Stratech Systems Limited Report_9 Mar 2012 _Final_.docx

Transcription

Factual investigation into certain matters of Stratech
Systems Limited
09 March 2012
Report to the Audit Committee & Singapore Exchange
Limited
Strictly Private & Confidential
Factual investigation into certain matters of Stratech Systems Limited
Report to the Audit Committee and Singapore Exchange Limited
09 March 2012
Table of contents
List of Abbreviations.........................................................................................................................3
Individuals named in this report .......................................................................................................4
1.
2.
Executive Summary ...........................................................................................................6
1.1
Our appointment ..............................................................................................6
1.2
Background .....................................................................................................7
1.3
Overview of the engagement ...........................................................................8
1.4
Forensic Technology Procedures ...................................................................10
1.5
General limiting conditions and constraints .................................................... 11
1.6
Specific limiting conditions and constraints ....................................................12
1.7
Maxwellisation ...............................................................................................13
1.8
Summary of our key findings and observations ..............................................14
Our key findings and observations arising from the Review .............................................31
2.1
Overview of revenue recognition and development expenditure ....................31
2.2
Timesheets ....................................................................................................68
2.3
Re-computation of net profits ....................................................................... 111
2.4
Fund raising exercises ...................................................................................81
2.5
Cash and bank disbursements to Directors..................................................123
2.6
Interested persons transactions .....................................................................97
2.7
Provision for litigation suits ............................................................................98
2.8
Delay of AGM and non-announcement of litigation suits ................................99
2.9
Patent registration........................................................................................146
2.10
Corporate governance .................................................................................151
List of Appendices .......................................................................................................................108
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List of Abbreviations
Abbreviation
Name
AC
Audit Committee
ACRA
Accounting & Corporate Regulatory Authority
AGM
Annual General Meeting
Citibank
Citibank Singapore Ltd
EY Advisory
Ernst & Young Advisory Pte. Ltd.
HR
Human resource
IFS
IFS Capital Limited
LTC
LTC LLP
Plan-B
Plan-B ICAG Pte. Ltd.
PT PGI
PT Panasonic Gobel Indonesia
SGX
Singapore Exchange Limited
Stratech
Stratech Systems Limited
Surecanlah
Surecanlah Consultancy
UMF
UMF (Singapore) Pte. Ltd.
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Individuals named in this report
Name of individuals
Position/ Roles
Mr. Aaron Yu Xiao
System Engineer
Mr. Ben KY Yap
(“Mr. Ben Yap”)
Human Resource Manager
Ms. Bernice
Software Engineer
Mr. Chew Hai Chwee
(“Mr. HC Chew”)
Independent Director and member of AC
Mr. Chua Ah Leng
(“Mr. Chua”)
President and Chief Operating Officer
Ms. Coreen Kuo
Manager, Marcom & Corporate Communications
Dr. David Chew Khien Meow
(“Dr. David Chew”)
Executive Chairman
Mr. Faizal
Technical Specialist
Ms. Florence Khoo Ngiak Fah
(“Ms. Khoo”)
Former Finance Director
Ms. Foong Lai Kiun
Project Director on contract basis
Ms. Ho Wei Li
(“Ms. Ho”)
Finance Manager
Ms. Jamilah Ibrahim
(“Ms. Jamilah”)
Administration Manager and Personal Assistant to all
executive members
Mr. Joe Ong
Director of Sales
Mr. John Lim
Ex-Chief Technology Officer
Mr. Jules Yap
Ex-Group Director of Homeland Security Products and
Capabilities
Dr. Kennedy Chew Khien Mien
(“Dr. Kennedy Chew”)
Director of Alliance and Technical Fellow
Ms. Laura Tan
Accounts Assistant
Mr. Lam Ah Wah
(“Mr. Lam”)
Director, Presales Solutioning and Support
Mr. Lee Choon Meng
Group Director of Technology and Chief Technology
Officer, Stratech iVision
Ms. Leong Sook Ching
Executive Director and Chief Corporate Officer
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Name of individuals
Position/ Roles
(“Ms. Leong”)
Mr. Lim Soon Hock
(“Mr. Lim”)
Executive Director, Deputy Chairman and member of AC
Mr. Mahadevan Lukshamayeh
(“Mr. Mahadevan”)
Senior Legal Counsel
Mr. Mark Ang
Project Manager
Mr. Melvin Chiang
Project Manager
Mr. Mike Choo
Audit senior, LTC
Ms. Phoebe Heng
Manager – Planning and Strategy
Mr. Ravi Ranganathan
(“Mr. Ravi”)
Sales and Marketing Account Manager
Mr. Sajjad Akhtar
(“Mr. Akhtar”)
Independent Director and AC Chairman
Ms. Sandra Yow
Senior Manager, LTC
Mr. Teh Teong Lay
(“Mr. Teh”)
Former Financial Controller
Ms. Verly
Audit senior, LTC
Mr. Wang Ke Jian
Software Engineer
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1.
Executive Summary
1.1
Our appointment
1.1.1
Ernst & Young Advisory Pte. Ltd (“EY Advisory”) was appointed by Stratech
Systems Limited (the “Company” or “Stratech”) on 1 September 2010 to assist
in assessing certain allegations raised in the anonymous letters sent to the
Singapore Exchange Limited (“SGX” or the “Exchange”).
The anonymous
letters are appended in Appendix 1.
1.1.2
Certain of the allegations raised in the anonymous letters are listed as follows:
i.
“The mere excuse used by the company to delay the holding of the
AGM was a sham and did SGX and ACRA look into the real
reasons for the delay in holding the AGM; sources had said that in
the last few months, the Company had been experiencing deep
financial trouble as staffs and employees were not paid salaries for
months and hence the logical conclusion that the company may
have no money to pay for the printing of the AR.”;
ii.
“Payments made for projects are squirreled away to finance various
questionable expenses which left many projects without finance to
proceed and are constantly delayed leading to Liquidation
Damages..”;
iii.
“Dr. David Chew and family also frequently incur high expenditure
despite the Company having cash flow issues. This includes first
class air tickets for 2..”;
iv.
“Duplicated or non-existing personnel timesheets were falsified in
order to raise the cost of R&D or used to show an efficient
operational expense…”;
v.
