SGX fires warning on suspect China-linked impairments, write-offs

THE Singapore Exchange (SGX) has flagged disclosure concerns over some companies, particularly several with large operations in China.

It is closely monitoring disclosures of companies including those which show large swings in financial positions and performance, the exchange said in a post on its regulator's column on Tuesday.

Several companies with large operations in China have recently announced adverse and significant changes in their financial positions under "perplexing circumstances", noted SGX chief regulatory officer Tan Boon Gin. These companies are mainly from the textile and sporting goods, manufacturing, heavy industries, packaging, electrical and electronics, retail and chemical sectors.

The regulator highlighted a long list of concerns. Some companies have reported customer claims for compensation more than 10 times the value of the original sales, while 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 such as 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 post is seen as unusual - the SGX is often less explicit in delivering caution. When contacted, SGX declined to name the companies in question. Mr Tan said, in response to queries, that "we are simply highlighting a trend observed based on publicly disclosed information".

"This column serves to set out SGX's expectations of directors, in particular the audit committee, to be vigilant on such matters should they encounter such situations in their companies."

Stefanie Yuen Thio, joint managing director of TSMP Law Corporation, noted that while the actions mentioned in the regulator's column are worrying, the bad practices are the exception rather than the rule among the S-chips or China-focused stocks of today. "In the S-chip heyday of 2006-2007, we saw many China companies list in Singapore. Some may not have had the best management teams; even large listed darlings like CAO had their scandals, and stories about how entire sets of accounting papers literally went up in smoke in China did not raise corporate eyebrows. The S-chips of today are generally managed to a more international standard so it would be unfair to tar all China-listed companies with the same brush," said Ms Yuen Thio.

"While a 'light touch' in regulation makes sense in a mature market, a sound financial centre like Singapore also needs to root out mismanagement. It seems to me that this SGX blog post is an early warning signal to directors that they had better exercise due care, or face the consequences."

The exchange highlighted customer claims and write-offs of accounts receivables and other assets as two key areas of concern. It 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.

"SGX is concerned with recent developments where the value of fixed assets including land and real estate properties have been significantly impaired or written off in the records of the company, based on the value-in-use methodology of valuing these fixed assets. These fixed assets may be subsequently disposed without proper disclosure or accountability," said the regulator. "In particular, where the land and real estate properties have been too aggressively impaired to nominal or below its open market value, such disposals at the impaired values prejudices the interest of shareholders as a whole."

David Gerald, president and CEO of the Securities Investors Association (Singapore) (SIAS) noted that the warning - both for retail investors and companies - is a good safeguard.

Based on his observation, "there were three announcements by three Chinese companies, and SGX is pre-empting the fourth announcement", said Mr Gerald, who also declined to name any company. "If there is a fourth one, investors need to know they have to ask questions . . . (SGX) is letting investors know this is happening (and) you need to ask questions, and companies are also being told what steps they need to take. I think it's good as a safeguard."

In his post, Mr Tan stressed that SGX is closely monitoring companies reporting adverse financial developments, and that auditors must undertake audit procedures 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.

"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."

This article was first published on November 18, 2015.
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