China Sky faulted for rule violations in scathing report
Auditors cite failure to make mandatory disclosures or get approval for transaction
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Auditors cite failure to make mandatory disclosures or get approval for transaction
By Jonathan Kwok
21 June 2013
China Sky Chemical Fibre failed to make mandatory disclosures, included wrong information in share market announcements and undertook a major transaction without investor approval, according to a damning report yesterday.
Special auditors Stone Forest Corporate Advisory, which began its probe in October, said the incidents happened between 2006 and 2011.
The problems at the firm led to its shares being suspended in November 2011. The suspension remains in place.
Stone Forest said one of the failures occurred in December 2006 when an acquisition of a unit by China Sky in turn made Fujian Fuyuan one of its subsidiaries. No disclosure was made via Singapore Exchange (SGX) announcements or in China Sky’s annual reports although listing rules required such disclosure, Stone Forest added.
After the purchase, two construction agreements totalling 114 million yuan - in 2008 and in 2009 - were struck to develop some land in Fujian, which was held by Fujian Fuyuan.
Stone Forest said the agreements should have been tabled to China Sky’s board to decide whether a disclosure was necessary. It was not until March 2011 that the contract sum was announced, only after SGX queries.
In June 2011, a “termination agreement” was signed transferring China Sky’s stake in Fujian Fuyuan back to the original seller.
Stone Forest noted that the board did not give approval for the deal.
Although China Sky said the agreement was an “unwinding” of an initial acquisition that was never completed, Stone Forest said it was actually a major transaction, one that would require shareholder approval at a general meeting.
It added that China Sky’s dealing with the land, via Fujian Fuyuan, also involved “numerous” errors in disclosures. Stone Forest said the management, such as the group financial controller, and the board should have made sure the announcements were accurate before releasing them.
The special auditors also took issue with the lack of disclosure of transactions between China Sky and a firm owned by former audit committee chairman Lai Seng Kwoon.
China Sky had said previously that any single interested person transaction worth less than $100,000 need not be disclosed in the annual report.
Stone Forest said the wording of the mainboard rules could have led to different interpretations but added that it felt contracts with a total value of more than $100,000 made in a financial year should be disclosed, even if individually they were less than $100,000.
In this case, Stone Forest said that “there were indeed interested person transactions with the former audit committee chairman (Mr Lai)... from financial year 2006 to financial year 2010”.
China Sky had said in its annual reports that there were no interested person transactions for those years. Stone Forest called these statements “erroneous”, although it added that China Sky may have disclosed the transactions as “related party transactions” in its financial statements.
The scathing report included some recommendations, which China Sky yesterday said it had noted.
It intends to quickly appoint a compliance adviser to guide the firm on its obligations to comply with listing rules, and internal auditors to help improve control documentation.
Other planned measures include an “approval matrix” to ensure that all announcements are approved by all directors before they are released.
Soon after China Sky shares were suspended in 2011, it was embroiled in a public spat with the SGX, which demanded that it appoint a special auditor. The firm refused but finally complied in October.
China Sky said yesterday that it will submit a proposal to resume trading “in due course”.