No records, no checks, no plan
Hong Kong-listed China Forestry Holdings announced yesterday a laundry list of wide-reaching failures in corporate governance.
The scandal-ridden firm admitted: 'The company has not established clear procedures for shareholders' meetings, board meetings and committee meetings, had not established procedures for formulating and approving business objectives and budgets, did not regularly monitor risks, lacked an internal audit department, has not established plans for business growth, had not kept records of weekly backup data, had adopted anti-corruption policies but such policies had not been appropriately enforced.'
The announcement did not seem to faze The Carlyle Group, a US firm that owns nearly 11 per cent of China Forestry as part of the US$147 billion of assets it manages globally.
'The company still has real value,' a Carlyle spokesman said.
China Forestry said yesterday it was implementing measures to improve internal controls, including setting up a five-year business plan, monthly budgets and an internal audit department and monitoring related-party transactions.
The Carlyle spokesman said: 'The business has stabilised. The management team has been replaced. The new management team is strengthening its corporate governance and internal controls.'
Since last year, Carlyle has been working closely with an independent investigation and auditors in rectifying China Forestry's problems, the spokesman said.
China Forestry admitted recently that its financial statements from 2006 to 2009 were not verifiable because of missing information.
Some employees of its subsidiary Yichun Jingfeng Forestry altered bank statements provided to the parent's head office last year to cover up unapproved payments and three personal bank accounts that received cash from sales of logs, China Forestry said earlier.
An internal investigation last year discovered personal bank accounts of some employees of China Forestry's subsidiary Manzhouli Yishang Forestry that appeared to have received funds from sales of logs.
'Due to the manner in which records were maintained, sales through the personal bank accounts of employees of Manzhouli in 2011 cannot be verified,' the firm said.
There was no record of any costs for logging activities from 2009 to 2010, the investigation, by an independent committee of the firm, found. Of the company's 17 customers on its books in 2008 and 2009, information on eight customers was missing, and there was no record of five of the companies even existing.
China Forestry's auditor, Crowe Horwath, qualified its 2011 annual report. The auditor said it could not obtain sufficient information to verify the firm's claims to 96,000 hectares of forests in Yunnan province and the fair value of 2.2 billion yuan (HK$2.7 billion) associated with them.
Credit rating agency Standard & Poor's said yesterday: 'We expect the negative effects from alleged accounting irregularities to continue, because the company's auditor has cited numerous limitations in the financial statements and did not express an opinion.'
S&P gave China Forestry a negative outlook while maintaining its CCC- long-term credit rating, below investment grade, indicating the firm is vulnerable to debt problems.
Separately, the 2011 annual report of another Hong Kong-listed firm, China Public Procurement, was qualified by its auditor, Morison Heng. The auditor said it could not obtain sufficient information on HK$5.3 billion of goodwill.