Published May 7, 2009

SGX should show its hand on China Sun

By TEH SHI NING

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GIVEN the troubling developments at China Sun Bio-chem, it is now time for the Singapore Exchange (SGX) to stand up and be counted.

So far, the Exchange has stuck to its often repeated position to 'not disclose its dealings with individual listed companies unless there is cause for public censure'. This, despite the shocking issues raised by China Sun's independent directors (IDs) on Monday.

But there are strong reasons why SGX needs to be seen to be taking action on this case.

First, what the IDs revealed suggests that the external audit of the company by KPMG may now be meaningless due to the disappearance of crucial accounting records.

This compromises the very process by which the regulator typically deals with accounting irregularities: having the independent directors or audit committee commission an independent audit.

China Sun's stocks have been suspended since March, when it was unable to release its FY2008 financial results because its auditors PricewaterhouseCoopers (PwC) could not verify 929 million yuan (S$201 million) worth of bank and trade receivable balances. Hence the audit committee's appointment of KPMG to conduct an independent review.

Now, it seems that the company's management is doing its best to block the audit.

And if that audit fails, as it looks likely, what will happen next? The market, and the investors stuck in the stock, need SGX as regulator to say something.

Second, the announcement on Monday was made by just three of the board's seven directors - its executive directors (EDs), including China Sun's CEO, had opposed the release, decrying it as inaccurate and inappropriate - and its contents were startling.

The announcement told of attempts to hamper the auditor's independent review of the company's China offices, including how a truck containing accounting records was stolen, and a mysterious blackout during computer forensic procedures, after which a disk drive could not be detected.

Taken together with the 'grave concerns' the IDs expressed over the CEO's refusal to provide details on certain issues, all these suggest a major lapse in corporate governance and processes, going way beyond a mere board conflict.

Just as troubling is the report by the IDs that the EDs allegedly threatened to hold the IDs liable for all losses resulting from Monday's announcement.

Surely, the Exchange cannot stand by and say nothing when IDs are being threatened for trying to do their job - which is what SGX has been pushing them to do in the first place?

It is ironic that should the regulators choose to take action against the board for 'breach of duties', it might be the case that the only action which can be taken will be against the IDs, who are based in Singapore, and not the non-IDs, who are in China.

Of course, SGX could be quietly intervening in the background; it may well have queried the company. But if it has, it should say so. There is already enough disquiet about Chinese companies listed here, including the fact that companies based overseas lie outside the jurisdiction of Singapore regulators and law enforcers.

The China Sun issue isn't going to go away. The IDs called a board meeting yesterday, and will release an announcement today on what transpired.

It's still not too late for SGX to show its hand. Investor confidence has already been rocked by a slew of corporate scandals here. If SGX chooses to stay silent, it will add further to the damage.