Published March 13, 2009

Raffles Edu needs to tighten checks on investments

By OH BOON PING

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THE accounting scandal at Oriental Century Ltd has undoubtedly struck a blow at Raffles Education, which owns a 29.9 per cent stake in the China-based education provider.

Oriental Century shocked the market yesterday when it said its chairman and CEO Wang Yuean had confessed to having - over several years - inflated sales and cash balances and had diverted unspecified sums to an interested party.

But what's also surprising is Raffles's hands-off approach to Oriental Century.

So what is so special about Oriental Century that its biggest shareholder Raffles Education did not insist on board representation or carrying out its due diligence?

During a teleconference yesterday, Raffles' chief executive Chew Hua Seng admitted that the group had relied primarily on Oriental's IPO prospectus, without conducting separate checks when it bought a significant stake in 2006. Even more surprisingly, Raffles is not represented on the management, even though it now owns nearly 30 per cent in Oriental.

When queried, Mr Chew said that 'Oriental Century is a listed company with its own set of prospectus, governance and auditors. Even if we are shareholders, we cannot just go in and carry out the due diligence'. Plus, the business model at Oriental is sound, as the China-based education provider runs three colleges and provides other ancillary courses catering to the rising education demands in China. 'If the business model is working, why fix it?' he added.

Sounds well and good. Except that these are no reasons for not doing the proper checks, not when the company has since pumped in over $30 million worth of investment.

And it seems odd that the biggest shareholder did not even ask for board representation, if only to ensure that its investment is safe.

Plus, as Raffles is now painfully aware, even listed companies also have their fair share of 'fraud' cases. Names such as Auston International and China Aviation Oil immediately come to mind.

True, a strong corporate governance structure certainly helps to mitigate the risk of accounting scandals, but this is of minimal use if there isn't sufficient oversight at the ground level.

A case in point was CAO which appeared to have a proper risk management system in place. However, a clear lack of enforcement allowed the former CEO Chen Jiulin to override the system and he nearly brought down the company with his heavy trading losses.

A second issue concerns the adverse impact the scandal will have on Raffles.

Yes, Oriental's contribution to the group's $99.4 million net profit last year amounted to just two per cent and the group said it will not be materially affected by the latest development.

However, it is clear that should Oriental eventually cease to be a going concern, Raffles may have to write off its entire $34.6 million stake - potentially wiping off a big chunk of its FY09 earnings.

In addition, Raffles' brand name among the investment community can be expected to take a hit by the entire saga.

For a group that has grown rapidly largely through acquisitions, the latest news also raises investors' concerns about Raffles' many other investments in China.

In this regard, Mr Chew assured reporters that the Oriental incident is a one-off case, as it carried out its due diligence and staggered the payments according to pre-set milestones, while retaining management and cash control of its other China-based schools.

But regardless of the soundness of those investments, one thing is clear: Raffles will now have to tighten its investment checks as its shareholders deserve no less.