Kingsmen Creatives

[sahara]

lol. on a side note.... China New Town also just lifted its trading halt. so coincidental.

Btw, can someone explain the 2nd "fraud" case ?

I dont get why the loss is so big, when Kingsmen claims that the services of value equivalent to the Prepaid Amount (SGD2.7m) had in fact been rendered.
- when a firm makes a prepayment, it either gets back in SERVICES (recognise as operating expenses) or cash (paid back) or WRITE OFF (Impairment)
- since Kingsmen got the SERVICES, it should be recongised as operating expenses AS PER NORMAL, and not some impairment to scare all the investors away...
- why are they insisting Party B pay back the money, when Party A/B completed the project for them..
- why isnt Kingsmen suing party A and party B to get the money back, bankrupting them or something... Instead of making impairments... and wasting shareholder money....

Because they had an asset on their balance sheet for a service they thought they were owed. It turns out that service wasn't owed at all, so the asset has to be cancelled. Hence the non cash cost.

Only the payment of the withheld money will be an actual cash cost to the company, and that's money that they owed anyway. This isn't a big deal financially, it's the legal implications of the bribery.

[l0nEr]

Because they had an asset on their balance sheet for a service they thought they were owed. It turns out that service wasn't owed at all, so the asset has to be cancelled. Hence the non cash cost.

Only the payment of the withheld money will be an actual cash cost to the company, and that's money that they owed anyway. This isn't a big deal financially, it's the legal implications of the bribery.

So in the first part, are you saying that there was a misstatement in the accounting? You mean that the party eventually completed the project, so there wasnt supposed to be a prepayment (not owned any service), but should have been expensed off long ago?
Or do you mean, Kingsmen thought that they could recover the amount (the cash is already paid before hand), and now they realise they couldnt, so they are writing it off. ==> if this is the case, where does the completion of the service come in?

On your second part, so you mean the amount they paid wasnt an extraordinary cost. If so, why bother making a big fuss out of it.
Personally I dont quite understand why that is considered a bribe. I only know that legally, after you borrow, and you want to amend certain covenants or clauses, you pay a fee and if the other party agrees its okay. Since its under the agreement of both parties, that the initial contract was amended. A penalty is normal.
I think its only a bribe when the employee paid an employee or someone in party B, but not party B itself, to amend the clause.

I just feel the whole announcement is poorly written, or maybe im just too stupid.

[sahara]

Because they had an asset on their balance sheet for a service they thought they were owed. It turns out that service wasn't owed at all, so the asset has to be cancelled. Hence the non cash cost.

Only the payment of the withheld money will be an actual cash cost to the company, and that's money that they owed anyway. This isn't a big deal financially, it's the legal implications of the bribery.

So in the first part, are you saying that there was a misstatement in the accounting? You mean that the party eventually completed the project, so there wasnt supposed to be a prepayment (not owned any service), but should have been expensed off long ago?
Or do you mean, Kingsmen thought that they could recover the amount (the cash is already paid before hand), and now they realise they couldnt, so they are writing it off. ==> if this is the case, where does the completion of the service come in?

On your second part, so you mean the amount they paid wasnt an extraordinary cost. If so, why bother making a big fuss out of it.
Personally I dont quite understand why that is considered a bribe. I only know that legally, after you borrow, and you want to amend certain covenants or clauses, you pay a fee and if the other party agrees its okay. Since its under the agreement of both parties, that the initial contract was amended. A penalty is normal.
I think its only a bribe when the employee paid an employee or someone in party B, but not party B itself, to amend the clause.

I just feel the whole announcement is poorly written, or maybe im just too stupid.

I mean should have been expensed long ago.

In my opinion, the big fuss is that the two employees acted illegally. Put it like this: Subcontractor B received a "personal guarantee" from the two employees that they would get the contract. One of the two employees then authorised further prepayments to B (for other projects they were working on for KE). Management claims they thought this was for urgent working capital requirements. In actuality it was to settle the "personal guarantees".

This is a bribe. The two employees were bribed by B so they would sway the awarding of the contract towards them. The two employees deceived Kingsmen and got them to pay money to B, only for B to then pay the two employees this amount as part of the bribe (not to use it for working capital).

This is how I read it. It also explains the quote from E&Y as posted before. I agree that it is a poorly written statement and I had to read it several times.

[piggo]

An employee with one of my (LSE listed) clients was fired recently. Though fraud was not announced explicitly, it was suspected that he benefited from contracts awarded to his favored subcontractors. Though the scale is different, it reminded me of the logical consequences of fraud of this level. Problem with Kingsmen is that for years, it was suspected (probably worse if it wasn't suspected) that two of their "employees/stakeholders" were stealing from the company. Yet no swift disciplinary action was taken despite the case being escalated to the authorities. They are risking the reputation of the company to protect 2 individuals!

So I'd presume for Kingsmen, low level fraud are tolerated, and they will also try to tolerate high level fraud even if it the company's profits takes a (10% excluding the amount written off in earlier years) dent. How then can my gauge of future profits be certain? Should I discount their future profits by 20% to account for the possible extra curricular activities? IMO given the earnings prospects + dividend yield, there are other better companies out there.

