Auditors of China Gaoxian unable to verify bank balances at its China units

 

(SINGAPORE) Accounting irregularities have surfaced in yet another S-chip - China Gaoxian, confirming investors' fears over what triggered its trading halt.

 

The latest development comes barely a month after two other S-chips or Chinese companies listed here, China Hongxing and Hongwei Technologies, also flagged similar accounting problems.

In its disclosure yesterday, China Gaoxian said that its auditors Ernst & Young could not verify or confirm the bank balances for two Chinese subsidiaries for the fiscal year ended Dec 31, 2010.

'The audit committee (AC) has instructed the auditors to carry out an expanded scope of its audit,' said the group's audit committee chairman, Chan Kam Loon.

Mr Chan, a former head of listings at the Singapore Exchange, said that the AC has also met executive chairman and CEO Cao Xiangbin, who indicated that he would cooperate and instruct the management to do the same.

The group has requested a trading suspension of its shares here, following a trading halt since Tuesday and a trading halt of its Korean Depository Receipts (KDRs) since Wednesday.

Yesterday, SGX also directed Hongwei to appoint special auditors, given the group's inability to clarify its state of affairs 'despite the severity and urgency of the situation'.

Auditors at Hongwei and China Hongxing could not finalise their audit for the 2010 financial year as they could not confirm certain cash and bank balances.

Reflecting increased concern over accounting issues cropping up at some S-chips, SGX sent out reminders to ACs of all S-chips this week, instructing them to undertake an internal review and report to the exchange by May 31.

SGX also asked the ACs to make sure that the Articles of Association at key Chinese subsidiaries gives them the ability to hire or fire legal representatives.

While market watchers welcome the latest directives from SGX, some are circumspect about the effectiveness of these measures.

Securities Investors Association Singapore (SIAS) president David Gerald noted that these initiatives 'do not go far enough to meet the practical difficulties faced by directors and auditors to seek accountability and trace the funds parked in accounts outside Singapore'.

A classic case was Sino-Environment, which faced difficulties repatriating funds from a China bank account to Singapore, after questionable cash transactions were uncovered. Its judicial managers have since sought a court order to freeze the China account.

There must be the willingness on the part of the majority shareholder and senior management to cooperate with the Singapore authorities and the auditors, Mr Gerald said. He suggested that a mechanism be in place for at least one independent director to authorise any funds raised in Singapore to be transferred to an overseas account.

Then, there is the problem of uncooperative legal representatives, which reared its ugly head in recent times at companies such as Falmac, Tat Hong and Millennium & Copthorne.

In China, every registered company has a legal representative who holds the company seal that gives legal capacity to make and execute agreements, provide guarantees and transfer assets.

But problems arise when the legal representative abuses that power, refuses to step down or surrender the company seal.

While there is legal recourse that companies can seek in China, the actual implementation is unevenly applied across different local jurisdictions, said Lin Song, co-head of international China practice at KhattarWong.

To register a new legal representative, the company seal is still required and only the registered legal representative can apply for a new seal, though some courts may adopt a more flexible approach.

Still, it would be useful to review the whole constitution of the group of companies to identify areas that do not provide protection to shareholders and make amendments, he said.

'With the recent scandals, it has become more urgent for listed companies, especially for S-chips, to look at this issue,' Mr Lin added.

Chia Kim Huat, a partner at Rajah & Tann, pointed out that 'the right to remove legal representative is one thing but to implement it is another thing'.

But he is against the idea of parking working capital, other than surplus cash, outside China where the companies' key operations are, as that would be 'killing the business to catch the thief'.