SGX flags financial irregularities at S-chips

SINGAPORE - Singapore Exchange has warned investors to pay attention to the financial irregularities that are emerging among the listed companies here with operations in China.

Several of these companies have recently announced significant and perplexing changes in their financial positions, usually the in form of write-offs over questionable customer claims and bad loans, SGX chief regulatory officer Tan Boon Gin said in the exchange's Regulator's Column on Nov 17.

"In some instances, the companies reported customer claims for compensation more than 10 times the value of the original sales which is the subject to the claim. In others, trade receivables written off ballooned and explanations offered did not provide clarity or comfort.

"Others involved the company extending prolonged credit terms to customers and reporting dwindling sales, while making significant prepayments to suppliers for raw materials and deposits for capital expenditure and expansion, only to write off these significant amounts," Mr Tan said.

These situations have caused a massive erosion of the companies' cash, assets or reserves, which gave the companies an excuse to, in turn, made impairment provisions on assets such as factories and land.

"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 cautioned.

The article did not name these companies, but noted that they are in the textile, manufacturing, heavy industries, retail and chemical sectors, among others.

These recent cases reflected similar irregularities that also emerged during the Global Financial Crisis in 2008 and 2009.

Remisier Alvin Yong said there have been a surge of such cases again over the past year, which collectively point to corporate governance issues.

"The fact that a management can allow such huge write-offs or impairments to happen shows a worrying lack of competence within the said company. In a worst case scenario, there may actually be criminal intent involved where the management is trying to siphon money out of the company," Mr Yong said.

In his article, Mr Tan said SGX expects companies to conduct their due diligence, such as ensuring controls and seeking independent professional advices, before the write-offs are made.

"Investors should note SGX's concerns and monitor these risks closely when making their investment decisions. In addition, SGX may raise questions to the board of these companies," Mr Tan added.