Companies linked to jailed mainland businessman Gu Chujun engaged in 'abnormal cash flows' of 7.55 billion yuan with refrigerator maker Guangdong Kelon Electrical Holdings, according to an audit report commissioned by the company. Gu, the former chairman of Guangdong Kelon, continues to hold a controlling stake of 26.43 per cent in the company despite being in a mainland jail since September last year for economic crimes and signing an agreement to sell the shares. However, the management of the Hong Kong and Shenzhen-listed company now plans to use KPMG's findings to wrest the stake from Gu, who reneged on an undertaking to sell his shares to rival Qingdao Hisense Air-Conditioner. Also uncovered in the KPMG audit were further 'abnormal cash flows' of 236 million yuan. Kelon, one of China's biggest makers of refrigerators and air-conditioners, would provide KPMG's findings to its lawyers and sue Gu and his companies for damages, said vice-chairman Liu Congmeng in an announcement published on the Hong Kong stock exchange website yesterday. According to the KPMG report, from October 1, 2001 to July 31 last year, the net abnormal cash outflow from Kelon to Gu's firms - or to companies suspected to be linked to him - was 592 million yuan. Gu was the chairman of Kelon from early 2002 to August last year when he was dismissed from the post. However, this net cash outflow arising from abnormal transactions, about 7.75 billion yuan, represented only a portion of the loss suffered by the group, according to Mr Liu. He said more fraud might be uncovered because Kelon's board would soon investigate smaller cash flows not examined by KPMG, which mostly involved transactions of at least 10 million yuan. In its report to Kelon's management, KPMG said it had found abnormal cash inflows of 2.46 billion yuan and abnormal cash outflows of 2.16 billion yuan between Kelon and Gu's companies bearing the name 'Greencool', from October 1, 2001 to July 31 last year. It uncovered a further 1.1 billion yuan of abnormal cash inflows and 1.9 billion yuan of abnormal cash outflows between Kelon and other companies suspected to be linked to Gu during the same period. The abnormal cash flows might have resulted in inflated revenues, in which case Kelon would amend its financial statements, Mr Liu said. 'The findings of the investigation may have significant impact on the group's financial statements,' he warned. KPMG found certain cash flows recorded in bank statements were not disclosed in Kelon's records and 4.57 billion yuan of funds were exchanged between Kelon and Gu's Greencool companies without any business relationships to justify them, as well as 468 million yuan of raw material purchases far in excess of Kelon's operating needs. Certain Kelon executives were involved in 758 million yuan of fund transfers within the firm, unsupported by any actual business and in breach of mainland regulations, according to the findings. Kelon might be questioned by mainland watchdogs on these internal transactions, Mr Liu said.
