Damning report on FibreChem after probe
Independent investigators have issued a damning report on FibreChem Technologies for making several accounting misstatements in its financial results over several years.
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Investigators say several misstatements found in firm’s financial results
By Melissa Tan
28 December 2011
Independent investigators have issued a damning report on FibreChem Technologies for making several accounting misstatements in its financial results over several years.
FibreChem, once a favourite of local investors, has been suspended from trading on the Singapore Exchange (SGX) since an accounting scandal erupted nearly three years ago.
Investigator nTan Corporate Advisory was appointed in February 2009 to carry out an independent assessment on FibreChem’s trade receivables and cash balances as of Dec 31, 2008.
The probe was triggered after FibreChem’s auditor Ernst & Young said it had encountered difficulties in finalising its audits of these items.
In a report out yesterday - set to cost the company $4.64 million - nTan said it had spent ‘several months’ in discussions with FibreChem’s Chinese management before obtaining revised balance sheets and accounting records. By the end of the probe, nTan said it had uncovered numerous financial and accounting irregularities and an unauthorised change to the group’s corporate structure.
It found that FibreChem’s misstatements extended beyond the apparent initial scope of the problem.
There was a HK$382 million (S$63.5 million) discrepancy between FibreChem’s initial balance sheet declaration of its net assets as of Dec 31, 2008 and the revised figure.
In February 2009, FibreChem recorded that it had HK$2.98 billion in net assets as of Dec 31, 2008. But during nTan’s investigation, FibreChem changed the figure to HK$2.6 billion.
The true figure could be even lower, as nTan cautioned there may be further reductions to the company’s net assets figure after a special-purpose audit conducted by PricewaterhouseCoopers from September last year to February this year. The results of this report are not out yet.
FibreChem also violated SGX listing rules by failing to disclose significant Chinese bank loans. Its balance sheet failed to disclose HK$450 million of such loans.
nTan also found that the company had omitted bank loans from its financial statements from 2005 to 2008. These bank loans made up between 6 per cent and 21 per cent of the group’s total net asset value from 2005 to 2008, nTan said.
During this period, FibreChem’s shares rose in spectacular fashion, soaring from 37 cents to an all-time high of $2.70 in May 2007. nTan suggested this increase may not have happened if the China-based fibre manufacturer had disclosed its loans.
The omission of bank loans violates SGX listing rules, which stipulate that listing companies must immediately disclose any significant borrowings.
FibreChem did not disclose any Chinese bank loans when it sought its listing on the SGX mainboard in April 2004.
nTan also found that FibreChem had overstated its cash balances by HK$686 million, while its net profit for 2008 was inflated by HK$385 million.
nTan said it could not determine whether the net profit overstatement was applicable only to 2008, or earlier years as well. It also found that FibreChem’s management had transferred a 51 per cent stake in a Chinese subsidiary, Xiamen Microfibre, from Honglin International to Xiamen Specialised in December 2008.
The change effectively placed FibreChem’s assets beyond the reach of its creditors.
This was done without the knowledge or approval of the board, even though the legal representatives of Xiamen Microfibre and Xiamen Specialised were both on the board of FibreChem and would have known about the deal.
In response to the report, Mr Zhang claimed that he had not been aware of the misstatements in FibreChem’s published financial statements for 2008. He said he ‘was not conversant in English, and did not fully understand the nuanced details of the group’s financial statements’.
Of the fees, $3.99 million has been paid, with $651,000 still outstanding.