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.