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Colourful words from KPMG in their report on China Milk! I wonder if the other suspended S-Chips also have similar stories to tell? Huh

Business Times - 10 Jun 2011

Auditors spill the milk on China firm


KPMG's report on China Milk reveals irregularities in transactions and payments

By LYNETTE KHOO

(SINGAPORE) Special auditors of China Milk have unravelled several irregularities in the company's transactions and found significant payments made without board approval and documentation.

A damning report released yesterday details sloppy corporate governance and non-compliance with listing rules and accounting standards in the group.

But, in an unusual move, it was the Singapore Exchange (SGX) that released the report. SGX said that it did so after China Milk's audit committee 'did not take prompt action' despite a reminder to release the report by 5pm yesterday.

SGX had on April 5 last year instructed China Milk to appoint special auditors to probe its state of affairs. This followed the group's failure to inform SGX of the outcome of a cash audit, after China Milk defaulted on its convertible bonds for failing to meet repayment obligations amounting to US$170 million.

The group had assured then that it had enough cash within China to settle the repayment but there was 'administrative' delay in remitting the funds.

But KPMG said in its findings that China Milk did not have sufficient funds to meet its liabilities to the bondholders as its consolidated bank balances as at Feb 12, 2010, was US$85 million.

The special auditors reviewed four major financial commitments totalling US$203.4 million that China Milk had struck since March 2009.

There were no minutes to suggest that the board was properly apprised and due diligence was undertaken before the agreements were signed and payments made, KPMG said.

One of the projects was a joint venture agreement for a 40 per cent stake for about US$20.6 million. KPMG found that the group spent substantially more and there was no meaningful documents to prove the completion of the acquisition.

The group's main operating subsidiary, Daqing Yinluo Dairy Co Ltd (DQYL), also spent about US$72.8 million to secure land use rights, work the land and cultivate alfalfa, a herbal crop. But the amount spent on working the land and for cultivating alfalfa totalling US$52.2 million was not announced by the group, KPMG said.

Another US$72.9 million was spent on improvement works to the farm and facilities. But DQYL was not able to identify the improvement works performed during the auditors' visit, KPMG added.

China Milk also spent US$37.1 million to buy replacement cattle around February and March 2010. Ironically, KPMG found that the group's population of cows fell by about 53.5 per cent over 12 months between April 2009 and March 2010.

The dairy cows purchased were also found to be of similar average age of five years, instead of the average age of two years as claimed by the cattle broker whom KPMG interviewed.

Undisclosed expenditures on grassland improvement and cultivation of alfalfa run up to at least 355 million yuan, close to the group's full-year net profit of 382.5 million yuan for the year ended March 31, 2009.

'In our view, the undisclosed expenditure is a significant expenditure which would materially affect the value or price of the company's securities had this been announced by the company,' KPMG said. 'As such, we are of the opinion that the undisclosed expenditure should have been disclosed.'

KPMG said that its investigations 'encountered numerous obstructions', ranging from an uncooperative bank manager to a dodgy main contractor allegedly engaged by DQYL.

Further visits to DQYL after June 22, 2010, were thwarted by group CEO Liu Hailong, who took the view that KPMG was acting outside the scope of its engagement, KPMG said.

'The perception we formed cannot be said to be a company ready to be transparent in its commercial affairs,' KPMG said in its report. 'It is also apparent to us that the company failed to reach the high prudential standards expected by the exchange of a public listed company.'

(Not Vested)
Closing of a chapter as company is to be delisted in a month's time on 13th June.

http://infopub.sgx.com/Apps?A=COW_CorpAn...ec1fdc13ec

At its peak, ChinaMilk was worthed slightly over a billion. So that is a billion worth of "market value" (or ~60mil IPO proceeds) + 150mil convertible bonds gone up the air (or more accurately, siphoned off by the Mgt).

http://www.financeasia.com/News/69810,ch...s-ipo.aspx

(once vested, and burnt)