“Products designed by employees, patented and paid by Stratech
Systems Limited are registered under Dr. Chew’s personal name”;
vi.
“It has been reported in the Annual Report for the last few years that
2 of the 3 independent directors are no longer independent as they
have contracts with the Company to provide services and they are
being paid by the Company”; and
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vii.
“The Company was put on the Watch List in March 2008 and was
removed from the Watch List on 28 January 2010. One of the
reasons for the removal was that it had posted profits for the last 2
years. Further, the Company had not satisfied the $40m threshold
of market capitalisation but was given a waiver by SGX pursuant to
Listing Rule 107 as announced.”
1.2
Background
1.2.1
The Company is principally engaged in the design, development, integration,
implementation,
maintenance
and
project
management
of
information
technology and advanced technology systems. The Company (together with its
subsidiaries, the “Group”) delivers large-scale complex, real-time, mission
critical systems in areas of intelligent Vision, intelligent Transport Systems and
e-Systems for governments and businesses, serving industries such as
aerospace and defense, financial services.
1.2.2
On 29 December 2006, the Company announced the change in its financial
year end from 31 December to 31 March. Based on the announcement, the
reason for the change in financial year end was “to avoid the rush for
professional audit resources at the end of each calendar year and with the view
of improving the engagement economics.”
1.2.3
Pursuant to Rule 1311 of the SGX-ST Listing Manual, on 5 March 2008,
Stratech was placed on Watch-List1 as it recorded pre-tax losses for the last
three consecutive years and a less than S$40 million daily market capitalisation.
1.2.4
Under the Watch-List, Stratech is required to provide quarterly updates on its
financial performance, including its future direction and any other material
developments that may have a significant impact on its financial position.
1.2.5
On 29 January 2010, the Exchange approved the Company’s application for
removal from the Watch-List 2 . The Company delivered consolidated pre-tax
1
An issuer placed on the watch-list has 24 months to restore its financial health to meet the requirements for removal from the watch-list,
failing which it will be delisted or have trading in its listed securities suspended with a view to delisting.
2
The Exchange will place an issuer on the watch-list, if it records:(1) Pre-tax losses for the three (3) most recently completed consecutive financial years (based on the latest announced full year
consolidated accounts, excluding exceptional or non-recurrent income and extraordinary items); and
(2) an average daily market capitalisation of less than S$40 million over the last 120 market days on which trading was not suspended or
halted.
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09 March 2012
profits for the two most recent consecutive years and has on 12 November
2009 announced an unaudited net profit of S$1.1 million for the half-year ended
30 September 2009. Although the Company did not achieve S$40 million
average daily market capitalisation over the last 120 market days, SGX had
waived the criteria for the removal as the Company had achieved an average
daily market capitalisation of close to S$40 million over the last 120 market
days notwithstanding the global economic crisis.
1.2.6
The Group’s consolidated audited pre-tax profits for FY2007, FY2008, FY2009
and FY2010 are set out below:
FY2007
FY2008
FY2009
FY2010
S$’000
S$’000
S$’000
S$’000
Pre-tax profit
(10,567)
786
1,180
1,169
[Table 1]
1.3
Overview of the engagement
1.3.1
The scope of EY Advisory’s work covers the period from 1 January 2007 to 31
July 2010.
1.3.2
In general, our scope of work (our “Review”) focuses on the abovementioned
allegations raised in the anonymous letters as follows:
i.
To review all cash/bank disbursements made by Stratech from 1
January 2007 to 31 July 2010 to Directors and Dr Chew and his
family to identify any irregularities;
ii.
Analyse research and development cost to identify any irregularities
and/ or anomalies;
iii.
Analyse and assess the matters surrounding the registration of
patents;
iv.
Analyse the use and/ or the proposed use of the funds from fund
raising exercises and loan from IFS Capital Ltd;
v.
Discussion with the Company’s statutory auditors and/ or Directors
to gain an understanding of the Company’s sales/ revenue in
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relation to revenue recognition. Depending on the assessment of
the
discussion,
perform
additional
procedures,
if
deemed
necessary;
vi.
Analyse the adequacy of provision made for accounts receivables
and litigation suits;
vii.
Assessment on Interested Person Transactions for any noncompliance with SGX’s rules for the following:
viii.
a.
Payments to and/ or contracts with Directors; and
b.
Loans from/ to director/ shareholder
Analyse and assess the procedures and findings previously
performed in relation to the delay and/ or non-announcement of the
issues highlighted in the anonymous letters. Depending on the
assessment, perform additional procedures, if deemed necessary;
ix.
Assess the internal control and governance structure specific to the
scopes mentioned above as deemed appropriate; and
x.
Any other incidental work, as deemed necessary, under the
instruction of Stratech’s Audit Committee (“AC”)3 and the Exchange.
1.3.3
During the course of our work, we had on 26 October 2010, 3 December 2010
and 15 December 2010 met up with the Company’s statutory auditors, LTC LLP
(“LTC”) to understand certain matters which are relevant to our engagement.
Additionally, we had also on various occasions for the period from December
2010 to January 2012 discussed our findings and/ or obtained relevant
clarifications from the Management and/ or AC.
1.3.4
The terms of our engagement require us to provide, upon the completion of our
work, a combined written report to SGX and the AC (the “Report”) on our
findings for the matters raised under our engagement letter dated 1 September
2010. The Report will include our procedures, factual findings and improvement
options, where relevant.
3
AC comprised 3 independent directors during our review period namely Mr. Sajjad Akhtar (“Mr. Akhtar”), Mr. Chew Hai Chwee (“Mr. HC
Chew”) and Mr. Lim Soon Hock (“Mr. Lim”). Mr. Lim was appointed as the Deputy Chairman and Executive Director of Stratech with effect
from 10 August 2010 and resigned as AC member on 19 May 2011. Mr. Lim Kim Choon was appointed as AC member on the same day.
Mr. HC Chew was Chairman of AC during our review period up till 29 July 2009 and Mr. Akhtar was appointed Chairman of AC on the
same day.
