Advance Modules was a Malaysia based semiconductor company which came to Singapore for Main Board Listing in 2005.
For year ending 31 December 2005, its then auditor Deloitte and Touche was unable to issue a clean audit report. There was uncertainty relating to a transaction to a single customer worth USD 14.4 mil.
NEL’s auditor KPMG reported directly to Minister of Finance (NEL was involved in a round tripping transaction with Advance Modules). Under Companies Act, an auditor can report a matter to the Finance Minister if it believes an offence involving fraud or dishonesty has been committed by officers or employees of a publicly listed company.
Round tripping to inflate revenue and profit. This involved:
Sales to customer Long Gain for US 14.4 mil. (The questionable transaction in 2005)
In March 2008 the company disclosed that it had purchased USD 11.9 mil from Diviner for Machinery and Equipment. Which started in 2006. The estimated value according to KPMG is worth only USD 3 million.
In December 2007 the company revealed that the customer had paid back 9.4 million and another USD 3.7 million came from Mr Vincent Tan, MD.
Round tripping takes place with the help of friendly parties i.e. related parties who were willing to share the risks and returns.
Whistle blowing – both former and incoming auditor Horwath First Trust were unable to issue a clean audit report. This had prevented the company from further fund raising which would have most certainly ended up in a bigger scam/ loss to investors.
IPO risks – the pressure of meeting profit targets before and after IPO is a factor for false accounting
Failure of corporate governance – that independent directors did not play a proper role in warnings and prevention. Were they selected properly? Or were they also a friendly party picked by management/ major shareholders?
Considerations by Auditors:
~ Audit procedures to reveal related party transactions – alertness, do background check on customers and suppliers for especially large and unusual transactions, are these companies well-known in their respective industry, do they have the capacity to handle such large volume / high value transactions.
~ Validity of transaction in the sales cycle, purchase cycle.
~ The concentration of sales – one single transaction of such high value in relation to the whole year’s sales should put auditor in alert.
~ Use corroborative evidence – production capacity and shipping documents may help to identify that sales of 14.4 mil is not possible.
~ Management integrity assessment.
~ Unusual accounting entries – size, nature, supporting documents, check with staff who recorded the transaction, by interview – if they are hesitant, e.g. if they reply to auditor to refer directly to an executive director/ senior management about the transaction then the auditor should be put on alert.