapore Exchange (SGX) have sounded the death knell for several listings in recent years. They are also expensive exercises for both the affected companies and their shareholders, but such audits remain one of the few options available to the SGX to uncover possible regulatory lapses given its limited powers.
SGX's regulatory constraints - especially when it comes to foreign listings - have been laid bare in its latest stand-off with China Sky, suggesting that it may have to tighten the way boards review and disclose internal controls, as well as consider more disclosure of its mostly private regulatory dealings with listed companies.
China Sky has resisted SGX's directive for a special audit - one typically made by the regulator over transactions that require more thorough investigation - setting an uncomfortable precedent of outright defiance.
In the case of China Sky, SGX wants special auditors to probe 72 million yuan (S$14.7 million at current exchange rate) worth of repairs and maintenance costs that were incurred in 2009; the purchase and subsequent return of a piece of land in Fujian province; and interested person transactions between China Sky and its independent director, Lai Seng Kwoon, who, together with the two other independent directors, has resigned over the firm's rejection of a special audit.
This has now snowballed into a public spat - especially after notes from recent private meetings between SGX and China Sky have been made public by both parties - with the S-chip defending its non-compliance on the grounds that it had already explained itself to the exchange, and that a special audit is expensive and time-consuming.
The latter point is valid, as FibreChem Technologies' special audit process has shown. The inquiry conducted by nTan Corporate Advisory revealed HK$777 million (S$129 million) in missing cash, among other financial and accounting irregularities.
But the cost was heavy for both the company and the shareholders, who waited three years before the investigations - incurring a staggering $4.64 million in fees - were done.
From 2004, over 20 companies listed here - most of which have businesses based in China - have gone through a special audit process that took up varied amounts of time and money, a compilation by BT showed. More than five special audits were done last year, just about the same number in 2009, when companies were caught naked by pulled credit lines.
The running trend of inquiry findings includes missing cash, questionable transactions and fraud, often with the use of fake bank statements. Some reports take a more dramatic turn, with China Sun Biochem Technology claiming that the truck transporting accounting records had been stolen.
One exception is Fujian Zhenyun Plastics Industry, which went through the process early last year. Special auditors suggested flawed internal control and governance, but no money was found to be missing outright.
The majority of these companies were listed between 2004 and 2006. Some have been delisted, while others remain suspended or lie in wait for white knights.
Mano Sabnani, a shareholder of China Sky, noted that SGX should publish a status report showing the progress of its dealings with the problematic S-chips, as well as the issues that plagued these companies, so that shareholders are kept informed.
'There's a lot of debris out there,' he told BT.
The problem is, like all the king's horses and all the king's men, a special audit cannot put Humpty Dumpty together again.
While market watchers agree that a special audit is still necessary to dig out transactions that may have breached listing rules since SGX has no powers to investigate, they note the limited consequences the report can bring about, especially with a lack of enforcement when it comes to foreign listings.
'It is important to get to the bottom of the issues. If not for anything else, it may help prevent further losses to the company and minority shareholders,' said Associate Professor Mak Yuen Teen from NUS Business School. '(But) would shareholders be able to sue those responsible to recover their losses?'
Yap Wai Ming, a partner at Stamford Law, likened the call for a special audit to 'shutting the door to the barn after the horses have bolted'.
'It is normally too late and if the losses are not recoverable, the company is worst off by the cost of the special audit,' he said, suggesting cheaper alternatives such as a financial review that has a more specific and limited coverage.
'A balance needs to be struck and understandably, from a regulator's view point, it may be easier to go for a full audit to extract the maximum mileage out of such an exercise,' he said.
'The best solution is really to instil vigilance in the independence of the board and having strong internal control processes aided by a capable team of auditors to reduce non-compliance.'
SGX has raised its scrutiny in its latest revision to its listing rules. It wants companies that have a legal representative, typically Chinese ones, to disclose the individual's identity and responsibilities, and have boards ensure a 'robust system of internal controls' by suggesting that the audit committee can commission an independent audit on internal controls.
Robson Lee, a corporate lawyer and deputy secretary of Securities Investors Association (Singapore), suggested making independent audits mandatory.
'While this would inevitably increase the costs of listing, it would be a more proactive and useful measure to minimise corporate failures,' said Mr Lee.
'It would be better for the exchange to have periodic 'health-check' updates by issuers published to the market, as opposed to having a 'terminal-stage' medical report suddenly announced to the market in the form of corporate failures and special audit directives.'
Some say SGX should signal earlier that it has intensified its scrutiny of certain companies, rather than keep discussions behind the scenes or until things come to a boil.
SGX and its regulator, the Monetary Authority of Singapore, have long enjoyed broad discretion in not disclosing dealings with individual firms, a point that has invited criticism. Some see that as favouring business relations over regulation and the public's right to information, and point to China Sky's case, where saving face yields little saving grace.
Notably, SGX had queried China Sky at end-April over the discrepancies in the value of interested person transactions, and over non-disclosure relating to a sale of land in Fujian (China Sky said this was part of a non-disclosure agreement). Some feel more could have been done then to address the issues facing the company, rather than resorting to a special audit later. Such dissatisfaction will likely harden calls for SGX to separate its regulatory function from its profit-making role, market watchers say.
'To borrow a legal maxim - 'nemo judex in causa sua', or 'no man should be a judge in his own cause',' said Mr Yap.
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