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09 March 2012
1.3.5
The purpose of our engagement was to provide SGX and the AC with an
understanding of the matters set out in our engagement letter and our findings
arising from our work performed. This Report sets out our key findings and
observations. Our fieldwork commenced on 3 September 2010 and was
concluded on 1 October 2010. For the period thereafter up till January 2012, we
had on a sporadic basis made certain requests for further information and
clarification
as
certain
documents
and
information
became
available
subsequent to our field work.
1.3.6
During the course of our work, we kept SGX and the AC apprised of any
significant events and/or transactions that warranted their attention.
1.4
Forensic Technology Procedures
1.4.1
In the course of our work, we performed limited forensic technology procedures
on the hard disks of selected computers and laptops belonging to the Company.
The procedures include:
i.
forensic imaging on the said hard disk drives through specific
computer forensic software and hardware, where forensic imaging
is defined as the process of creating a verifiable and complete bit
stream copy of a drive, volume or selected file(s) which is stored
within an image file or a series of image files;
ii.
verification of the image files for completeness, accuracy and
usability; and
iii.
analysis of the electronic data contained within the image files
derived from the forensic imaging process, including metadata such
as file properties (“computer forensic analysis”). Our analysis of the
emails extracted includes but not limited to, analysing the content of
the emails on a holistic manner and reading through the threads of
the emails, to the extent available, in order to understand events
occurring before and after each email.
1.4.2
The custodians to the Company’s laptops and computers that were subject to
the forensic technology procedures are limited to: Mr. Ben KY Yap (“Mr. Ben
Yap”) (HR Manager), Ms. Florence Khoo Ngiak Fah (“Ms. Khoo”) (Former
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09 March 2012
Finance Director) and Ms. Jamilah Ibrahim (“Ms. Jamilah”) (Administration
Manager and Personal Assistant to all executive members).
1.5
General limiting conditions and constraints
1.5.1
Our Report has been prepared on the basis of management information,
financial data and documentation prepared by Stratech relevant to our scope of
work, as well as interviews and/or discussions conducted with relevant persons.
1.5.2
The findings in this Report are based on facts obtained from the interviews
and/or discussions as well as review of documents that were provided to us.
1.5.3
The procedures that we have performed in arriving at the findings in this Report
do not constitute an audit or a review made in accordance with the Singapore
Standards of Auditing or Singapore Standards on Review Engagements;
accordingly, no assurance will be expressed in this regard. .
1.5.4
The scope of work set out in this Report does not amount to an internal audit
and shall not be relied upon as the primary basis for assessing the adequacy of
the system of internal controls.
1.5.5
Unless expressly stated, the information contained in this Report has not been
subject to detailed verification procedures and no document expert has been
engaged to independently verify the authenticity of the documents. No
representation is made by EY Advisory as to the accuracy or completeness of
such information and nothing contained in this Report is or shall be construed
as a representation of the future.
1.5.6
All assumptions made for the purpose of this engagement are based on
information and representations provided by Stratech and persons in
connection with our work.
We do not give any representation, warranty,
indemnity or undertaking expressly or impliedly as to the accuracy or
completeness of such information provided to and used by us in our
assignment.
1.5.7
We wish to highlight that the people we interviewed were not under oath.
Hence, certain judgments would need to be exercised as to the credibility of the
views and recollections of those interviewed and/or discussed.
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09 March 2012
1.5.8
Any report issued by EY Advisory should not be used by Stratech for any other
purpose than that stated in our letter of engagement without our prior written
consent. In the event that we provide written approval to Stratech to use any of
our reports for purposes other than that stated in our letter of engagement, we
will need to approve the form and context of such a report to be released. In
addition, we shall require an appropriate indemnity from Stratech absolving EY
Advisory from any liability or consequence arising from the release of such
report for purposes other than that specified above.
1.5.9
Neither the whole nor part of our Report, nor any reference thereto, may be
circulated nor published in any way whatsoever, nor used for any other purpose
than that specified in the Report without our prior written consent pertaining to
the form and context in which it appears. Except if requested by SGX to furnish
the Report to the relevant authority and/ or regulatory board, this report should
not be used by and/or disclosed to third parties, without the expressed consent
of EY Advisory. No reliance should be placed by third parties on the report for
any purposes whatsoever and EY Advisory shall not be responsible to third
parties who have acted on the information contained therein.
1.5.10
We reserve the right (but we are not under any obligation) to review, alter and
amend our Report in the light of any matters not previously brought to our
attention as a result of new developments, which may or may not materially
affect our opinion both prior to and subsequent to the date of this Report.
1.6
Specific limiting conditions and constraints
1.6.1
Ms. Khoo who was the former Finance Director was critical for the performance
of our work. However, our attempts to reach Ms. Khoo were unsuccessful
whether independently based on the contact details provided by the AC or
through the assistance of the AC and/or the management4 of the Company (the
“Management”). Had we were able to speak to her, there may be information
that may or may not be consistent with the findings stated in this Report.
1.6.2
There were certain documents that were considered relevant to our work but
unavailable to us as the same could not be located and/or missing during our
4
Management comprised Dr. David Chew, Ms. Leong Sook Ching (“Ms. Leong”) (Executive Director and Chief Corporate Officer) and Mr.
Chua Ah Leng (“Mr. Chua”) (President and Chief Operating Officer).
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09 March 2012
fieldwork. A listing of these documents is set out in Appendix 35. As such, we
only relied on available documents that were provided to us.
1.6.3
In the performance of our work, we are to rely on accounting records from
January 2007 to March 2010. However, the complete set of accounting records
for January 2007 and February 2007 were missing from the Company’s
records. In January 2012, the Company informed that these accounting records
were located but we did not perform further work on these documents as we
were finalising the Report. Additionally, the accounting records for the period
from April 2010 to July 2010 at the time we commenced our work i.e., on 3
September 2010 were not yet prepared.
1.6.4
Except for the custodians mentioned in preceding paragraphs in which forensic
technology procedures were applied, we did not apply the same to any other
custodians and/or employees of the Company. Had we done so, other emails
and documents relevant to our work may come to light which may or may not
have an impact to this Report.
