Thursday, January 10, 2008

JEL Corp - Accounting Fraud, Manipulations and Misdemeanours

The latest scandal to hit the stock market belongs to JEL Corp, which was suspended in September 2007 following news that SGX suspected something was wrong with their reporting and financials. The CAD were called in and KPMG was appointed as the independent forensic auditor to investigate into the affairs of the company (the usual procedure). Needless to say, SGX had to suspend trading in the counter as it would not create a "fair and orderly" market.

Now, on January 8, 2008, the auditors have issued their audit report and it's not a pretty picture. Basically, the gist of it is saying that there were deliberate attempts to falsify documents, create fictitious invoices (hence boosting revenues), use creative accounting entries to reduce expenses (hence inflating profits) and non-disclosure of related party loans. The main culprits which were named include Mr. Eric Tan (former Chairman), Mr. Eric Leow (Director) and Mr. Wee Teck Han (CFO). After reading the KPMG report, I must say it's quite appalling how these "irregularities" have been committed considering it is a listed entity and we have been stressing on corporate governance and transparency. This is really a blemish and the perpetrators deserve to be punished severely as the minority shareholders will surely suffer a sharp drop in the value of their investment once trading resumes.

The KPMG report does not mince words and states clearly how the books were cooked in a variety of ways, some innovative and some downright plain and dirty. Apparently, there was insufficient independence and internal controls on the part of the audit committee to ensure these fraudulent transactions did not take place. The auditors have stated that FY 2006 profits will need to be restated; which means that the S$8 million profit for FY 2006 now becomes just S$1.92 million, while for 1H 2007 they are supposed to show a net loss of S$1.38 million instead of a net profit of S$4.35 million. This is a very significant, material and pervasive difference indeed and reminds me of the case of ACCS (now renamed MDR) where the Management also tried to inflate revenues to justify their "targets". Incidentally (or rather, coincidentally), MDR had almost entered into a strategic partnership with JEL through a share swap before this scandal broke out. That proposed joint venture was effectively scrapped when news of the scandal broke.

It remains to be seen if corporate governance and internal controls can help to prevent future occurences of such nature from recurring, as it seems that there has been a long list of casualties like MDR (former ACCS), Informatics and China Aviation Oil which have been through such scandals. Most do not recover and the stigma and bad reputation stay with them for a long time, causing their share prices to languish below 10 cents and making it very hard for the companies to raise funds through secondary equity offerings.

I hope that the perpetrators will be rightfully punished to send a strong message that this kind of insufferable behaviour will not be tolerated, especially when so many people's money is at stake. The selfish intentions of the perpetrators and the resulting fallout will only serve to haunt their conscience in the long-term, as they look back and reflect on the harm and damage they have caused to all those who had faith and trust in them. Incidentally, even veteran investors such as Mr. Sam Goi (Chairman of Tee Yih Jia Foods) and Koh Boon Hwee were conned into investing in this so-called "promising" company.


la papillion said...

Hi mw,

I guess this kind of things can't be predicted. It's totally unforeseeable. Hence the importance for a margin of safety to safeguard one's investment against such random events.

I agree a harsh punishment is necessary, if not, the confidence of investors in reading the financial reports will be shaken. That will be totally unacceptable.

musicwhiz said...

Hi LP,

Yes such events are very hard, if not impossible, to predict. But according to a thread on Wallstraits forum, there were people who pointed out that the company was not a good investment in the first place; so one would have avoided investing in JEL early on.

That said, margin of safety is still important as a method of minimizing losses, though you cannot avoid losses altogether.

Let's wait for updates on JEL to see what will happen. I certainly hope the perpetrators get their just deserts !

Regards, Musicwhiz

Anonymous said...

one thing to realise is to invest in companies with honest mgt.. however as retail players, such knowledge is very difficult to come by, not the least through analysts reports or AGM. do you know of better ways?

Simon said...


I know this is not related, but anyone knows how do i search who are the top property analysts in Singapore? Is there a survey or website i can look at?

musicwhiz said...

Hi Anonymous,

There is really no better way I can think of than attending AGM to speak to Management yourself. Another way is to observe what they promise and whether they deliver on it. Many companies make lofty promises about acquisitions and new businesses but in the end, shareholders are left disappointed without a good explanation. I think we have seen such cases from the likes of Rowsley and Equation Corp.

Regards, Musicwhiz

musicwhiz said...

Hello Simon,

Sorry I do not know the answer to your query.

Regards, Musicwhiz

shuaka said...

hi musicwhiz

I do respect/admire your passion for value investment and make an effort to attend the AGM.

Perhaps, there are another group of investors who lack the time and knowledge to ask intelligent qns at the meeting.

Thus various forums and some "value-investment" guru sent out the message about the attractiveness of this counter.

several of my friends, including are still stuck !! We are talking about 4-5 figures sum. I am disappointed but blame no one but myself. I move on......

Thanks for the autopsy analysis .

Good stuff, keep writing !

musicwhiz said...

Hi Shuaka,

Thanks for visiting, I do appreciate it. I feel the problem lies with people not even being interested in their investment in the first place, and they treat stocks like gambling chips and do not realize it is part ownership of a company and that can be a very powerful thing indeed ! Second, they fail to adequately prepare for AGM or EGM in order to question the Management about the company's affairs and plans. Thus, even if they attend, they may lose out on a golden opportunity to "hear stuff from the horse's mouth".

I would caution against listening to advice from forums or those who claim to be "gurus". Self-proclaimation of guru-ship is, to me, an act of extreme arrogance and I believe such people may have an inferiority complex. One should always do their requisite research before buying ANY company. For JEL, I notice they are in the retail business yet margins somehow seem very high, thus it was a warning flag. Their business is also unexciting and will not have the sustainable competitive advantage which would attract value investors (I feel). Such talking heads on forums may have their own personal agenda for recommending. Note that I NEVER make any recommendations for or against a company; I always encourage independent research. If you catch a fish for a person, you only feed him for one day. Teach the person to fish, and you feed him for a lifetime !

Sorry to hear about your losses, hope you can manage to recover some part of your capital after the JEL suspension is lifted.

Regards, Musicwhiz

Anonymous said...

To all value investors,

having all been said, how many times have such scandals hit the Singapore stock market? What is SGX doing with their so called corporate governance. There is no way to escape from bad corporate governance. Whatever it is, when bad things happen, there will always be a cover up stories.
So tell me, why arent the perpetrators punished? So do whatever u want and just quit from the management later.

musicwhiz said...

Hi Anonymous,

I agree SGX is not very good with corporate governance, though they preach it a lot. But on the flip side, sometimes these fraud cases are really hard to detect unless you are an insider (hence, a whistle blower) or if you got a forensic audit team in. Auditors in general act as watchdogs, not bloodhounds and their responsibility is not to uncover or discover fraud.

In JEL's case, I did not notice that there was any prosecution for those involved, thus it must seem that one can do what they want and just get away with it. I really hope the authorities dish out the appropriate punishment to the perpetrators, otherwise SGX will look like a laughing stock and Singapore's corporate governance rules will take a severe beating.

Today, after lifting of the trading halt, JEL crashed 75% from 24 cents to just 6 cent, wiping out S$71 million from its market cap and leaving it as a company worth just S$23.7 million instead of S$94.8 million. Such is the sad situation for investors who had faith in the Management but were sorely let down.


greentree said...


Prices bounce back sharply these few days. Trading halt, pending announcements. What's up ? It seems some people heard of good news before halt ?

Musicwhiz said...

Hi greentree,

Just more money raising that's all. The Company can't seem to make a decent profit without having to tap capital markets for funds.