Question 1
Your firm has been appointed by the Company as the Special Auditor to review and report on the Potential Fraud:
- Discuss and determine if there is any potential breach of the Companies Act on directors duties by the independent directors (ID1, ID2 and ID3) in approving the new business, and what are the relevant provisions.
- Evaluate what additional clarifications the independent directors (ID1, ID2 and ID3) should have asked from Ahmin before considering whether or not to approve the new business of providing the Consultancy Services.
Whistle Blowing Report from the Auditor's Alamak Limited ("Alamak" or the "Company') is listed on the mainboard of the Singapore Exchange Securities Trading Limited (SGX-ST). On 15 September 2020, the Audit Committee (the "AC") received a report from the Company's statutory audits (the "Auditors") that during the course of their audit of the Company's accounts for FY2019, they discovered potential fraud in relation to certain business transactions and the related financial reporting (the "Potential Fraud"). Following the receipt of the report from the Auditors, on 22 September 2020, SGX RegCo instructed the Company to appoint a Special Auditor to investigate the Potential Fraud. The Special Auditor is to report directly to the AC and SGX RegCo on the findings. The Potential Fraudulent Transactions Alamak was previously a coal trader in the international market. However, due to global concern over climate change, the trading volume had been dropping steadily since 2015, and after years of making significant losses, the Company decided to divest the coal trading business to the Company's then controlling shareholder in 2019. The closing date of the divestment transaction was August 2019. Facing cash flow and going concern problem, the Company completed a share placement exercise in June of 2019, resulted in a new controlling shareholder, Ahmin, who is a national of Nigeria. Ahmin was appointed as the Executive Chairman and CEO. The Board then comprised Ahmin as executive director, and three (3) other Singaporean independent directors, ID1, ID2 and ID3. Given that the Company would have no business after the divestment of the coal trading business, Ahmin proposed to the Board that the Company provide consultancy services to companies in a number of African countries to operate consumer electronics, computer and telephone retail shops. The consultancy services include store concept design, advice on retail systems, provision of staff training and procurement services (the "Consultancy Services"). Ahmin represented verbally to the independent directors during a Board meeting in July 2019 that the main advantage of this business model is that there is no capital investment required. The operators of the retail shop (the "Customers") who sign up for such non-cancellable Consultancy Services contract will pay a total fee of $250,000 per outlet for a minimum of four outlets. He also represented that he already had a potential list of at least 10 such Customers. However, due to varying laws and regulations in the many African countries, the Company would not be able to sign contracts directly with the Customers. Instead, the Company would need to work through a third party company registered in Nigeria as a Representative of the Company, to sign contracts with the Customers and collect the fees from the Customers. There was also no need for the Company to employ any new staff to conduct this business as the Representative already has the capabilities to assist the Company in performing the Consultancy Services at a commission of 20%. And due to exchange controls imposed in some of the countries, the payments for such Consultancy Services would be remitted by the Representative to the Company in Singapore through third party agencies instead of approved financial institutions. Based only on Ahmin's verbal representations, the Board approved of this new business. During FY2019, based on information provided by the Representative, the Company recorded a total of S$6mil revenue from 6 Customers and collected via third party agencies, a total sum of $2mil. A total sum of $1.200.000 in commissions and another sum of $800.000 for expenditures incurred for the Consultancy Services were paid to the Representative. During the early part of 2020. based on information provided by the Representative, the Company recorded revenue of $2mil from 2 new Customers. No payment was collected yet. In April 2020. however, the Representative informed the Company that due to Covid-19, all of the Customers had temporarily ceased operations and would not be able to pay the Company. The total related accounts receivables stood at $6mil. Meanwhile, the Auditors was not able to complete the audit due to lack of information and the Company had to apply to ACRA and SGX for extension of time to hold annual general meeting. Another Change of Controlling Shareholder In May 2020. Ahmin sold his shares in the Company to Pierre, a French businessman residing in Singapore. Two of the independent directors, ID1 and ID2 decided to resign. Pierre then invited his long-time friends ID4 and ID5 to join the Board. The Board now comprises Pierre as executive chairman & CEO, and three independent directors, ID3, ID4 and ID5. The three IDs make up the AC, with ID3 remaining as the chairman of the AC as he is the only person with an accounting degree and has recent and relevant accounting or related financial management expertise or experience. Pierre also hired a new Chief Financial Officer (CFO") to replace the one who has resigned along with Ahmin. Provision for Doubtful Debts The new CFO had tried to collect the $6mil receivables from the Customers but were unable to reach any of them. Covid-19 has also made it impossible to travel to these African countries to look for the Customers. The Company was also unable to get any helpful responses from Ahmin and the Representative, although the CFO found it strange that the Nigeria mobile number of Ahmin and the Representative is only different by one number. For the 6 months ended 30 June 2020, the Company decided to make a full provision for the $6mil of accounts receivables. New Business in Distribution of French Wine and Brandy Pierre is able to secure for the Company an, exclusive distributorship for certain high-end brands of French wine and brandy for the Singapore market. In July 2020. Alamak signed distributorship agreements with 3 well known French brands. Pierre has declared to the Board that he has no personal interest in these transactions and has no relationship with any of the suppliers that could be classified as Interested Person Transaction under Chapter 9 of the Listing Manual. Under the agreements, the Company is committed to buy a minimum of S$10mil of products per year on CIF term. The Company will need to rent suitable cold-rooms for storage, break bulk and distribution to customers such as supermarket chains, hotels and food and food and beverage (F&B) businesses
