By Mak Yuen Teen

Directing companies to engage a third party to undertake a review or special audit of certain actions and transactions is an important tool used by the Singapore Exchange to establish whether an issuer has complied with the listing rules. The outcome of such reviews or special audits may form the basis of further regulatory action by SGX, which may also refer more serious cases to other regulatory authorities. In some cases, like SingPost, the company initiated a special audit without, or before, being directed by SGX to do so. Such reviews and special audits are not statutory audits governed by strict auditing standards, and there may be limitations in scope and methodology.

In order to help ensure that the scope of the review or special audit is adequate, and that it is objective, SGX often provides inputs into the scope, and the reviewer or special auditor reports its findings not only to the audit committee, but also to SGX. Nevertheless, as we have seen in the Datapulse Technology case, the company is able to vary the scope of the compliance review and to choose the compliance reviewer, presumably with the concurrence of SGX.  In my article “Datapulse’s compliance review: holistic or compromised?” published in the Business Times on March 23, I argued that the deviation in scope of the review from the original intent based on the notice of compliance issued by SGX, would compromise the review. I also pointed out certain past transactions and actions that may warrant a review, but there are no indications that these will be covered.

There are other limitations with third-party reviews and special audits. Because they are essentially managed by company through the audit committee, which often has a vested interest in its findings, the findings may not be objective.  In the Datapulse case, the audit committee comprises the directors whose actions are under review.

In a number of cases, third-party reviews and special audits have resulted or partly resulted from articles I have written about a company. Examples include SingPost, YuuZoo and of course, Datapulse. However, I have never been approached by the reviewer or special auditor about whether I have other information which I have not disclosed in my articles that may be relevant to the review or audit. I have on occasions also been approached by others, such as employees or ex-employees of companies, who have told me that they have relevant information but have not been approached by the reviewer or special auditor, even though in some cases these employees have made it known to the reviewer or special auditor that they are willing to assist.

This is probably because the company and the reviewer/special auditor mutually agree on who to seek information from. The company is likely to resist efforts to seek information from other sources that will probably be adverse. Of course, the reviewer or special auditor should not just take whatever it gets from these other sources (or from the company) at face value. Unfortunately, by not seeking information from other sources, it raises questions as to whether a review or special audit will end up merely legitimising what was done or minimising the adverse findings. SGX has a role to play in ensuring that the reviewer or special auditor casts its net as wide as necessary to arrive at the facts.

Let’s consider the compliance review that is now going on at Datapulse. The board has decided to expand the scope to cover the investment into Raffles Campus some years back. Raffles Campus is owned by one of the former independent directors, Ng Boon Yew, who is now proposed for election as a director at the EGM on April 20. It has also decided to review the circumstances surrounding the departure of Intan Ng, a former executive director and  another of the proposed directors. Putting aside the deviation from the original intent of the review, is the compliance reviewer going to get the views of Mr Ng and Ms Ng in undertaking the review, or is it going to just rely on what the current board, management and other parties, such as the former controlling shareholder and CEO, Ng Cheow Chye, provide or say? If the review only considers the views of the latter, how is that going to be balanced, fair and objective? Where is the natural justice if the views of the other parties are not considered at all?

Why is Datapulse not instead reviewing the short-lived investment by Lian Beng into Datapulse, which was accompanied by Datapulse paying $20 to buy a stake in, and providing an interest-free loan of $2.9 million to, a Lian Beng subsidiary, Goldprime Realty? That investment was sold off for just $35,000 after 16 months, which would have been less than what Datapulse would have received merely by putting the $2.9 million in fixed deposit. Why did Datapulse provide an interest-free loan? Low Beng Tin, the current Datapulse chairman, was an independent director of Lian Beng when the investment into the Lian Beng subsidiary was made and when it was later sold to another company which has another Lian Beng independent director on its board. The Datapulse board keeps talking about wanting to uphold high standards of corporate governance, so why not review this and other matters I have raised?

The company intends to release the findings of the compliance review before the EGM. Shareholders will likely take into account the findings in deciding how to vote. If the review only considers the views of one side, it is hardly fair to the requisitioning shareholders and the directors being proposed for election. Further, the company is unlikely to release the full report from the compliance review, or the full report from the strategic review. What shareholders would at best get are likely to be executive summaries, which may not give the full picture of the findings.

I therefore urge shareholders to bear in mind the limitations of the reviews being undertaken and the reports that will be released. They should not jump to conclusions because the reviews would probably have only considered the views of those who have a vested interest in retaining their directorships, rationalising the hasty acquisition of Wayco Manufacturing, and pushing further ahead with a diversification that is driven by a hasty acquisition to start with.  The summary reports will likely give only a partial picture of what have transpired.

I plan to write a fuller article in the lead-up the EGM  in response to the circular and the presentation at the SIAS dialogue session. My views are unchanged. I believe that shareholders should vote to remove all the existing directors, appoint the proposed directors and reject the company’s diversification plan.