1.7
Maxwellisation
1.7.1
We had on 3 January 2011 provided AC with our draft Report. A copy of the
same was provided to the Management through the AC on or around the same
time. This allowed the Management and the AC the opportunity to submit their
written responses as they relate to our findings and observations. This exercise
is known as Maxwellisation.
1.7.2
On 1 February 2011, we received the Management’s written responses from the
AC (“Management’s response”). Extracts of the Management’s responses
pertaining to specific paragraphs can be found in the relevant sections of the
Report.
1.7.3
On 23 February and 21 April 2011, we met with the Management to gain further
understanding and/or clarification in relation to certain comments raised by the
Management. Arising therefrom, there were exchanges of information and/ or
documents from the Management up till January 2012..
5
As the Company moved office in December 2011, certain documents were retrieved by the Management but we did not perform further
work on these documents.
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09 March 2012
1.7.4
For the same period up till January 2012, we continued to be in discussions
with the Management and the AC, and on certain occasions, AC and SGX to
address some of the matters which were raised during the course of our work.
1.8
Summary of our key findings and observations
1.8.1
Key findings and observations identified are summarized in this section. Details
of the key findings and observations are provided in Section 2 of this Report.
Revenue recognition and development expenditure
1.8.2
During the course of our Review, we noted that additional accrued revenue
amounting to S$1,468,000 and S$2,738,000 were recorded on the last day of
FY2008 and FY2009 respectively.
1.8.3
We were provided by the Management with the project costing worksheets in
support of the accrued revenue. From our analysis of the project costing
worksheets, we noted the following:
i.
Percentage of completion method was used for revenue recognition
for all projects, save for one particular project. The basis for the
revenue recognition for this project in FY2008 was inconsistent with
that of FY2009.
For the same project, the basis for revenue
recognition for FY2008 was based on delivery of goods and/or
services whereas in FY2009, the revenue was recognized based on
percentage of completion which was measured by the percentage
of costs incurred for the work performed to the estimated total
contract costs. Assuming that the basis for revenue recognition for
FY2009 was adopted, the cost for FY2008 may have been
understated by S$568,527 or, the revenue may have been overstated by S$623,719. Although we have not performed an audit of
the
financial
statements
of
the
Company,
the
possible
overstatement of revenue or understatement of cost could have a
downward impact on the net profit by the corresponding amount for
FY2008 if the change in revenue recognition method was applied
retrospectively and prior year adjustments pertaining to the same
are made accordingly;
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09 March 2012
ii.
In support of the basis for revenue recognition for FY2008 based on
delivery of goods and/ or services, the Management had provided
us with the submission documents to the customer for the designs
of the individual modules. However, from the remarks indicated on
the submission documents, we noted that out of the 10 submissions
before 31 March 2008, 6 submissions appear to be rejected by the
customer for reasons unknown to us. Based on these documents, it
also appears that although designs were submitted by the
Company, not all had been accepted and approved by the
customer. In the absence of approval and acceptance by the
customer, the risk and rewards of the services performed by the
Company may not have passed on to the customer. As such, the
basis of revenue recognition i.e., based on delivery of goods and/ or
services without taking into account the acceptance by the
customer, may not have adequately fulfilled the criteria as set out in
FRS18 for accruing/ recognizing revenue for the design stage in full;
iii.
Further, we noted that the billing to the customer for the delivery of
the above modules only took place after FY2008. The 20% design
revenue was only fully billed by the Company to the customer on 3
November 2008. We sought clarification from Mr. Chua who
informed us that the difference in timing between revenue
recognition and progress billing was due to changes and requests
constantly made during the course of work and customer will only
be billed when such changes or requests were fully completed;
iv.
Third party and manpower costs incurred specifically for projects
were capitalized as development expenditure during the course of
the
projects.
In
particular,
manpower
costs
amounting
to
S$443,585, S$640,187 and S$1,115,934 were capitalized in
FY2008, FY2009 and FY2010 respectively. In FY2009 and FY2010,
the amount of project costs that was reversed and capitalized as
development costs were S$927,000 and S$684,000 respectively.
The amounts capitalized were a percentage of the project costs
based on internal design rates. Such accounting treatment on
development expenditure may raise questions as to whether it
meets the attributes as prescribed in FRS38. Further, the
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09 March 2012
capitalisation of project costs as development costs would have an
impact on the costs of sales and correspondingly on the net profit of
the Company; and
v.
The basis in which the percentage for capitalisation was applied
appears to be inconsistent for the various projects during FY2009
and FY2010. Based on our Review of the information provided by
the Company, the percentages used for the projects were 20% or
33%. We sought clarification from the Management on the different
percentages applied to the various projects and we were informed
that the differences were due to the different nature of each project.
Accordingly, we did not attempt to quantify the impact to the net
profit, if any, arising from such differences.
1.8.4
In a meeting with the Management and LTC, the Management clarified and
asserted that the costs that were capitalised satisfied the attributes as set out in
FRS38 i.e., it generates future benefits to the Company. Further, according to
the audited financial statements, development expenditure is amortized on a
straight-line basis over their estimated useful lives of 3 to 5 years.
1.8.5
Based on our observation as noted in paragraph 1.8.3(iv), the capitalisation of
project costs including third party hardware/ software and manpower costs for
specific on-going projects based on an internal design rate appears to be
inappropriate as such costs attributable to the intangible asset may not have
been reliably measured and not complied with FRS38 where an intangible
asset shall be recognized if, and only if, an entity can demonstrate, among
others, its ability to measure reliably the expenditure attributable to the
intangible asset during its development.
1.8.6
As revenue for the design stage of the project had already been recognized in
FY2008, the capitalisation of the design costs in FY2009 and FY2010 does
raise questions as to whether there was timing issue in terms of revenue
recognition vis-à-vis costs.
1.8.7
From our forensic technology procedures, we identified several emails which
appear to be a concern as it relates to the discussion on (i) revenue recognition;
(ii) cost capitalisation; and (iii) achieving the target of S$1 million net profit for
FY2008. Specifically, we identified an email from Ms. Khoo to Dr. David Chew
Khien Meow (“Dr. David Chew”) (Executive Chairman) in May 2008 which
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09 March 2012
states “… thanks for understanding in my over-zealousness in maintaining the
S$1 million profit. Can’t fault me for trying?...” As we could not speak to Ms.
