In late May 2010, a furious row erupted when a neighbouring country’s stock exchange issued a stinging rebuke to a public listed company (PLC) and four of its directors over the PLC’s failure to disclose material information to the market.

 

The row was so heated that it ran on well into June this year.

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This sorry saga started in January last year, when the bourse in question directed the PLC to appoint special auditors to probe a number of suspicious transactions within the PLC.

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This was after a former auditor of the PLC found something fishy about the goings-on in the company and reported the findings confidentially to the country’s finance minister.

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The PLC acted accordingly and in March this year, after the ensuing independent investigation, the special auditors presented their draft report to the PLC’s audit committee (AC) as well as the regulating bourse. So far, so good.

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Subsequently, the bourse asked the AC to comment on the draft report so that it could then finalise the report and release it publicly. But, despite the bourse’s repeated request, the AC refused to do so.

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After nearly two months of this apparent stonewalling, on May 20, 2010, the bourse directed the PLC’s board to release the special auditors’ executive summary of the probe online.

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In its directive, the bourse said that the special auditors’ review of the PLC would be considered material information and that it had to be released promptly to all and sundry, in line with listing rules.

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Again, the PLC failed to comply with this directive. The regulator responded by releasing a report that fingered the PLC for dragging its feet in disclosing the material information.

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In the report, the regulator pointed out that the PLC’s repeated refusal to comply with its instructions raised many questions about how directors of such a listed company should behave and act on matters such as these.

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The regulator then advised listed companies in the country to consult it first if it had any intention to appoint any of these four directors of the PLC as “a director or a member of management.”

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We read such a statement to be a fresh way forward in such a regulatory quandary as it suggests that there is now a possible “watch list”, or even blacklisting of errant directors.

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That is the practical result of requiring companies to obtain the regulator’s approval to appoint certain individuals whose directorships are under a cloud.

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After the stock exchange’s reporting of the PLC’s refusal to release material information, the AC seemed unrepentant, so much so that it released its own statement, pleading mitigating circumstances for not complying with the exchange’s directive.

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The pleas included a delay in releasing the report due to circumstances beyond their control and a dispute over how much to pay the special auditors.

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The AC even blamed the PLC’s executive director for allegedly failing to issue the auditors’ final report on time despite being advised to do so.

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The regulating bourse, of course, did not take this lying down. In a strongly worded response, it stated that “there was no credible reason for the delay in releasing the special auditors’ report, and that the report was first presented to the AC” which meant that the AC was in full control of the findings.

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The regulator added that “it was illogical for the AC to say that it was not ‘party’ to the company’s non-compliance with the regulator’s directives”. As the regulator added sharply, “it is well-established that an AC cannot abdicate the responsibilities under the pretext of delegation.”

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So much for passing the buck.

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The stock exchange pointed out the discrepancies in the AC’s conduct of the matter; chiefly that it had claimed it could not obtain the special auditors’ report and yet was able to issue a response online to the exchange’s reprimand of the PLC.

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In any case, the regulator said the AC’s highlighting of the supposed fee dispute with the auditors was irrelevant to the subject.

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But the drama did not end there. In a separate statement, the PLC’s special auditors said that there had been an issue in August 2009 over non-payment of their fees but that it had been resolved after the appointment of the present chairman of the AC.

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The auditors added that despite the earlier fee dispute, they had proceeded to probe the PLC and deliver their draft report to the AC and stock exchange.

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So, the auditors emphasised that the fee dispute really had no bearing on the date of release of the report.

At the end of it all, the auditors did find some irregularities in the company, particularly in a contract dated sometime in December 2007, which was considered material information for the planned listing of the PLC’s subsidiary on the Hong Kong Stock Exchange.

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The auditors also raised concerns about how much corporate governance there was in the PLC, seeing that it lacked so much transparency and sufficient documentation of its transactions.

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The auditors added that the PLC had even tried to tamper with evidence, citing a computer forensic analysis which showed that the laptops of the PLC’s key personnel had had new operating systems installed in them prior to the auditors’ review.

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The patience of the regulator has been tested long enough and it has finally cracked the whip. There will be no further time extension for the PLC to complete and release by Dec 9, 2010 its audited accounts for e fiscal years 2008 and 2009. If it fails to do so, the regulator will delist it. And so the standoff between the regulator and the PLC continues. Stay tuned.