Saturday, March 26, 2011

If the cash is not there, does it matter?

Somebody pointed out that for the S-Chips with problem, they were all being audited by Ernst and Young. It could be that they have been directed to be zealous in checking their books, rather than any misgovernance taking place in those companies. But it occurred to me, just before I was about to sleep, that if the cash balances cannot be verified (plus minus one million perhaps?), then all the numbers in the financial statements are just beautiful equations.

For example you have a business selling paper clips. You sell some paper clips that cost $500 for $1,000, but you receive only $500 first, the rest 30 days later, so you will have $500 worth of cash and $500 trade receivables. If you are an investor, which number must be the most real to you to matter? Revenue, COGS, cash of trade receivables?

The answer to this poorly thought out example is, it all depends. A company may fib all the numbers above for various reasons. It may want to inflate revenue so that it can make it look like a growing company. It may over report COGS to avoid paying higher taxes (since it leads to lower profit). And so on. 

I have not been an auditor before so I am assuming that, the only way to verify that the company's account is to check if the cash is really there. This is because a company can fake everything from, invoices and receipts.

However, in the case of the S-Chips, they have taken things to a new level, in that even cash balances can be forged. In one instance, since China is so big, bank officers belonging to dubious banks can be made accomplices to the crime of "cheat the investors".

More needs to be done to protect Singaporean investors. It is one thing to buy a company that has a terrible business, thinking that it will turnaround. It is another to buy into a seemingly good company, when in actual fact, there has been a great deal of financial forgery. However, there can be no commercially viable way to make S-Chips here give investors the assurance that they really have the money in the banks, unless they keep it in a Singapore bank. Till then, we can only say buyer beware.


  1. Even bank fixed deposit certificates can be fake. How to trust s-chips?

  2. i dont disagree... hence i think S-Chips need to set up a local account or at least with a big bank in the tier-1 city of China.

    it wont be easy cause China has control of forex, i.e. SAFE, hence there are legitimate reasons for them not to park their monies outside the mainland