Khoo, we are unable to adequately assess the underlying reasons as well as
the context of her email.
1.8.8
Further, we also noted several other emails in relation to recording of accrued
revenue and development expenditure. Man hours incurred for development
and for specific projects by the employees of the Company are recorded based
on the timesheets from the relevant employees. From our forensic technology
procedures, we noted discussions via emails between Ms. Khoo and several
other staff within the Company which appear to suggest that the timesheets
may not have been prepared on a timely basis but may have been prepared
retrospectively upon request by their statutory auditors. Different versions of
timesheets were also noted during the course of our Review for the same
employee and for the same period wherein hours and description of work done
were different for the two versions of timesheets. We discussed our
observations with the Management who clarified that the employees could have
been less than timely in preparing the timesheets but nevertheless, the hours
recorded reflected the actual hours incurred for development purposes. Be that
as it may, we are unable to match the hours recorded in the timesheets to the
development expenditure worksheet that forms the basis for capitalisation.
1.8.9
The proximity of timing of the observations and its accounting impact together
with the emails associated with it may raise questions as to whether the
Company will be able to meet the requirement under SGX-ST Listing Rule
1314(1)6 to be removed from the Watch List.
1.8.10
In response to the above, the Management clarified that the profit achievement
for FY2008 was attributable to new businesses secured and the observations in
relation to revenue recognition and development expenditure had been
appropriately assessed by the AC and the statutory auditors.
1.8.11
Further, the management also had on 18 April 2011 provided us with a
computation to assess the net profit for FY2008 and FY2009 on the assumption
that EY Advisory’s observations as set out in the preceding paragraphs are
6
An issuer on the watch-list may apply to the Exchange for its removal from the watch-list if the issuer records consolidated pre-tax profit
for the most recently completed financial year (based on the latest full year consolidated audited accounts, excluding exceptional or nonrecurrent income and extraordinary items) and has an average daily market capitalisation of $40 million or more over the last 120 market
days on which trading was not suspended or halted.
17
09 March 2012
adopted. The computation revealed that the Company would still record a net
profit of S$1.5 million in FY2009 but a net loss of S$241,000 in FY2008.
However, in this computation, we noted that an amount of S$2 million (forming
part of the other operating income of S$3.58 million as reported in the annual
report of the Company for FY2009) which relates to write-back of trade and
other payables and other provisions was included to derive the net profit of
S$1.5 million in FY2009.
1.8.12
We analyzed the S$2.0 million write-back of the trade and other payables in
FY2009 and noted that it was primarily attributed to the following three (3)
categories of write-back and one adjustment which aggregated to S$1.7
million7. The remaining S$0.3 million was due to write-back of trade and other
payables from the subsidiaries. The Management confirmed that LTC was duly
apprised of the write-back as well as the reasons pertaining to the same at the
time the financial audit was performed for FY2009. We set out below our
observations on the write-back of the S$1.7 million and the adjustment in
FY2009::
i.
S$703,668 was due to the write-back of trade and other payables
i.e. amounts due to suppliers and external service providers
(hereinafter collectively referred to as “vendors”). We do not have
the underlying supporting documents for each of such write-back for
our assessment but based on the information and/ or explanation
provided by the Management, we understand that:
a.
S$140,783 (approximately 20%) had aged more than six
(6)8 years which resulted in the write-back in FY2009 and
we were told that some of which were in dispute and the
respective vendors had ceased to pursue the payments;
b.
S$206,516 (approximately 29%) did not age more than six
(6) years when the write-back was made in FY2009 but
based on the Management’s recollection (of which
S$183,589 was without supporting documents), most of
7
There was a provision for foreseeable losses for PT PGI amounting to S$1.7 million in FY2009. Based on the documents and/or
explanation provided by the Management, we understand that the provision for foreseeable losses for PT PGI of S$1.7 million has no
relevance to the S$1.7 million of write-back of trade and other payables. Please see paragraph 1.8.22 on details to PT PGI litigation suit.
8
The six (6) years benchmark was provided by the Management.
18
09 March 2012
such payments were in dispute and were no longer
pursued by the respective vendors;
c.
S$356,369 (approximately 51%) did not age more than six
(6) years and was without any supporting documents or
journal vouchers and/ or explanations by the Management;
and
d.
Although items (b) and (c) above did not age more than six
(6) years at the time the write-back was made in FY2009,
some of the write-back amounting to S$139,992 has
lapsed more than 6 years till to date and we were told by
the Management that there were no further follow-up
actions undertaken by the respective vendors in relation to
these payables.
ii.
S$796,844 was due to the write-back of accruals. This was
subsequently adjusted to S$666,844 due to an audit adjustment of
S$130,0009. For the aggregate accrual write-back of S$666,844, we
were informed by the Management that this write-back was
primarily due to an accounting oversight as the accruals made in
FY2008 were not reversed when the same was paid in FY2009. We
set out below the explanations provided by the Management:
a.
The project cost for a project of S$550,000 was accrued in
FY2008 but the same amount was erroneously taken up as
an expense in FY2009 when payments were made. The
write-back of this accrual was incorrectly recorded as other
operating income in FY2009 instead of crediting against
cost of goods sold; and
b.
The remaining S$116,844 relates to write-back of provision
for professional fees, legal fees, project material costs for a
project and staff claims made prior to FY2009.
iii.
S$329,488 was due to the write-back caused by the reversal of
provision of excess unconsumed leave. In support of this write-back,
9
The audit adjustment of S$130,000 was made as a result of an excess provision for foreseeable losses for a project.
19
09 March 2012
the Company had on 21 February 2012, provided us with an email
memo from the human resource (“HR”) department (also previously
provided to LTC and AC) which communicated the change in the
Company’s policy where only five days of leave can be carried
forward and there was a clean-up exercise in FY2009 to effect the
same. However, the Management was unable to provide us with
prior data which includes the detailed listing and supporting
documents in support of this reversal as the data in the HR
database had been overwritten.