[l0nEr]

I mean should have been expensed long ago.

In my opinion, the big fuss is that the two employees acted illegally. Put it like this: Subcontractor B received a "personal guarantee" from the two employees that they would get the contract. One of the two employees then authorised further prepayments to B (for other projects they were working on for KE). Management claims they thought this was for urgent working capital requirements. In actuality it was to settle the "personal guarantees".

This is a bribe. The two employees were bribed by B so they would sway the awarding of the contract towards them. The two employees deceived Kingsmen and got them to pay money to B, only for B to then pay the two employees this amount as part of the bribe (not to use it for working capital).

This is how I read it. It also explains the quote from E&Y as posted before. I agree that it is a poorly written statement and I had to read it several times.

Hi Hi. thanks a lot for your explanation. I really like your blog btw.

Yep, i couldnt understand the part regarding the "personal guarantee for the project". Very vague.

"...around the time when the Settlement Agreement was entered into, a personal guarantee to Subcontractor B for the Project. When the personal guarantee is viewed together with the Settlement Agreement, it would appear that some of the costs of the Project were under-recognised"

Oh.. i thought the personal guarantee was part of the settlement agreement. i.e. Subcontractor B agreed to take up the debt for Subcontractor A because the 2 employees made a personal guarantee to them, for what matters I do not know. I thought it might be some project assistance or anything along those lines. Which is why Kingsmen said the some of the costs of the project was under-recognised, as the personal guarantee should had been expensed too as part of the settlement.
I also felt that it seemed more like a "promise" as compared to a "Written agreement", and that most SME work based on trust.
But i guess the bribery reason will fit better since the matter was reported to ministry of finance and CAD. Nonetheless, even if its a bribery reason, i dont see how it affects Kingsmen as long as it wasnt purported by the senior management. Even if it is so, Sun Hung Kai Properties recovered sharply after their co-chairmen and executive directors were arrested for corruption...as long as the daily business isnt affected, i guess things are fine?

[cif5000]

After reading the announcement several times, I believe that the fraud has nothing to do with bribery. Money (about $3m) was pushed out to A+B for work not performed. And in the face of the auditor and AC, the management pushed out another $764,619.60 and wrote off whatever owing to KE. The logical thing to do in KE interest is to do a contra.

Wait for the CAD...senior management will be investigated.

[corydorus]

Some info i found from the web.

Kingsmen Facts
Founded in 1976
SGX-listed in 2003
Over 1,300 creative professionals and project managers
18 offices worldwide

Kingsmen Exhibits Pte Ltd.
KE is a subsidiary of Kingsmen managed by another MD.

[KopiKat]

Wow! So many interesting interpretations... Let me join in the fun!

I won't quote anyone in case you want to tone down the original post, especially if it's unsubstantiable and may get you into trouble...

Based on my reading of the SGX Annc, I doubt that the MGMT discovered any acts of bribery (there's always the possibility that CAD may dig up something else) as there would have been sackings / suspension if so. My speculation of the 'Personal Guarantee',

Contractor B is likely a small company, possibly in the worst case, even a one-man show. Very likely, not much FCF and that's why they need the pre-payments in the first place.

How Contractor B likely function is to sub-con out most of the jobs to different sub-contractors. They have to pay the sub-con and I doubt they can drag payments for too long. But, with Kingsmen with-holding the $746k, how to pay the sub-con for jobs already done? One way would be for Contractor B to get a Bank Loan. No collateral, how? Possibly, 2 of the Kingsmen employees acted as their guarantor... ie. 'Personal Guarantee' provided...

So, if my speculation is correct, the bank could have been the one who alerted AC when they couldn't collect from either Contractor B or the Kingsmen employees. Contractor B may also have been the one who'd alerted AC in their zest to get their final payments and release from the pre-payments since the jobs were already done (as per MGMT findings).

Still, CAD is now involved. No doubt this will drag on for weeks, months or maybe even years?? Unlike the MGMT who has a vested interest to resolve this issue as fast as possible so that they can focus on their business, CAD would have no flexibility on what's right and wrong.... Very likely, someone will end up getting charged in court. How serious? Will it open up a can of worms? Senior Mgmt also involved? Will it affect Kingsmen credibility and business? I don't know... Each of us will have to evaluate our own risk-reward equation and make our own decision... As events unfold, we'll have to be quick and decisive, in case we were wrong... or right... Just learn from the experience and make sure you don't lose money you can't afford to lose... or just sit tight and enjoy the ride..

Vested and views are tainted...

[Share Investor]

In a businesstimes article, it was mentioned a poison pen letter was sent to SGX. Not likely to be from a bank.

[wee]

One way would be for Contractor B to get a Bank Loan. No collateral, how? Possibly, 2 of the Kingsmen employees acted as their guarantor... ie. 'Personal Guarantee' provided...

My view:

IMO a rational employee would not likely put up his personal networth to be a bank guarantor for a subcontractor of his employer, especially one that is small and without much assets, especially when the reason is as innocent as to help a subcontractor manage cashflow and benefit accrues to his employer/subcontractor and not himself.

I am also dubious of the kind of bank that would accept such arrangement.