Published March 20, 2009

SGX flags hot spots for company boards

In a timely alert, it calls on boards to verify cash and other areas of heightened risks

By CHEW XIANG

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(SINGAPORE) The Singapore Exchange yesterday urged boards to step up checks on their companies' cash holdings, accounts receivables, off-balance sheet items and other 'areas of heightened risks'. And the results of such checks, the SGX said, should be disclosed.

'We expect listed companies . . . to be responsive to our communication and take prompt action as necessary,' SGX said.

Market watchers said that the move was likely to be a response to accounting scandals that have hit some companies in recent weeks, especially listings from China.

'There are concerns whether some of the recently reported findings affecting a few companies are isolated cases or indicative of more pervasive problems,' said Tham Sai Choy, regional head of audit at KPMG LLP.

Two S-chips - Fibrechem Technologies and Oriental Century - are suspended from trading over alleged accounting irregularities. Beauty China and Sino-Environment have found their future clouded by major shareholders who have been hit by financial problems.

However, Yeo Lian Sim, SGX senior executive vice-president and head of risk management and regulation, described it as a timely alert. 'We're not prescribing this,' she told BT.

'It being the end of the year when many of the listed companies do their annual audits, we found it good timing to alert them to look in particular at their cash balances and their accounts receivables, and to verify these,' she added.

Analysts say that the scandals have depressed valuations, and they cite China stocks where some investors have lost faith that their financials, especially their cash holdings, are fairly reported.

Credit Suisse says in a research report that of the 90 S-shares with net cash positions, nearly 40 per cent have market caps that are lower than their latest historical net cash.

'Rising cases of accounting irregularities means that the market is no longer sure of the attractiveness of the investment case here,' the report says.

But others note that the problem is a general one. According to data from shareinvestor.com, 135 of the 700-odd companies listed here are valued below their cash holdings.

One senior accountant with experience in China suggested that part of the problem is that thousands of factories in southern China - possibly clients of companies listed here - have been shuttered as demand has fallen off a cliff.

'If they disappear, and you can't collect your (accounts receivable) from them, then you can't service your loans and your credit lines get cut and the company fails. So, there's a temptation to do something there with your financial statements,' he said.

Hence, fresh and thorough checks will help boost investor confidence, noted Richard Loi, partner of assurance and advisory services at Deloitte Singapore.

'Although additional audit procedures come with increased cost, it is money well spent as it reinforces investor confidence amid the current economic and financial uncertainties,' he said.

Ms Yeo denied that SGX was targeting S-chips in particular, and said that the move was not directed at shoring up investor confidence.

'This alert is being put out because it's the right thing to do. As a result of this, if companies have good governance . . . yes, that will generate confidence in the market,' she said.

Ernest Kan, vice-president of the Institute of Certified Public Accountants of Singapore (ICPAS), said that the notice would remind audit committee members especially of their fiduciary responsibilities, noting that SGX had called for 'further checks and more detailed validation' where necessary. 'When you suspect management may be lying or not disclosing all the facts, audit committee members should be more forceful and not just take what the management says,' he said.

One accountant noted that differing business practices in each country pose a problem. 'In Singapore, for instance, you can write to the bank and ask for statements, and accept what they give you. In other places, it's not so easy. If you go to a bank, you have to check, is the person behind the counter really an employee of the bank, and what kind of relationship to the company he has. For a sum of money, he might do them a favour.'

But all the checks in the world are not proof against a determined fraudster. 'Audits cannot provide 100 per cent assurance,' said Mr Loi of Deloitte.

'Where things can go wrong in financial reporting will depend on how management wants to run the business,' said KPMG's Mr Tham.