1.8.13
SGX-ST Listing Rule 1314(1) states that “An issuer on the watch-list may apply
to the Exchange for its removal from the watch-list if the issuer records
consolidated pre-tax profit for the most recently completed financial year (based
on the latest full year consolidated audited accounts, excluding exceptional or
non-recurrent income and extraordinary items)….”. Premised on the annual
reports of the Company, with the exception of FY2009, we did not note writeback of trade and other payables which formed “other operating income” of the
Company in other financial years i.e. FY2007, FY2008 and FY2010.
Accordingly, prima facie, it may appear to suggest that the write-back in
FY2009 could be a one-off occurrence. In relation to the same, the
Management had informed and provided us with certain supporting documents
that there were similar write-backs in other financial years but recorded
differently i.e. set off against accruals.
1.8.14
However, in the absence of (i) adequate supporting documents for write-backs;
and (ii) a specific definition in the accounting standard and relevant guidelines
for the assessment on the recurring nature of such write-backs, we are unable
to opine on whether such write-backs of payables and provisions should be
considered recurring in nature and hence included in determining the
Company’s recorded consolidated pre-tax profit for FY2009 for the purposes of
Rule 1314(1) of the Listing Manual.
1.8.15
Be that as it may, based on the information available to us, the amount of writeback without supporting documents amounting to S$869,446 may potentially
have a downward impact to the profitability to the Company’s recorded
consolidated pre-tax profit for FY2009 for the purposes of Rule 1314(1).
However, this is unlikely to impact the removal of the Company from the Watch
20
09 March 2012
List as the Company would still be recording a consolidated pre-tax profit for the
same year.
Payments made by the Company
1.8.16
For the period between 1 January 2007 and 31 March 2010, the Company was
predominantly funded from the cash flow generated from the various fund
raising exercises which took place in the same period as well as personal loans
from Dr. David Chew and Ms. Leong. The loans from Dr. David Chew were for
the payment of damages awarded to PT Panasonic Gobel Indonesia (“PT PGI”)
and for working capital purposes.
1.8.17
Generally, the cash flow generated from the above was used for working capital
purposes with more than 33% being utilized for salary costs. Of which,
approximately 33% of the total salary was salary to senior management10.
1.8.18
Based on our analyses of the payments made by the Company, we noted the
following:
i.
Dr. David Chew travelled on first class flights for business on certain
occasions during the period from May 2008 to February 2010
although cash flows appear to be challenging for the Company
whilst being on the Watch List during the same period. The service
agreement dated 1 January 2008 between Dr. David Chew and the
Company specified that Dr. David Chew “…shall be entitled to travel
on such class of travel (not including SIA suite class or equivalent)
as he deems fit taking into consideration factors including but not
limited to the Company’s financial condition.” Be that as it may, we
were informed by the AC that the service agreement for Dr. David
Chew was only finalized sometime in end November 2008 or early
December 2008 and was back-dated to 1 January 2008 which
resulted in the above observation. Total cost for first class tickets for
the mentioned period amounted to S$140,537 via-a-vis total travel
spending of S$259,621 over the three financial years. We did not
10
Senior management encompassed Dr. David Chew, Ms. Leong, Mr. Chua, Mr. Joe Ong (Director of Sales), Dr. Kennedy Chew Khien
Mien (“Dr. Kennedy Chew”) (Director of Alliance and Technical Fellow), Mr. John Lim (Ex-Chief Technology Officer) and Mr. Jules Yap
(Ex-Group Director of Homeland Security Products and Capabilities)
21
09 March 2012
note any travel costs that were paid by the Company for the family
members of Dr. David Chew.
ii.
We also noted other payments to Dr. David Chew and Ms. Leong
and accruals made for Dr. David Chew’s credit card expenses which
are not provided for in the service agreements for both persons
dated 1 January 2008. These, included inter-alia: the credit card
expenses for Dr. David Chew of S$154,690,
interest for late
payment charges for Dr. David Chew’s credit cards of S$15,377 and
club membership dues of S$4,852. We also noted accrual of
S$102,182 of credit card expenses for Dr. David Chew that were
not supported with credit card statements and/ or invoices or
receipts.
iii.
The receipts, bills and invoices in support of certain reimbursements
of expenses from the Company to Dr. David Chew and Ms. Leong,
amounting to S$76,038 during our review period were not properly
and adequately kept and maintained by the Company’s accounting
department, but were instead kept separately and in an unsorted
manner, and the nature of some of these expenses were not
indicated on the accompanying payment vouchers. We are
therefore unable to verify that these expenses were adequately
supported to be for Company’s expenses.
iv.
As such, the total expense reimbursements to Dr. David Chew and
Ms. Leong as well as accruals made for credit card expenses which
were not adequately supported or not provided for in their service
agreements dated 1 January 2008 amounted to S$96,282 for paid
expenses and S$102,182 for accrued expenses for the period
between 1 April 2007 and 31 March 2010.
v.
In response to the above observations, the Management notes that:
(a)
the expenses amounting to S$76,038 were incurred for the
Company’s business, and included payments for hotel
accommodations, airport transfers and car hires for
business trips, restaurant charges for business purposes,
corporate gifts for officers and employees of the Company,
online anti-virus software for the Company’s laptops, petrol
22
09 March 2012
charges for
the
Company’s
vehicle,
medical
fees,
periodicals, bank and interest charges. The Company has
since implemented and/ or tightened procedures to
improve
its
filing
and
maintenance
of
supporting
documents for expense claims;
(b)
expenses and reimbursements amounting to approximately
S$20,229
(interest
charges
of
S$15,377
and
club
membership dues of S$4,852) were incurred for the
Company’s business, and is in the process of updating and
tightening provide clear guidelines, rules and regulations in
the areas highlighted by us; and
(c)
the accrued credit card expenses amounting to S$102,182
were neither claimed by nor paid to Dr. David Chew and
were instead accrued as part of the Company’s annual
external audits on grounds of prudence. These accrued
expenses have since been written back in FY2011 as Dr.
David Chew never submitted claims for the credit card
expenses and hence, were subsequently reversed.
1.8.19
Payments for independent director fees (Mr. HC Chew, Mr. Akhtar and Mr. Lim)
were made through Dr. David Chew but later reimbursed to Dr. David Chew by
the Company. We understand from the Management that such arrangement
was due to the lack of cash flow by the Company at the time the payments
were made to the independent directors.
