These notices come after SGX's call last month for closer scrutiny by auditors
By JOYCE HOOI
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FOLLOWING the accounting fallout over companies such as FibreChem Technologies and China Sun Bio-Chem, auditors have been sounding the 'emphasis of matter' alarm practically every market day.
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Since the start of March, 44 companies have been flagged by auditors in 'emphasis of matter' notes that have either highlighted going-concern issues, offered a qualified opinion or provided a disclaimer of opinion.
For 39 of those companies, the emphasis of matter had been over their assumption of operating as a going concern - or being able to meet their financial obligations over the next 12 months.
The remaining five had been flagged in qualified opinions by their auditors over their treatment of asset impairment and fair value assessments.
These notices had come on the back of the Singapore Exchange's call last month for better scrutiny by auditors in the areas of 'heightened risk' such as the impairment of account receivables and assessment of off-balance sheet items.
Following the SGX reminder and worsening conditions for companies, auditors have been cracking down on the numbers.
'We have been doing a lot of additional work diligently - making sure that assets are stated at the right values and that liabilities are classified appropriately as current or non-current,' said Tham Sai Choy, KPMG Singapore's head of audit.
While an emphasis of matter note might be worrying, Mr Tham points out that some are more worrying than others.
'The emphasis of matter paragraph in the audit report only reminds the reader of the uncertainties described in the financial statements,' said Mr Tham.
'The nature of these uncertainties can vary greatly, and that is where the reader can gain real insight into the issues that the business faces, by reading carefully the description of those uncertainties.'
Most of the companies tagged with having going-concern issues lately have been characterised by large net losses, net current liabilities and a breach of covenants in relation to a loan.
Of note, too, is the recent slew of companies that have had their going-concern status called into question by their ability to finance the convertible bonds that they had issued, such as Sino-Environment and Celestrial Nutrifoods.
'In the current difficult market, it might not be as easy for companies to get large bank loans for refinancing the convertible bonds,' said Yeoh Oon Jin, the Singapore assurance leader for PricewaterhouseCoopers, LLP.
Of the 44 companies with audit issues, 18 are S-chips. One local auditor reckons that their recent prominence in auditors' notes could be a function of fear and ignorance.
'When auditors are reporting on a firm in China, they might have no clue whether the firm has the banks' support. So some auditors are leaning towards the side of caution by putting in a going-concern note. I'm very surprised that S-chips even have a going-concern issue. Fraud is a bigger concern for them.'
Where fraud is concerned, investors depending on auditors to pre-empt the next Oriental Century debacle will find themselves disappointed.
'Auditors are the last line of defence. They come in after everything has happened,' said an auditor who declined to be named.
Even if audit reports occur after the fact, some have the effect of prodding companies into greater disclosure.
China Fashion Holdings, for instance, had responded to its auditors' going-concern notice last Tuesday by announcing that it would not be going ahead with the purchase of an office unit in Hangzhou, but would be asking for a refund of its 6.15 million yuan (S$1.36 million) deposit instead.
Joshua Tan, an analyst with Phillip Securities Research, reckons that some companies should do one better by coming clean immediately.
'When it comes to uncertainty, people will presume the worst. If management pre-empts the report, it will increase long-term confidence in the firm, even if the market does not reward it immediately,' he said.
The outlook is a bleak one for the rest of the 765 firms on the Singapore Exchange.
'If the economy continues to go south, it is likely to create a situation where more companies will struggle to keep afloat and as a result more going-concern issues could surface,' said PwC's Mr Yeoh.
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