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Best World must address concerns over accounting practices: SGX
BEST World International shares will remain suspended indefinitely until the company addresses concerns over accounting practices that have cast doubt on its actual financial position.
This is the verdict from the regulatory arm of the Singapore Exchange (SGX RegCo), after an independent review of Best World's premium skincare distribution business in China uncovered questionable deposits into the personal bank accounts of various individuals by its franchisees and other potential breaches of the Singapore Companies Act.
The findings by PricewaterhouseCoopers Advisory Services (PwC) have also resulted in auditor Ernst & Young issuing a disclaimer of opinion on Best World's financial statements for FY2018.
SGX RegCo said in a statement on Thursday night: "In the absence of sufficient clarity on the actual financial position of the group and legality of the business including compliance with PRC regulations, trading in the shares of the company cannot resume in a fair, transparent and orderly manner."
Hence, the trading of Best World shares will not resume until it submits a proposal that addresses the concerns raised, SGX RegCo has decided.
"SGX RegCo will consider the company's proposal and its audited financial statements for FY2019 before making a determination on the company's continuing listing on the exchange," it said.
Best World had earlier been granted an extension of five months from April 30 to Sept 30 to hold its annual general meeting for the financial year ended Dec 31, 2019. Its audited FY2019 accounts should be published by then.
But no deadline has been imposed on when Best World must restore itself to investability, so shareholders' funds continue to be stuck after trading was suspended in May last year.
One big concern flagged by PwC in its report published on Thursday is the unusual relationship between Best World and its former import agent Changsha Best as well as marketing agent Vicstar.
Both Changsha Best and Vicstar contributed to Best World's revenue, and are ostensibly not part of the Best World group.
But checks by PwC revealed that Best World's employees were in fact substantially involved in the daily operations and financial activities of both entities.
"Import agents' employees appear to be deferring to Best World management for various approvals and operational decisions," PwC observed.
Best World employees also appear to be in possession of the bank tokens of some of Changsha Best's bank accounts, whereas the owner of Changsha Best, who is the brother-in-law of Best World chief executive Dora Hoan, told PwC that he was not aware of the performance of his company, or the fact that he was its sole shareholder.
Changsha Best's practice of recording only part of its operations in its "official books" is another concern flagged by PwC.
In FY2017 and FY2018, Changsha Best only recorded about 60 per cent of sales proceeds in its official bank accounts, while proceeds from the remaining 40 per cent of sales were deposited into six other personal bank accounts. Three of these accounts were in the name of a spouse of a Best World employee.
The monies in the personal bank accounts were used for payment of sales incentives to Changsha Best's employees, commissions to distributors, and transfers to Vicstar.
When questioned by PwC, Best World's management explained that Best World played a role in the affairs of Changsha Best in order to safeguard the monies due to it for products sold on credit terms, and acquire market knowledge from the import agent's employees.
PwC said it was unable to independently corroborate Best World's response.
Best World also seems to have been managing the financial affairs of Vicstar, which it described as its marketing agent since 2012.
According to Best World, Vicstar handles its Customer Relationship Management (CRM) system and collects service fees from the import agent, Changsha Best, on behalf of Best World.
But there are other arrangements that Best World's audit committee did not know about, PwC found.
Vicstar's audited accounts, prepared by Best World employees, reflect that all purchases by Changsha Best from Best World and all sales by Changsha Best to the distributors in China continue to be recorded in Vicstar.
"This was a back-to-back arrangement in which every sale from Best World to the import agent would be on-sold by the import agent to Vicstar at a mark-up," PwC wrote, though the goods themselves were sold and delivered from Best World in Singapore directly to Changsha Best in China, without passing through Vicstar.
"We have not seen any official invoices issued by Changsha Best to Vicstar," PwC added. "We are unable to establish the commercial rationale of this back-to-back arrangement which appears inconsistent with the substance of the underlying transaction."
Vicstar's audited accounts might not reflect the "true and commercial substance" of its activities and Best World could be liable since its employees prepared these accounts, PwC said.
"We understand that there are no employees in Vicstar . . . We are also unable to establish who is the directing mind of Vicstar. During the interview with the shareholders of Vicstar, they have both represented that they do not perform any operational functions except to authorise payments as signatories."
PwC also flagged a possible breach of Section 199 of the Companies Act, which requires companies to keep proper accounting records and maintain an adequate system of internal accounting controls.
This is because Best World's China subsidiary, BW Changsha, has a practice of depositing 20 per cent of sales proceeds into personal bank accounts. The group also lacks a proper audit trail between the CRM system, sales orders and cash collection.
The company explained that the 20 per cent deposits represented trade rebates given to the franchisees and belonged to the franchisees.
However, PwC was unable to verify this as it noted that the monies in these bank accounts were also being used to make various payments to BW Changsha's own employees.
Asked if it has referred Best World's potential breaches to the authorities for investigation, an SGX spokesperson said: "SGX RegCo will study the special audit report before deciding on any additional courses of action."
Separately, PwC also found that some of the personal bank accounts used by Changsha Best - ostensibly an entity that is not part of the group - were the same as those of BW Changsha.
Some of the cash in these bank accounts - S$16.8 million in total - was transferred to Vicstar in FY2017 and FY2018. Vicstar then paid out most of this sum as service fees to Best World.
As at March 31, the balance in Vicstar's bank accounts amounted to S$15,000 and US$127,000.
PwC's review was subject to various limitations, and it took care to note that its work does not constitute an audit or review in accordance with generally accepted auditing standards.
"We were unable to determine if the contracts and agreements by Best World in relation to the China operations (including but not limited to distributorship agreement with the import agents and contracts with franchisees) were on normal commercial terms," it said.
"We were provided with limited records from the franchisees which made it difficult for us to perform any meaningful verification work on them," it added.
Best World's goods are not delivered on a timely basis either. PwC noted: "When we requested for access to delivery documents and tracking sheets, the third-party warehouse informed us that they do not maintain such records and we were denied access."
PwC was hired to review the financial affairs of Best World after concerns were raised by The Business Times in February last year over its sales practices as well as that of its China franchisees.