1.8.20
In addition to the payments of independent directors’ fees, we also noted
payments to Mr. HC Chew’s sole proprietorship Surecanlah Consultancy
(“Surecanlah”) and Mr. Lim’s company Plan-B ICAG Pte Ltd (“Plan-B”). Total
payments made to Surecanlah and Plan-B during our review period amounted
to S$49,074 and S$75,000 respectively. These payments were made for the
consultancy services provided by Mr. HC Chew and Mr. Lim’s companies
respectively and duly disclosed in the annual report of the Company for
FY2008, FY2009 and FY2010 in accordance to Chapter 9 of the SGX-ST
Listing Manual. We understand that on 1 August 2010, the contract with Plan-B
was terminated in view of Mr. Lim’s appointment as the Deputy Chairman and
Executive Director of Stratech with effect from 10 August 2010. We also
23
09 March 2012
understand that the contract with Surecanlah ended in March 2011 upon
completion of the project.
1.8.21
The Company paid for company cars’ installments purchased in the name of Dr.
David Chew to UMF (Singapore) Pte Ltd (“UMF”) for vehicle SDT8884K and
Citibank Singapore Ltd (“Citibank”) for vehicle SJF8884M amounting to
S$26,065 and S$70,742 respectively. SDT8884K was disposed and replaced
with SJF8884M on 8 May 2008. Based on the vehicle log card, the date of
purchase of vehicle SJF8884M was on 8 May 2008 and purchased in Dr. David
Chew’s name 11 . However, a Trust Deed between Dr. David Chew and the
Company was only signed a year later i.e. on 8 May 2009 although the vehicle
SJF8884M was recorded as an asset of the Company in FY2009.
Adequacy of provision for litigation suit
1.8.22
An announcement was made by the Company on 23 January 2010 that the
court has awarded PT PGI damages in the sum of S$1.83 million with interest
and costs. While provision for foreseeable losses of S$1.7 million was made in
FY2009, total damages which include interest fees and legal fees amounted to
S$2.19 million was paid on 28 January 2010, resulting in an increase of
S$481,769 from what was previously provided. Provision for foreseeable losses
of S$1.7 million made in FY2009 is fairly close to the damages awarded by the
court of S$1.83 million before interest and legal costs.
1.8.23
Under SGX-ST Listing Rule 703, an issuer must disclose information “that
would be likely to have a material effect on the price or value of securities of
that issuer.” Taking into account the Company’s basis for disclosure i.e. more
than 5% of annual turnover, the amount for legal fees and interest costs did not
appear to fall within the disclosure threshold for FY2009 and hence the nonannouncement.
Delay of AGM and non-announcement of litigation suits
1.8.24
We performed a litigation search on the Company and noted 11 other litigation
suits during our review period. No provision for foreseeable losses or
11
Dr. David Chew is entitled to a company car as provided for in his service agreement dated 1 January 2008.
24
09 March 2012
announcements was made for these cases. We enquired with Ms. Leong who
explained that the non-provision and non-announcement was due to the
following reasons:
i.
Amounts in dispute (which ranged between S$9,004 and S$86,670)
with regards to the 11 cases were immaterial i.e. below 5% of
Group’s annual turnover;
1.8.25
ii.
Amounts had been fully accrued for as trade or other payables;
iii.
Amounts in dispute were not frivolous and fully supported; and
iv.
Amounts in dispute were specified in the writs of summons.
SGX-ST Listing Rule 703(4)(a) requires an issuer to provide timely disclosure of
material information 12 in accordance to the Exchange’s corporate disclosure
policy. However, as materiality is not defined in the listing rule, the Company
had considered amounts below 5% of Group’s annual turnover to be
immaterial. We reviewed the writs of summons and noted that the amounts in
dispute are below 5% of the Group’s annual turnover
1.8.26
For FY2010, the Company had decided to produce its annual report in CDROM. However, due to the omission of the option form to shareholders to
request for a printed annual report, there was a delay in the annual general
meeting (“AGM”) which was originally scheduled for 29 July 2010. The request
for extension of the AGM date was granted by SGX on 28 July 2010 and the
Accounting & Corporate Regulatory Authority (“ACRA”) based on a written
confirmation from the Company that it is not aware of any information that will
have a material bearing on investors’ decision which had yet to be announced
by the Company.
1.8.27
In relation to the above, we noted the following from our computer forensic
analysis:
i.
On 10 June 2010, the printing company sent a sales confirmation
order to Ms. Coreen Kuo (Manager, Marcom & Corporate
12
Material information includes information, known to the issuer, concerning the issuer’s property; assets; business; financial condition
and prospects; mergers and acquisitions; and dealings with employees, suppliers and customers; material contracts or development
projects, whether entered into in the ordinary course of business or otherwise; as well as information concerning a significant change in
ownership of the issuer’s securities owned by insiders, or a change in effective or voting control of the issuer, and any developments that
affect materially the present or potential rights or interests of the issuer’s shareholders.
25
09 March 2012
Communications) for the printing of the annual report and requested
for 50% down payment amounting to S$27,746;
ii.
On 5 July 2010, the printer sent another email to Ms. Coreen Kuo to
ask for initial deposit before proceeding with the artwork;
iii.
On 9 July 2010, Ms. Coreen Kuo forwarded the email to Dr. David
Chew seeking his permission to ask Finance to proceed with the
down payment for annual report;
iv.
On 22 July 2010, the Company requested for the quotations again
from the printing company and the printer provided two options:
(Option 1) annual report in CD-ROM format for S$20,660; and
(Option 2) annual report in hard copy format for S$27,280; and
v.
On the same day, Ms. Phoebe Heng (Manager – Planning &
Strategy) forwarded the email to Ms. Leong citing that the CD-ROM
option is cheaper and suggested that they proceed with the CDROM option.
1.8.28
Based simply on the chain of emails and the chronology of the events, it
appears that the Company had only decided to have the annual report in CDROM format on or after 22 July 2010. The option to proceed with the CD-ROM
format suggests that it was selected because it was cheaper.
