China’s Sound Global plunges 61 per cent after sacking chief financial officer for missing 2 billion yuan

Beijing-based firm denied allegations it had inflated sales and profits

PUBLISHED : Monday, 25 January, 2016, 2:17pm
UPDATED : Monday, 25 January, 2016, 2:17pm

Shares of water- and sewage-treatment projects developer Sound Global, whose chief financial officer was sacked after 2 billion yuan was found missing from its books, have plunged 61 per cent as trading resumed after a 10-month suspension.

They ended the morning trading session at HK$2.72, down from HK$7 on March 13 when they were last traded. The Hang Seng Index has fallen 18.4 per cent in the same period.

The Beijing-based firm, which had denied accusations from anonymous company researcher and short-seller Emerson Analytics a month before trading was suspended that it had inflated sales and profits, said it had met securities regulators’ requirements for trading to resume.

“The company has already put in place adequate financial reporting procedures and internal control systems to meet the obligations under the listing rules,” it said in a filing to Hong Kong’s stock exchange on Monday.

It had engaged independent forensic specialist RSM Nelson Wheeler Certified Public Accountants to investigate the 2 billion yuan cash discrepancy, and published outstanding financial results, to meet the exchange’s requirements.

The cash shortfall at the end of 2014 was discovered by its former auditor, Deloitte Touche Tohmatsu, when it audited its 2014 financial statements.

PKF Accountants & Business Advisors was subsequently appointed by its independent non-executive directors to conduct a special investigation, and RSM was appointed to conduct a forensic accounting review.

RSM found that Sound Global had made payments totalling 2 billion yuan of “earnest money” to secure the proposed acquisition of two water project companies in November 2014, via parent firm Sound Group.

The payments were not recorded in Sound Global’s accounting records until April 3, a month after the discrepancy was discovered by Deloitte.

“Confidentiality of the proposed acquisitions as requested by the relevant vendors to avoid intense competition” was cited as the reason for using the parent as the agent for the payments.

Wang did not record the payments because he “intended to wait and see if the proposed acquisitions could be completed by the of 2014, and if so, the earnest money would be fully refunded”, Sound Global said.

But “due to his oversight and or heavy workload, he had forgotten to follow up with the progress of the proposed acquisitions and to post the relevant entries”.

Wang Kai was “removed” as chief financial officer and an executive director on December 18.

The parent refunded 2 billion yuan plus interest to Sound Global on April 13 last year, which was used to repay bank loans and pay project bid deposits.

“No obvious irregularities” were found by RSM, Sound Global said, adding RSM was unable to verify Wang’s explanation that he genuinely planned to make accounting entries for the 2 billion yuan payment by the end of 2014.

Five days before Sound Global first announced the accounting discrepancy on March 31 last year, former independent non-executive director Wong See Meng resigned, citing family and personal commitments.

Two other independent non-executive directors, Fu Tao and Winston Seow Han Chiang, followed suit in July last year.

Deloitte Touche Tohmatsu resigned as auditor on July 17 last year, saying “the approach that the board and the audit committee plan to adopt will not, in Deloitte’s view, entirely address the aspects which Deloitte considers necessary in the circumstances to provide a proper basis for concluding on those outstanding audit issues”.

HLB Hodgson Impey Cheng was then appointed to succeed Deloitte.

HLB gave a “clean” and “not qualified” opinion on the 2014 financial statements.

Sound Global posted an 16.3 per cent rise in audited net profit for 2014 to 502.9 million yuan.

Unaudited net profit for last year's first six months grew 30.9 per cent year on year to 317.4 million yuan.

Emerson said in a February 4 report, “a secret engineering technology service” accounting for some 40 per cent of Sound Global’s sales between 2011 and 2013 was conducted by “a mysterious subsidiary that leaves no trace in the Chinese water industry, a strong indication that the revenue just didn’t exist”.

Sound Global denied Emerson’s allegations, saying they were based on the firm’s voluntary announcements, an industry portal and anecdotal evidence, which could not be used to draw conclusions.