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Bank statements and sales tax invoices fabricated, it says
By JAMIE LEE
24 October 2011
Many of Hongwei Technologies’ recent bank statements and sales tax invoices have one thing in common: they’re fake.
In a damning special auditor’s report released last Saturday, KPMG told of ‘templates’ found in the company’s records used to create false bank statements; an apparent scheme run by a bank officer - and blessed by Hongwei’s executives in China - to use millions held in one account to cover the loans of other firms; and an undisclosed father-son relationship between one of Hongwei’s suppliers and its executive director.
‘Taken in totality, the evidence seriously undermines the integrity of the accounting records provided to use for our review,’ said KPMG, concluding that documents have been doctored ‘in accordance with the agenda of certain individuals within the group’.
KPMG’s seven-month- long investigation came after Hongwei said in February that its auditors could not confirm cash and bank balances in a subsidiary in China, Shuangli (Xiamen) Polyester Co. Trading in the shares of the Chinese polyester fibre maker listed in 2005 have been suspended since.
KPMG highlighted ‘material irregularities’ with the bank statements it had received. Of the statements from six banks, only that from Singapore’s United Overseas Bank (UOB) appears real, it noted. The other five are Chinese banks.
The bank statements for accounts held by another subsidiary, Xiongjin, in Citic Bank’s Xiamen branch between January and February 2011 had four transactions dated 2010.
And 12 bank statements from the Industrial Commercial Bank of China had page numbers running sequentially - even though they were supposed to be issued independently.
Shuangli’s reported bank balance of 55.3 million yuan (S$11 million) as at Dec 31, 2010 is, according to the Chinese management, almost all gone.
A bank officer at Xiamen Bank Xiangyu sub-branch had used the monies in the account to ‘temporarily repay loans of other companies which had fallen due’, KPMG was told.
‘The company’s Chinese management also informed us that they were fully aware of this scheme and had allowed it to take place,’ it added.
Just 280.63 yuan could be left in the account.
Xiamen Bank, which holds 130 million yuan that Hongwei claims it had as at end-December 2010 - or nearly all of its funds then - has not sent bank confirmations to KPMG. The bank has not confirmed the explanation by Hongwei’s Chinese executives either, said KPMG.
‘We have grave doubts regarding the cash balances of the group,’ it added.
The auditors uncovered soft-copy ‘templates’ - some of which had been deleted prior to the computers being delivered to the auditors - of bank statements and sales tax invoices that created documents ‘which markedly resembled the official documents in format and layout’.
Notably, about 218 million yuan worth of sales from the two subsidiaries Shuangli and Xiongjin between December 2009 and March 2011 involved questionable tax invoices since they were not issued by the two subsidiaries. The sales represented 25 per cent of the total sales then.
‘There is no reason for the company to possess such templates as the blank tax invoices would have to be purchased directly from the relevant tax bureau,’ KPMG noted.
The company admitted to obtaining false tax invoices. Its explanation that this was part of a sale arrangement was rejected by KPMG as ‘implausible and internally inconsistent’.
The auditors also found ‘highly suspicious’ email message exchanges.
‘The attachments to the email appear to demonstrate an ability on the part of the company to ‘predict’ detailed information relating to sales and purchase transactions which were to take place more than a month later,’ KPMG added.
The group had bought 31 million yuan worth of raw materials from this supplier for the whole of 2010. It did not get shareholder approval for this interested-person transaction.
Responding to the report, Hongwei’s audit committee said the firm has ceased trading with Wanzhong, since the majority owner ‘could be’ the father of director Lin Jimiao.
‘Mr. Lin Jimiao should make good any losses that the company has suffered as a result of the above said interested-party transactions with Wanzhong,’ the committee said.
It also wants Mr. Lin, his wife and another director implicated in the report to resign from the firm. The audit committee is now seeking legal advice.