By Lee Su Shyan

ADVANCE Modules and the NEL Group are listed companies that would ordinarily barely register on the radar screens of most local investors.

Both had a market capitalisation of around $10 million before trading of their shares was suspended.

But the pair, which operate in the semiconductor industry, are now in the spotlight for all the wrong reasons: allegations of rigging sales numbers and a high-profile report to Finance Minister Tharman Shanmugaratnam by NEL's auditor, KPMG.

Under the Companies Act, an auditor can report a matter to the Finance Minister if it believes an offence involving fraud or dishonesty has been committed by officers or employees of a publicly-listed company.

A spokesman said the Ministry of Finance 'previously received 18 such reports in 2007 and 20 in 2008', but he did not give details, citing the confidential nature of these reports.

It is still early in the new year. Given the growing financial crisis, however, observers expect the number of such reports to rise, reflecting more financial problems among companies or, at the very least, more disagreements between auditors and their clients.

Advance Modules has had a chequered history, with troubles dating back to 2005 when it was listed.

For the financial year ended Dec 31, 2005, its auditor at the time, Deloitte & Touche, declined to give the company a 'clean' audit report.

The reason: 235,592 pieces of memory modules sold to a customer - as it now emerges, a business called Long Gain - for US$14.4 million (S$21.3 million).

As the sum represented over 41 per cent of the year's revenue and the customer had not paid up, Deloitte expressed concerns over whether the debt could be collected.

Deloitte later resigned, and Horwath First Trust was installed as auditor.

The matter dragged on through 2006. Advance Modules told the Accounting and Corporate Regulatory Authority - a company supervisory body - that it was looking into the concerns.

In June 2006, managing director Vincent Tan agreed to indemnify the company for the US$14.4 million, paying the whole sum via instalments.

Still, the issue remained a sticking point, and Horwath also declined to give Advance Modules a clean bill of health for the next set of results - for 2006.

In 2007, some payments for the debt of US$14.4 million were received from the customer - still unnamed.

In December that year, Advance Modules said the customer had paid about US$9.4 million, while Mr Tan had stumped up US$3.7 million, leaving about US$1.3 million unpaid.

In March last year, Advance Modules disclosed that it paid US$11.89 million to a supplier called Diviner for machinery and equipment starting from August 2006.

The auditor, Horwath, raised questions over this purchase.

The Singapore Exchange (SGX) weighed in and directed Advance Modules to get a special auditor to investigate the purchase and the company's affairs, given the earlier US$14.4 million debt.

KPMG was appointed. In November, it published its report, which alleged that the US$14.4 million sale was, more or less, a fictitious one, put in place to bump up sales to meet an internal target, as Advance Modules went public.

Shipping documents did not back up the sales amount. Production levels in 2005 could not have resulted in such a high level of output, said KPMG.

As for the machinery and equipment, KPMG said these had a value of US$3 million.

So, if Advance Modules had shelled out some US$11.89 million for machines that cost only a couple of million dollars, where did the rest of the money go?

This is what KPMG called round-tripping: Money leaving the company eventually comes back to it. This is where NEL - the former Nucleus Electronics - comes into the picture.

The money went full circle. Advance Modules paid Diviner for the new machines. Diviner then used the cash to pay NEL for some dies - tools used in manufacturing.

NEL used the money to pay Long Gain, also for purchases of dies. Long Gain took the money and paid Advance Modules for the chips.

When KPMG's report was released in November, NEL was extremely unhappy about being dragged into the spotlight, in particular about KPMG's 'conflict of interest' in both being a special auditor to Advance Modules and being its own auditor.

Now that KPMG has made the report to the Finance Minister, the SGX has ordered NEL to get a special auditor to look into these alleged transactions. Ernst & Young is in the process of being appointed.

For Advance Modules, the SGX has to decide - from KPMG's report - if any listing rules were breached and if further action is required.

Meanwhile, minority investors can only watch and wait as the shares of both companies remain suspended.

This article was first published in The Straits Times on January 08, 2009.