s207 (9a) Companies Act and NEL Group


What is that about?
Under the Act, the external auditor of a public company has a legal duty to report (ie. whistle blow) to Minister of Finance if potential fraud may have been uncovered during the annual audit exercise.

What if it turned out to be misunderstanding? No breach of legal duty if it is done in good faith.

s207 (9a) was seldom invoked. The last time it was used was about 12 years ago on CAM International Holdings Ltd. Recently it was invoked for NEL Group. KPMG has submitted a report to the Minister.

So what do KPMG think has happened in NEL Group?
Apparently there is this new game in town called “round tripping”. It was played by NEL Group and Advance Module, another listed company back in 2005.

How to play? First I sell to you. Maybe after my financial year end, you sell back to me at about the same price. Of course, nothing was really purchased or sold except maybe some people just do and exchange some paperwork on the “transaction”.

The pressure to perform financially has encouraged creativity!

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Mr Tham Sai Choy – ACCA Conference 2008

He said under the new regime, the auditor and consequently the management of business entities would have to present written submission on risks considered and any actions taken to mitigate that risks in the preparation of the financial statements.

In the past, putting “Non Applicable / NA” in checklist may suffice.

To carry that idea to the extreme (if it is not in the extreme now) would be that a management of a business entity now could be required by the auditor to provide a management representation letter certifying that

  • all risks, man made or otherwise, has been considered and deemed acceptable
  • and also attached supporting documents for that conclusion ie. weather reports from MET office, geography records for earthquake risks, CIA reports for terrorist risks etc etc etc.

Does it mean higher audit fees too? 🙂