Acra looking into Mazars' role in Midas auditing

Singapore

Mazars LLP's audit of scandal-hit Midas Holdings has come under the scrutiny of Singapore's Accounting and Corporate Regulatory Authority.

Midas, a Chinese railway parts maker which has a primary listing on the mainboard of the Singapore Exchange and a secondary listing in Hong Kong, is being investigated in Singapore and China for fraud.

Founded in 2000 by Patrick Chew, a Singaporean businessman with a rags-to-riches story, and a Chinese partner, Chen Wei Ping, trading in Midas shares has been suspended since Feb 8. Midas has been slapped with lawsuits filed in China over unauthorised loans by its ex-chairman, Mr Chen, and guarantees involving its Chinese units.

"Acra is closely monitoring this case and will assess if any further action is warranted," a spokesman told The Business Times.

The move by the auditing ombudsman - a statutory board under the Ministry of Finance - comes after Mazars said in April that in light of the findings in the course of its audit work for the financial year ended Dec 31, 2017, and recent developments in Midas, its auditors' reports issued for 2012 to 2016 could no longer be relied upon.

What shocked investors was that Midas' cash holdings now stand at about S$700,000 (before legal fees and salaries due) compared to the one billion yuan (S$209 million) reflected in the audited results for the year ended Dec 31, 2016.

Midas blamed the sorry state of affairs on the lack of control over its operations in China, while Mazars said their audits were based on required audit procedures, but they, too, had been deceived.

Previously part of Moores Rowland International network of firms, Mazars in Singapore has over 25 years of providing audit and advisory services to local and international firms. It merged with Moores Rowland in 2007 to become Mazars Moores Rowland, before becoming Mazars LLP in 2009.

To date, Midas is facing seven legal suits amounting to 520 million yuan in claims. Apart from bank balance shortfalls, it has also uncovered debt and liabilities amounting to 696 million yuan. Midas has said it can no longer operate as a going concern as its cash position will not be able to satisfy the claims made if the courts should rule in the claimant's favour.

If Mazars' audit was found to be deficient, the Public Accountants Oversight Committee (PAOC), which advises Acra, can mete out a range of orders on the individual accountants responsible, depending on the severity of the audit deficiencies.

These can range from a "hot review" where a certain number of its audit engagements will be reviewed by another public accountant, to a suspension of not more than two years, or a cancellation of its registration as a public accountant in extremely serious and repetitive breach.

Mazars, however, could face sanctions as a firm from if a complaint was lodged against Mazars and a disciplinary inquiry found that the firm failed to exercise adequate professional competence and due care in carrying out an audit. In that case, PAOC could order sanctions against a firm based on the findings and recommendations of the inquiry. (see amendment note)

Associate Professor Lawrence Loh, who is a director at the Centre for Governance, Institutions and Organisations (CGIO) at NUS Business School, said it must be a very serious development for a company's auditor to say its audited reports for the past five consecutive years can no longer be relied upon.

"While investigations are ongoing, the signs may point to issues as momentous as frauds or other grave misdeeds by the company. The auditor's due diligence may also be called into question," added Prof Loh.

When contacted by BT, Mazars head of audit and assurance Rick Chan explained that its audited reports for 2012, 2013 and 2014 have not been withdrawn, but could no longer be relied upon because Midas is being investigated by the Commercial Affairs Department (CAD) of Singapore, and it is unclear how far back this will go.

"Therefore, subject to the outcome of the investigation or other investigations that may be subsequently carried out by the board, the auditors' reports issued by Mazars for the financial years ended Dec 31, 2012, 2013 and 2014 could also no longer be relied upon," Mr Chan said.

As for its audited 2015 and 2016 reports, these have officially been withdrawn and may not be relied on.

Mr Chan said Mazars has yet to complete audit work for 2017 after it found certain irregularities.

It has not resigned as auditors but work has been halted pending investigations by CAD.

"As statutory auditors, Mazars are required to conduct an audit in accordance with Singapore Standards on Auditing (SSA) and are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error and forming an opinion thereof," Mr Chan noted.

"However, reasonable assurance is not an absolute level of assurance, because there are inherent limitations in an audit process, including it being circumscribed by industry accepted assumptions.

"This results in auditors necessarily reviewing documents and information provided by management which are not forensically investigated and assumed not to have been deliberately falsified, doctored or forged.

"Because of the assumptions and acceptable standard of verification in an audit process, the result of an audit is necessarily persuasive but not conclusive."

On Friday, Singapore Exchange Regulation (SGX RegCo) said it has been in engagement with the Chinese Embassy in Singapore in relation to communications with the relevant authorities in China on developments at Midas.

ZICO Insights Law LLC managing director Yap Lian Seng as well as counsel and deputy head of its China desk Qiu Yang welcomed SGX RegCo's active intervention, believing it brings in a certain degree of assurance and comfort to minority shareholders of Midas that they won't be left alone.

"This also shows a move towards 'meaningful regulation'. SGX RegCo took one step further to actively reach out to the relevant regulatory authorities based in Midas' home jurisdiction to help expedite the investigation," they added.

"This is a proactive, positive development, which acknowledges the fact that private enforcement action by liquidators, judicial managers and independent directors in recalcitrant companies has so far been relatively ineffective."

Amendment note: The story above has been amended to clarify that the Public Accountants Oversight Committee's use of hot reviews and suspension of public accountant registration applies only to individual accountants, and to explain the circumstances when the Committee may sanction a firm.