1.8.29
We sought clarification from Management who explained that due to the
omission of the option form to print the hard copy annual report, re-printing of
the annual report was required and hence, the request for quotation on 22 July
2010. Ultimately, the Company resolved with the CD Rom format for pricing
reasons. Further, we have also been provided by the Management with an
invoice and sales confirmation from the printer dated 5 July 2010 which
included 7,000 copies of CD replications and CD mailers as a proof that the
decision to have the annual report in CD-ROM format was already decided on
or around 5 July 2010. A copy of the cheque of S$21,333 dated 9 July 2010 that
was paid to the printer for the same was also provided to us by the
Management to prove that the decision to have the annual report in CD-ROM
was made in early July 2010.
26
09 March 2012
Corporate governance
1.8.30
During the course of our work, we noted various corporate governance lapses
as follows:
i.
Poor maintenance of accounting documents (including supporting
vouchers and schedules, timesheets etc) by the Company for the
period between 1 April 2007 and 31 March 2010. Certain of these
documents were either missing, misplaced or overwritten which
resulted in various challenges in the course of our work. We
understand from the Management that this was partly due to the
less than adequate handover from Ms. Khoo who left the Company
at a very short notice. Be that as it may, the Company would need
to consider the proper maintenance of its accounting documents in
compliance with Chapter 199 of the Singapore Companies Act
which provides that “every company and the directors and
managers thereof shall cause to be kept such accounting and other
records as will sufficiently explain the transactions and financial
position of the company and enable true and fair profit and loss
accounts and balance-sheets and any documents required to be
attached thereto to be prepared from time to time, and shall cause
those records to be kept in such a manner as to enable them to be
conveniently and properly audited”;
ii.
Ms. Ho joined the Company in April 2010. However, she
represented that she had no access to accounting records
maintained by Ms. Khoo since the day she joined. As a result, on
the day Ms. Khoo left, no other people in the Finance department
had knowledge of the accounting matters. The Finance department
from April 2010 to July 2010 comprised only Ms. Khoo and Ms. Ho.
iii.
Since the departure of Ms. Khoo in July 2010, there were no proper
accounting records maintained by the Company up until October
2010 except for a cash book which is maintained by Ms. Ho Wei Li
(“Ms. Ho”) (Finance Manager).
iv.
There was no proper segregation of duty in relation to payment
approval for Dr. David Chew and Ms. Leong’s claims. We noted
payments which relate to repayment of loans, salaries and
27
09 March 2012
reimbursements to both Dr. David Chew and Ms. Leong that were
either self-approved or approved by Dr. David Chew for Ms. Leong
or vice versa.
Total payments to Dr. David Chew which were
approved by Ms. Leong or not approved at all amounted to
S$2,447,788. Total payments to Ms. Leong approved by Dr. David
Chew or not approved at all amounted to S$207,703. Total
payments to Ms. Leong which were self-approved amounted to
S$86,769. Considering that Dr. David Chew and Ms. Leong are
husband and wife, such payment approval arrangement may
appear to be inappropriate. We informed the AC on the observation
and they had taken an active role in rectifying the issue and
represented that going forward, all Dr. David Chew’s expenses will
be reviewed and approved by Mr. Lim, who is currently based in the
Company as an Executive Director;
v.
Lack of information and/ or description for documentation in support
of payments to or payments made on behalf of directors and
journals raised;
vi.
Payments were made to credit card companies (including interest
for late payments) for expenses incurred by Dr. David Chew. Some
of these expenses are unsupported and based on the description
on the credit card statements, the nature of these expenses i.e.
whether it is business-related expenses or otherwise, could not be
adequately assessed;
vii.
Timesheets in support of the accrued revenue and capitalisation of
development costs were not properly maintained during the period
between 1 April 2007 and 31 March 2010. We were only provided
with timesheets for FY2010 as timesheets for FY2008 and FY2009
are missing from the Company’s records. Additionally, hours stated
on the timesheets did not necessarily reconcile to the capitalization
worksheet in support of development costs. As timesheets are
critical supporting documents and form the basis for accrued
revenue and capitalisation of development costs, timesheets would
need to be prepared on a timely basis and properly maintained; and
28
09 March 2012
viii.
Certain of the timesheets provided to us by the HR department
were not duly verified by Finance Department and Dr. David Chew
or Mr. Chua.
1.8.31
The Management responded to the above observations and commented on the
efforts undertaken to address the same which are extracted and set out below:
i.
“The Company has taken the necessary steps to improve its
approval processes. Dr. David Chew and Ms. Leong have ceased to
sign for each other’s reimbursements”;
ii.
“The Company has already appointed a CFO and boosts the staff
strength of its Finance team, and improves process flow to improve
this.”;
iii.
“The Company has already implemented new processes to improve
the expense claims procedures…” and
iv.
“…New processes and time sheet format have been implemented
and monitored on a weekly basis…HR department keeps its
independent assessment through regular dialogues with the project
teams and management as checks against and support for the
timesheets.”
1.8.32
The Company had taken steps to address the above findings by us, some of
which were implemented prior to the finalisation of our Report. Such
implementations
were
monitored
by
the
Company’s
Quality
&
Excellence Department and include the followings:
i.
The implementation of new processes and formats for timesheets,
and the periodic monitoring of the same, as well as the independent
assessment by the HR department of the Company on the
timesheets through regular dialogues with the various project teams
and the management of the Company to ensure that any
capitalisation of development expenditure is in compliance with the
relevant accounting standards;
ii.
The implementation of a new financial accounting system to
enhance the financial reporting structure of the Company;
29
09 March 2012
iii.
The improvement of the filing procedures for, and the maintenance
of, accounting documents;
iv.
The implementation of new financial processes to improve checks
and balances and the segregation of duties;
v.
The renaming and expansion of the role of the AC as the Audit Risk
Management Committee (“ARMC”) with effect from 11 July 2011, in
line with the recommendation of the Singapore Code of Corporate
Governance 2005; and
vi.
The ARMC monitors the compliance of financial policies and
procedures periodically through discussions and confirmations with
Management that such policies and procedures are being complied
with, and through reviews of timesheets and senior management
expense claims on a sample basis.
30

Stratech Systems Limited Report_9 Mar 2012 _Final_.docx

Transcription

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