Overview and Summary:

Oriental Century is a China-based education company, in which Raffles Education (SGX-listed education Group)holds 29.9% stake with cost of investment amounted to S$34.6mil. Trading in SGX was suspended.

Its former chairman and CEO Wang Yuean had in March 09 confessed to cooking the books for years and diverting money to an interested party.

A special audit by PWC uncovered falsified accounts, bank statements and student numbers, as well as various payments and receipts of unknown purposes.

The special audit found two sets of accounting books maintained by the group when it visited the group’s subsidiaries in China.

The second set of accounts showed that for the last five years, the total revenue of the group came to RMB19.87m (S$4.2 m) and accumulated loss totaling RMB55.42m.

These contrast with the reported total revenue of RMB328.44m and accumulated PAT of RMB173.03m. The actual group bank balances as at Dec 31, 2008 turned out to be RMB1.78m instead of the reported 234.34m.

At the main subsidiary, Oriental Dragon Management Co Ltd (ODM), which derived management fees from Oriental Pearl College (OPC), it was found that management fees collected fell short of the reported sum by RMB121.9m.

Mr Wang has a controlling 51.5% stake in OPC through Dongguan Baisheng Investments Development Co Ltd.

At the two schools – Nanchang No 3 Oriental Pearl High School and Humen Oriental Pearl Kindergarten – owned and managed by Oriental, it was found that school fees collected by Nanchang also fell short of the reported sum while the ownership of loss-making Humen came under a cloud.

Matters Arising:

• 2 sets of accounting books maintained by the group in which 1 set made publicly available was falsified. 
• Breach of fiduciary duties as the directors by:

1. committing fraud against the company;
2. falsifying accounts included the issue and receipt of false documents; and
3. fraudulent transfer of funds to its related party with self interest.

• Generally weak corporate governance within the company.

Considerations by Auditors:

~ Objectivity applied by auditors in evaluating evidence?

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

Its auditor had flagged doubts over its bank balance. Would the fraud be detected earlier should the auditor have probed and performed further work to verify and clarify the doubts especially transfer of funds between related parties?

~ 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?

~ Similar to Citiraya & NEL, human issue is a greater challenge for auditors than a system weakness issue where fraud and intentional misstatement of financial results committed by human are the greatest challenge to detect. Auditors cannot be expected to pick up all of these misstatements during an audit, since “Auditors are watchdogs, not bloodhounds”

~ Education on Ethical issues to the management is critical.