Auditor's independent review flags lapses in Pacific Star's operations, deals

INTERNAL auditor RSM Risk Advisory has conducted an independent review of Pacific Star's internal controls after revenue for the sale of 17 property units were included in its Q3 and Q2 2019 financial results despite risks of non-fulfilment by buyers.

The units are a part of Puteri Cove Residences (PCR), a Malaysian property development by the company's wholly-owned indirect subsidiary, Pearl Discovery Development Sdn Bhd.

RSM was brought in by Pacific Star's audit committee after the group financial controller brought these lapses to the committee's attention, and the purchases were excluded from its unaudited results.

This meant a combined revenue decrease of about S$7.2 million and a deeper combined total comprehensive loss of about S$3 million for its fiscal 2019 second and third quarter.

RSM identified six lapses and deficiencies in Pacific Star's standard operating procedures and transactions, and also said that sales policies and procedures were not reviewed regularly, or at least once a year.

Certain control activities were not clearly outlined in the sales policies and procedures, such as criteria to assess potential buyers beyond obtaining a copy of the buyer's identification.

Among other issues, RSM flagged the lack of a timeline for lenders to follow up with the agent or potential buyer regarding bank loan applications and that there was no requirement to document and file bank loan documents.

There was also no delegation of authority required for deposit refunds, nor a timeline between an appointment with a buyer and the signing of the sales and purchase agreement.

One of the lapses flagged involved the sale of five units to one of PCR's marketing agencies, where the agency was supposed to transfer the units to third parties at a later date.

The marketing agency had no intention to buy the units for itself and third-party buyers have not yet been secured as at the date of RSM's report.

Nowhere in the agency agreement is it stated that it is required to buy the units if it cannot find buyers after a specific period of time, but Pacific Star had previously included the units in recognised sales.

There were also seven purchases where it was not verified if buyers who wanted to use loan facilities could actually finance the property purchase. No minimum deposits or loan documentation were obtained.

Separately, another buyer related to the director of the former joint venture partner of Pearl Discovery Development wanted to rescind the purchase, and apply the amount paid for the unit to the purchase of another unit bought by the buyer's relative.

This did not constitute an interested person transaction under the Singapore Exchange's listing rules, but RSM noted it was not disclosed to the board or audit committee after the CEO had already cleared it.

In its recommendations to Pacific Star's board and management, RSM said there needs to be sufficient and formal due diligence on sales recognised and follow-ups on outstanding deposits and payments due from buyers.

RSM added there needs to be a robust delegation of authority to govern any changes to a sales contract, including approval from the board.

Pacific Star will also ensure appropriate approval for any waiver of deposits and matters related to financial oversight. RSM also called for improvements to the company's finance function.

The company has agreed to review and update its policies to include all RSM recommendations, to update its delegation of authority, and to implement new procedures and monthly reporting in relation to sale and purchase agreements.

Its executive chairman now has direct oversight of the group's finance function, and the company has reiterated to its finance team on their responsibility for the group's finances and reporting any accounting issues as needed.

Catalist-listed Pacific Star had in May announced the liquidation of its aluminium business as it seeked to focus on property development instead.

Its shares were unchanged at S$0.159 as at 10.05am.