Darco Water flags whistleblower report relating to China-based unit

SINGAPORE (THE BUSINESS TIMES) - Darco Water Technologies has received a whistleblower report concerning its China-based subsidiary Wuhan Kaidi Water Service Co (WHKD), it said in a filing to the Singapore Exchange late Thursday night (June 24).

According to the whistleblower, the company's executive chairman had instructed WHKD's head of finance to modify certain key financial figures for its FY2019 financial statements, which in turn were submitted to a bank in China that has extended banking facilities to WHKD.

The banking facilities granted comprised facilities for the issuance of performance bonds amounting to 13.58 million yuan (S$2.83 million) as guarantees for the performance by WHKD for obligations specified in the contracts with WHKD's customers and for the advancement of a short-term loan of three million yuan.

Based on preliminary investigations, the accounts submitted showed WHKD had recorded a profit of 1.7 million yuan for FY2019 as opposed to a loss of 23.2 million yuan as reported to the company.

Darco said: "Currently as far as the board is aware, only the executive chairman, Wang Yaoyu, together with the head of finance of WHKD and a staff from the finance department are involved in the misrepresentation... but have assured the company that the misrepresentation and use of the modified accounts were confined to the submission of such accounts to the bank."

Darco added that based on preliminary assessments, the audited financial statements of the group for FY2019 and FY2020 are not affected by the modified accounts.

The board has obtained legal opinions from Morgan Lewis Stamford and compliance adviser, W Capital Markets.

The company has been advised by the lawyers that under the relevant Chinese laws, the act of modifying certain key financial figures in WHKD's audited financial statements and submitting such accounts to the bank would constitute a violation of Chinese laws. This could result in fines, among other things.

The executive chairman has resigned from the board while the two other personnel involved are to be placed on leave of absence immediately. Mr Zhao Yongchang, the chief operating officer, will take over the oversight and supervision of WHKD's finance department.

Darco will also - together with an external auditor - check whether the audited financial statements that were modified were confined to FY2019; and whether WHKD's audited financial statements used for consolidation in the group's audited financial statements for FY2019 and FY2020 are valid.

Following an initial assessment by the company's management and "assuming a worst-case scenario where the bank withdraws the banking facilities", the board has been advised that currently the group as a whole will not encounter any going-concern issue and that the company will remain in a net assets position (including a net current assets position)", Darco highlighted.

The announcement also noted that the group's existing cash position stood at S$20.2 million, and that it has not provided any guarantee for WHKD's business and operations.

The total banking facilities from various banks in China - comprising facilities for the issuance of performance bonds totalling 20.57 million yuan as guarantees for the performance by WHKD for its obligations specified in contracts with its customers and for short-term loans amounting to 4.17 million yuan extended to WHKD - represents 11.5 per cent of the group's net assets based on the group's FY2020 audited financial statements.

Darco said it will make further announcements as and when there are material findings or developments.

The counter closed at 17.5 cents on Thursday, up 4.79 per cent or 0.8 cent.