Auditors are focusing more attention on risky areas, such as cash flow
By Yang Huiwen 30 March 2009
Auditors have raised red flags over nearly half a dozen S-chips in just the past week alone, as they step up checks on companies. And with the financial crisis still raging, analysts expect even more such cases to come to light.
In the past few days, the auditors of China EnerSave, Sino-Environment Technology Group, Celestial NutriFoods and Ocean International have all raised doubts in audit reports over the capacity of these businesses to continue operations.
Another China company listed here, China Sun Bio-chem Technology Group Company, even had its shares suspended from trading after its auditors questioned the existence of certain debtors in the firm’s books.
It joined the likes of FerroChina, China Printing & Dyeing, Beauty China, Oriental Century and FibreChem Technologies in having their shares suspended.
Auditors are doing more checks on companies’ books as they rush to complete their audit reports for companies with a Dec 31 year-end.
‘The credit crunch and economic downturn have prompted the various parties to be extra vigilant,’ said the vice-president of the Institute of Certified Public Accountants of Singapore, Dr Ernest Kan.
That is not to say that they have not been doing their work, added Dr Kan.
But the financial crisis and the recent reminders by the Accounting and Corporate Regulatory Authority and Singapore Exchange have resulted in auditors focusing more attention on risky areas.
For example, auditors are now asking companies to do a cash flow and profit forecast for the year so that the auditors can assess their future prospects and see if the firms have enough funding coming in.
This is usually not necessary in good times as cash flow is taken for granted, said Dr Kan.
When checking a firm’s accounts receivables, auditors in some cases go the extra mile to visit the debtors of a company to make sure they actually exist, instead of just phoning them. To further verify that the debts are collectible, debtors have been asked to provide proof of their credit standing from banks.
‘The tightening of checks may probably lead to a lot more cases popping up,’ said an analyst who declined to be named.
India’s Satyam Computer scandal in which its former chairman cooked the books to state higher profits and greater reserves shows that even reputable companies will not be spared more thorough accounting checks, he said.
The financial crisis is also increasing the risk of fraud, as the fear of losing bank financing could be one pressure point motivating some executives to cook the books, said Dr Kan.
To continue getting the bank loans, companies have to meet specified conditions set by banks, such as reaching a certain target for its return on investment ratio.
The slew of bad news on China companies listed here has spooked investors who now worry if reported numbers at any S-chip are genuine and whether the management is credible.
The FTSE ST China Index has dropped about 26 per cent since the start of the year, as the recent accounting scandals and corporate insolvency cases weigh on market sentiment.
‘We believe that disclosing the banks where the cash is purportedly kept and showing photocopies of bank statements are not enough to assuage investors’ concerns,’ said CIMB-GK research analyst Ho Choon Seng. ‘The best proof the cash exists is a return of capital to investors.’
Those firms which have boasted of having net cash positions have tended to avoid actions which would prove that the stated cash is really there, such as giving out dividends, he said. Instead, they would give ‘multiple reasons for not returning the cash to investors’.
For example, Synear Food Holdings’ decision to spend heavily on capacity expansion instead of paying dividends, ‘despite significant under-utilisation of capacity and plummeting sales, leaves us bewildered’, he said.
Some firms are attempting to shore up confidence in their position. For instance, China Essence Group’s chief executive, Mr. Zhao Libin, recently bought $113,700 worth of the firm’s shares while the company tried to allay concerns over its loans.
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S -chips under greater scrutiny
Auditors are focusing more attention on risky areas, such as cash flow
By Yang Huiwen
30 March 2009
Auditors have raised red flags over nearly half a dozen S-chips in just the past week alone, as they step up checks on companies. And with the financial crisis still raging, analysts expect even more such cases to come to light.
In the past few days, the auditors of China EnerSave, Sino-Environment Technology Group, Celestial NutriFoods and Ocean International have all raised doubts in audit reports over the capacity of these businesses to continue operations.
Another China company listed here, China Sun Bio-chem Technology Group Company, even had its shares suspended from trading after its auditors questioned the existence of certain debtors in the firm’s books.
It joined the likes of FerroChina, China Printing & Dyeing, Beauty China, Oriental Century and FibreChem Technologies in having their shares suspended.
Auditors are doing more checks on companies’ books as they rush to complete their audit reports for companies with a Dec 31 year-end.
‘The credit crunch and economic downturn have prompted the various parties to be extra vigilant,’ said the vice-president of the Institute of Certified Public Accountants of Singapore, Dr Ernest Kan.
That is not to say that they have not been doing their work, added Dr Kan.
But the financial crisis and the recent reminders by the Accounting and Corporate Regulatory Authority and Singapore Exchange have resulted in auditors focusing more attention on risky areas.
For example, auditors are now asking companies to do a cash flow and profit forecast for the year so that the auditors can assess their future prospects and see if the firms have enough funding coming in.
This is usually not necessary in good times as cash flow is taken for granted, said Dr Kan.
When checking a firm’s accounts receivables, auditors in some cases go the extra mile to visit the debtors of a company to make sure they actually exist, instead of just phoning them. To further verify that the debts are collectible, debtors have been asked to provide proof of their credit standing from banks.
‘The tightening of checks may probably lead to a lot more cases popping up,’ said an analyst who declined to be named.
India’s Satyam Computer scandal in which its former chairman cooked the books to state higher profits and greater reserves shows that even reputable companies will not be spared more thorough accounting checks, he said.
The financial crisis is also increasing the risk of fraud, as the fear of losing bank financing could be one pressure point motivating some executives to cook the books, said Dr Kan.
To continue getting the bank loans, companies have to meet specified conditions set by banks, such as reaching a certain target for its return on investment ratio.
The slew of bad news on China companies listed here has spooked investors who now worry if reported numbers at any S-chip are genuine and whether the management is credible.
The FTSE ST China Index has dropped about 26 per cent since the start of the year, as the recent accounting scandals and corporate insolvency cases weigh on market sentiment.
‘We believe that disclosing the banks where the cash is purportedly kept and showing photocopies of bank statements are not enough to assuage investors’ concerns,’ said CIMB-GK research analyst Ho Choon Seng. ‘The best proof the cash exists is a return of capital to investors.’
Those firms which have boasted of having net cash positions have tended to avoid actions which would prove that the stated cash is really there, such as giving out dividends, he said. Instead, they would give ‘multiple reasons for not returning the cash to investors’.
For example, Synear Food Holdings’ decision to spend heavily on capacity expansion instead of paying dividends, ‘despite significant under-utilisation of capacity and plummeting sales, leaves us bewildered’, he said.
Some firms are attempting to shore up confidence in their position. For instance, China Essence Group’s chief executive, Mr. Zhao Libin, recently bought $113,700 worth of the firm’s shares while the company tried to allay concerns over its loans.
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