Posted by CHEN Liting, Year 3 undergrad at the School of Accountancy, Singapore Management University
Business Times – 28 Dec 2011
THREE years of investigations have uncovered several financial and accounting irregularities at FibreChem Technologies, including an unauthorised share transfer and HK$777 million (about S$130 million) in missing cash.
Such were the discrepancies found at the Fujian-based textile firm ‘over an extended period of time’ that led nTan – engaged by the group as investigator and financial adviser – to question FibreChem’s published financial statements over the years.
nTan noted in its findings that it would be ‘reasonable to conclude that the financial and accounting irregularities were probably carried out at the direction or with the knowledge of senior members of the PRC management, in particular Mr Zhang and Mr Zheng’.
James Zhang was the group’s executive chairman and CEO, while Zheng Peirong was chief financial officer.
The damning report was released yesterday, after three years of investigations that were fraught with obstacles since nTan was appointed as independent investigator and financial adviser of the group.
‘A strong corporate culture that respects internal control measures does not exist at the PRC subsidiaries,’ nTan concluded.
‘Such an environment may have created a fertile ground for the abuse and overriding of internal controls which allowed the financial and accounting irregularities to be perpetrated at will.’
The red flag at FibreChem was first raised in early 2009 when its auditors could not finalise an audit of its trade receivables and cash balances for the year ended Dec 31, 2008.
An investment rescue plan for the group from Indonesian firm Prima Andalan Sentosa recently lapsed, prompting creditors to again issue statutory demands on FibreChem.
nTan said its investigations had uncovered a significant number of different types of irregularities beyond transactions involving the group’s trade receivables and cash balances.
There were several financial and accounting misstatements by the group – its net assets were overstated by HK$382 million, its cash balance was overstated by HK$686 million, and there was an unaccounted cash balance of HK$777 million.
Based on a revised group balance sheet, the worst-case scenario would be an embezzlement of the missing cash balance of HK$777 million, said nTan.
Around HK$450 million of loans from Chinese banks between 2005 and 2008 and a subsequent loan default were not disclosed in the group’s published balance sheets. Other group assets and liabilities, too, may not have been properly recorded.
When questioned during the probe, Mr Zhang said he had no reason to doubt the expertise of his CFO, Mr Zheng, in preparing and finalising the financial statements of the group and ‘had relied on Mr Zheng to ensure that the PRC bank loans (as well as all other accounting items) would be accurately reflected in the group’s published financial statements’.
These ‘significant’ financial misstatements constitute breaches of disclosure rules under the Securities and Futures Act and Singapore listing rules, nTan said.
nTan also found that during a restructuring exercise in December 2008, FibreChem management transferred 51 per cent of its shareholding in Xiamen Microfibre from one subsidiary to another without informing the board.
This resulted in the group’s assets being placed out of reach of its offshore creditors.
Mr Zhang had procured funds to pay for the group’s expenses on the independent investigation, its trading resumption proposal and other operating expenses.
But nTan said it faced several roadblocks during its probe: it was granted limited access to accounting records of FibreChem’s Chinese subsidiaries; the computers used by the PRC accounting team were missing; and the relevant accounting records of the group were incomplete and deemed unreliable.
‘Unlike other investigative assignments that we had carried out in Singapore, we did not have statutory coercive powers in the PRC to enable us to require the cooperation of, inter alia, the present and former employees of the group, certain customers and suppliers of the group who were all in the PRC,’ nTan said.