SGX keeping close tab on companies reporting sudden adverse financial changes

THE Singapore Exchange is closely monitoring disclosures of companies, including those which show large swings in financial positions and performance, and the regulator warns it will not hesitate to report audit infractions to relevant authorities.

In its regulator's column on Tuesday, SGX's chief regulatory officer, Tan Boon Gin, said that the regulator noted several companies with large operations in China have recently announced adverse changes in their financial positions under perplexing circumstances. These include the depletion of cash balance, assets or retained profits.

These companies are mainly from the textile and sporting goods, manufacturing, heavy industries, packaging, electrical and electronics, retail and chemical sectors.

Mr Tan noted that some companies reported customer claims for compensation more than 10 times the value of the original sales. Others inflated trade receivables written off, and provided little clarity. Some made significant loans and advances to business associates, which were not part of the normal course of business. These debts were eventually deemed uncollectible and written off. There are also others which made impairment provisions on their fixed assets like factories and land on the basis that discounted cash flow from the business was impaired and the value-in-use negligible.

"Some of these impairment decisions may be questionable. That these cases are surfacing at a time when China's economy is slowing and exports and imports declining may not be a coincidence,'' Mr Tan said.

The regulator said management boards and in particular, the audit committee, should pay close attention to certain adverse developments, which could result in a complete depletion of the company's entire cash balances or its retained earnings.

"The board of directors owes a fiduciary duty to shareholders to act in their interests and to safeguard the interest and assets of the company. The board must therefore remain vigilant and satisfy themselves on the veracity and reasonableness of the claims, payments and transactions, and appoint appropriate and suitable professionals to protect the company's interest. The Audit Committee must take a particular and active interest in the matter and view the safeguarding of the company's assets as their top priority,'' he stressed.

"Where there are concerns on possible irregularities or impropriety in the company, the board should consider if there is a need to change any of its Executive Officers or legal representative of the company," he said.

SGX is concerned with the manner in which claims appear to have been settled or compensated without due process. It stressed that it is the board's duty to verify the amount of damages claimed, and conduct its own investigations. Where significant payments are made or written off, controls must be in place for the board to deliberate on and question the merits of the payments or the actions taken by management to recover the amounts written off. The board cannot merely leave such decisions solely to management.

Mr Tan said auditors must undertake audit procedures to the standards expected for listed companies. The exchange reserves the right to request for a Special Auditor to be appointed to investigate and report on the true state of affairs of the company and for any special audit report to be made public.

If the compensation claims, write-offs and other financial developments are significant enough to cast doubt on whether the company can continue as a going concern or the company is unable to assess the state of its affairs, trading in the shares of the company may have to be suspended.

"We understand that difficult economic conditions can greatly hurt companies' financial and business performance. Nevertheless, based on past experience, we are vigilant that companies from certain sectors seem particularly vulnerable to the full negative impact of any economic slowdown,'' he said.

"In such circumstances, SGX expects companies to be transparent and accurate about their disclosures. Inaccurate or lack of disclosures on compensation claims and settlements without due process is a breach of SGX Listing Rules. Failure by directors to discharge their fiduciary duties also constitutes a breach."