The Singapore Exchange is warning investors to monitor risks after several companies with large operations in China announced major reversals in their financial positions "under perplexing circumstances".
The exchange is keeping a close watch on the companies, which include those from the textile and sporting goods, manufacturing, heavy industries, packaging, electrical and electronics, retail and chemical sectors.
SGX chief regulatory officer Tan Boon Gin said in a Regulator's Column posted online yesterday that the changes were usually in the form of questionable write-offs.
"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."
Some companies also extended prolonged credit and reported falling sales, while making significant prepayments to suppliers, only to write off these hefty sums. Others issued loans and advances that were later written off.
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 BOON GIN,
SGX chief regulatory officer
These write-offs caused a massive erosion of the companies' cash, assets or reserves, which in turn gave the companies an excuse to make 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, who was director of the Commercial Affairs Department before joining SGX in June, did not name the companies.
However, analysts have noted that a number of listed companies with businesses in China, known as S-chips, have over the past year reported sizeable write-offs.
For instance, spirit maker Dukang Distillers Holdings reported in August a 94.5 per cent year-on-year surge in its property, plant and equipment write-offs to 10.7 million yuan (S$2.4 million) for the year to June 30.
"Not every S-chip should be tarred with the brush of possible financial mismanagement. However, it is also probably true these financial irregularities are more common in Chinese companies," TSMP Law joint managing director Stefanie Yuen Thio told The Straits Times. She suggested Mr Tan's column "is a first shot across the bow" to company directors to exercise due care or be held accountable.
Mr Tan directed company boards to ensure controls and independent review before significant write- offs and compensations are made.
The SGX will monitor both company disclosures and audit procedures at listed companies, and the bourse has the right to request special auditors to examine the financials of a company. Financial irregularities that are significant enough may lead to shares being suspended, Mr Tan warned.
"In addition, SGX may raise questions to the boards of these companies, particularly when the steps outlined have not been adopted. Investors should pay particular attention to these questions and responses from the board."