Local Case 14

Overview and Summary:

NEL Group Ltd. is listed on the Singapore Exchange in May 2000. The Group is one of the leading players in the high tech products distribution and technology services and extending its business into oil and gas sector in Asia.

Its chief executive Choong Choo Leong had left the company with immediate effect in April 2009.

NEL has been plunged into crisis in recent months since early 2009. In March, two of its units received a payment demand from semiconductor supplier Atmel for outstanding invoices of US$11.8 million (S$17.7 million).

In February, KPMG was removed as external auditors and three directors were given the boot.

Early 2009, and under the SGX’s directive, NEL appointed Ernst & Young Risk Advisory Services as special auditors to probe certain transactions. This followed a confidential report submitted by KPMG in December 2008 to the Finance Minister, flagging potential dishonesty or fraud at NEL.

NEL and its two subsidiaries have been embroiled in allegations of dodgy deals with Singapore-listed Malaysian firm Advance Modules.

The so-called ’round-trip” transactions were allegedly carried out with Advance Modules, Long Gain Technology and Diviner Technology Corp that involved false invoices to give the appearance of greater sales and higher revenues.

Suspicion arose when KPMG (appointed as special auditor to Advance Modules) reported that sales of US$14.4m (S$21.2m) was fabricated to show inflated accounts for memory module maker Advance Modules, which was under pressure to report a profit for FY2005.

NEL shares were last done at four cents on Nov 27 2008. Trading was then suspended.

Issues Arising:

Auditors’ Considerations:

~ Objectivity applied by auditors in evaluating evidence?

  eg: could the auditors have performed further work to verify the existence of sales and any related party transactions at arm’s length?

~ Reliance on management representation?

  eg: could the auditors have assessed the integrity of top management for fraud and paid more attention to the 3rd party sales/debtors confirmation and reconciliation, bank reconciliation statement and performed additional audit procedures than solely relying on management representation?

~ Professional Competence and Due Care?

eg: could the auditors have performed more work, e.g., adopt an attitude of professional scepticism and be more alert to the possibility of fraud?

~ Similarly to Citiraya, human issue is a greater challenge for auditors than a system weakness issue where fraud and intentional mis-statement of financial results committed by human are the greatest challenge to detect. It is always defended as “Auditors are Watchdogs, not bloodhounds”

~ Educations on Ethical issues to the management is critical.