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Best World ordered to address independent reviewer's final report
THE regulatory arm of the Singapore Exchange on Thursday night said that Best World International must submit a proposal to resume trading.
In its proposal, the mainboard-listed premium skincare products seller has to address concerns raised in independent reviewer PricewaterhouseCoopers Advisory Services' (PwC) observations and recommendations, the legality of its sales and distribution model in China, and the lack of clarity on its financial position.
Trading in Best World's shares cannot resume in a fair, transparent and orderly manner without sufficient clarity on the actual financial position of the group and the legality of the business, said the Singapore Exchange Regulation (SGX RegCo).
SGX RegCo will consider the company’s proposal and its FY2019 audited financial statements before making a determination on its continuing listing on the Singapore bourse.
PwC was appointed in March 2019 to perform an independent review on the financial affairs of Best World's wholly-owned subsidiary BW Changsha (BWC), following a report by The Business Times which raised concerns over the group's sales transactions under a new franchise model.
On Thursday night, Best World announced PwC's final report on SGXNet.
The independent reviewer highlighted several concerns surrounding the company's operations under both the latest franchise model and an earlier export model, including the following:
Best World's employees were "substantially" involved in the daily operations and financial activities of the import agents and a Singapore-incorporated entity named Vicstar - all of which appeared to be entities that are not part of the group - such as approving expenses, holding some of Changsha Best's bank tokens, and liaising with the external auditors on Vicstar's financial audit.
This led PwC to highlight the group's potential exposure to legal and regulatory risks.
Also, one of Best World's import agents, Changsha Best - which is owned by Best World chief executive's brother-in-law Koh Kim Chuan - recorded about 60 per cent of the sales to the distributors or members in its official bank accounts.
The remaining 40 per cent was deposited in the personal bank accounts of various individuals, and these monies were used to pay sales incentives to Changsha Best's employees, commissions to distributors or members, and transfers to Vicstar.
PwC also noted that Vicstar's financial statements - prepared by Best World staff - might not reflect the true and commercial substance of Victsar's business activities.
Furthermore, the Best World subsidiary, BWC, had recorded about 80 per cent of the sales to franchisees, while the other 20 per cent was deposited in the personal bank accounts of individuals.
Best World said the 20 per cent deposits were trade rebates given to the franchisees and belonged to the franchisees, but PwC could not verify this.
As a result, PwC raised concerns as to whether the accounting records of the group were maintained in accordance with Section 199 of the Companies Act.
As for the legal review of the group's sales and distribution business in China, Best World's legal adviser is of the view that certain features of the franchise model may potentially be in breach of the regulations on direct selling and "chuan xiao".
Best World's statutory auditor, Ernst & Young (EY), has considered the findings in PwC's interim review report and issued a disclaimer of opinion on the group's FY2018 financial statements.
EY raised concerns about the company's relationship and arrangement with the import agents and Vicstar, as well as the group's potential unrecorded transactions through the payment of partial sales proceeds by franchisees into personal bank accounts.
SGX RegCo pointed out that both PwC's findings and EY's disclaimer of opinion raised concerns about whether Best World's financial statements present a true and fair view of the group's financial position and financial performance.
Between 2010 and 2011, Best World sold its products to China through Vicstar.
In December 2011, the company switched to an export model, by exporting its products to China through import agents.
Under the export model, Best World started distributing its products through the first import agent, Qingdao Beihui.
Changsha Best later took over from Qingdao Beihui as the import agent from September 2015 to June 2018.
Even though Best World had stopped its China sales through Vicstar, Vicstar continued to support the China operations of Qingdao Beihui and Changsha Best by maintaining its China members database and computing the commissions due to the China distributors or members of the import agents.
In July 2018, Best World moved to a franchise model through its subsidiary BWC, with BWC selling directly to franchisees.
Trading in Best World's shares has been suspended since May 2019.