A special auditor's report into a deal that went bad for Foreland Fabrictech has suggested the company may not have conducted proper due diligence before paying out compensation.
The 400 million yuan ($84.1 million) contract for dyed textiles apparently went awry, leading the buyer to launch a successful 280 million-yuan compensation suit.
In January, mainboard-listed Foreland commissioned the report from BDO after its former auditors Baker Tilly TFW issued disclaimers on four issues, including the compensation claim, in its audited report for the 2013 financial year. The Singapore Exchange (SGX) also raised queries over the 2013 report.
The special auditor's report found that in September 2013, a wholly-owned unit of Foreland, Fulian Knitting, entered a deal to supply more than 300,000 yards of dyed textile to Jiangxi Longdu, a winter jacket maker, in a contract worth more than four million yuan. Jiangxi Longdu was to manufacture winter jackets for Mega Chinese, a Hong Kong registered firm.
In November, Jiangxi Longdu complained to Fulian about the quality of the textile supplied.
Fulian then conducted internal investigations, and hired a law firm to determine if they had breached the contract with Jiangxi Longdu. It paid 280 million yuan to Jiangxi Longdu by May 2014.
However, BDO raised a number of potential flaws with the process in which Fulian agreed on the settlement.
Fulian's three independent directors had requested to meet the law firm hired by Fulian but did not manage to do so. The three clashed with Fulian's management on the compensation issue, asking to hire another law firm but were denied. This led to their resignations in early 2014.
BDO also found that, according to the contract between Fulian and Jiangxi Longdu, the latter had 30 days to complain to Fulian of defects in the textiles supplied.
The buyer complained after the contractual time frame, the auditors found in the company's Chinese circular, but Fulian's director Tsoi Kin Chit claimed there had been a typographical error. Mr Tsoi is also the executive chairman of Foreland Fabrictech.
Additionally, BDO found that Mega Chinese had only a paid-up share capital of HK$1, casting doubt on whether Mega Chinese would have been able to pay Jiangxi Longdu.
Ms June Sim, head of listing compliance at SGX, said yesterday that SGX would study the findings of the report, and take regulatory action for any breaches of the listing rules.
