factual investigation into certain matters of …...factual investigation into certain matters of...

Factual investigation into certain matters of Stratech Systems Limited 09 March 2012

Report to the Audit Committee & Singapore Exchange Limited Strictly Private & Confidential

Factual investigation into certain matters of Stratech Systems Limited Report to the Audit Committee and Singapore Exchange Limited

09 March 2012

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Table of contents

List of Abbreviations.........................................................................................................................3

Individuals named in this report .......................................................................................................4

1. Executive Summary ...........................................................................................................6

1.1 Our appointment ..............................................................................................6

1.2 Background .....................................................................................................7

1.3 Overview of the engagement ...........................................................................8

1.4 Forensic Technology Procedures ...................................................................10

1.5 General limiting conditions and constraints .................................................... 11

1.6 Specific limiting conditions and constraints ....................................................12

1.7 Maxwellisation ...............................................................................................13

1.8 Summary of our key findings and observations ..............................................14

2. Our key findings and observations arising from the Review .............................................31

2.1 Overview of revenue recognition and development expenditure ....................31

2.2 Timesheets ....................................................................................................68

2.3 Re-computation of net profits ....................................................................... 111

2.4 Fund raising exercises ...................................................................................81

2.5 Cash and bank disbursements to Directors .................................................. 123

2.6 Interested persons transactions .....................................................................97

2.7 Provision for litigation suits ............................................................................98

2.8 Delay of AGM and non-announcement of litigation suits ................................99

2.9 Patent registration ........................................................................................ 146

2.10 Corporate governance ................................................................................. 151

List of Appendices ....................................................................................................................... 108


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List of Abbreviations

Abbreviation Name

AC Audit Committee

ACRA Accounting & Corporate Regulatory Authority

AGM Annual General Meeting

Citibank Citibank Singapore Ltd

EY Advisory Ernst & Young Advisory Pte. Ltd.

HR Human resource

IFS IFS Capital Limited

LTC LTC LLP

Plan-B Plan-B ICAG Pte. Ltd.

PT PGI PT Panasonic Gobel Indonesia

SGX Singapore Exchange Limited

Stratech Stratech Systems Limited

Surecanlah Surecanlah Consultancy

UMF UMF (Singapore) Pte. Ltd.


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Individuals named in this report

Name of individuals Position/ Roles

Mr. Aaron Yu Xiao System Engineer

Mr. Ben KY Yap (“Mr. Ben Yap”)

Human Resource Manager

Ms. Bernice Software Engineer

Mr. Chew Hai Chwee (“Mr. HC Chew”)

Independent Director and member of AC

Mr. Chua Ah Leng (“Mr. Chua”)

President and Chief Operating Officer

Ms. Coreen Kuo Manager, Marcom & Corporate Communications

Dr. David Chew Khien Meow (“Dr. David Chew”)

Executive Chairman

Mr. Faizal Technical Specialist

Ms. Florence Khoo Ngiak Fah (“Ms. Khoo”)

Former Finance Director

Ms. Foong Lai Kiun Project Director on contract basis

Ms. Ho Wei Li (“Ms. Ho”)

Finance Manager

Ms. Jamilah Ibrahim (“Ms. Jamilah”)

Administration Manager and Personal Assistant to all executive members

Mr. Joe Ong Director of Sales

Mr. John Lim Ex-Chief Technology Officer

Mr. Jules Yap Ex-Group Director of Homeland Security Products and Capabilities

Dr. Kennedy Chew Khien Mien (“Dr. Kennedy Chew”)

Director of Alliance and Technical Fellow

Ms. Laura Tan Accounts Assistant

Mr. Lam Ah Wah (“Mr. Lam”)

Director, Presales Solutioning and Support

Mr. Lee Choon Meng Group Director of Technology and Chief Technology Officer, Stratech iVision

Ms. Leong Sook Ching Executive Director and Chief Corporate Officer


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Name of individuals Position/ Roles

(“Ms. Leong”)

Mr. Lim Soon Hock (“Mr. Lim”)

Executive Director, Deputy Chairman and member of AC

Mr. Mahadevan Lukshamayeh (“Mr. Mahadevan”)

Senior Legal Counsel

Mr. Mark Ang Project Manager

Mr. Melvin Chiang Project Manager

Mr. Mike Choo Audit senior, LTC

Ms. Phoebe Heng Manager – Planning and Strategy

Mr. Ravi Ranganathan (“Mr. Ravi”)

Sales and Marketing Account Manager

Mr. Sajjad Akhtar (“Mr. Akhtar”)

Independent Director and AC Chairman

Ms. Sandra Yow Senior Manager, LTC

Mr. Teh Teong Lay (“Mr. Teh”)

Former Financial Controller

Ms. Verly Audit senior, LTC

Mr. Wang Ke Jian Software Engineer


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1. Executive Summary

1.1 Our appointment 1.1.1 Ernst & Young Advisory Pte. Ltd (“EY Advisory”) was appointed by Stratech

Systems Limited (the “Company” or “Stratech”) on 1 September 2010 to assist

in assessing certain allegations raised in the anonymous letters sent to the

Singapore Exchange Limited (“SGX” or the “Exchange”). The anonymous

letters are appended in Appendix 1.

1.1.2 Certain of the allegations raised in the anonymous letters are listed as follows:

i. “The mere excuse used by the company to delay the holding of the

AGM was a sham and did SGX and ACRA look into the real

reasons for the delay in holding the AGM; sources had said that in

the last few months, the Company had been experiencing deep

financial trouble as staffs and employees were not paid salaries for

months and hence the logical conclusion that the company may

have no money to pay for the printing of the AR.”;

ii. “Payments made for projects are squirreled away to finance various

questionable expenses which left many projects without finance to

proceed and are constantly delayed leading to Liquidation

Damages..”;

iii. “Dr. David Chew and family also frequently incur high expenditure

despite the Company having cash flow issues. This includes first

class air tickets for 2..”;

iv. “Duplicated or non-existing personnel timesheets were falsified in

order to raise the cost of R&D or used to show an efficient

operational expense…”;

v. “Products designed by employees, patented and paid by Stratech

Systems Limited are registered under Dr. Chew’s personal name”;

vi. “It has been reported in the Annual Report for the last few years that

2 of the 3 independent directors are no longer independent as they

have contracts with the Company to provide services and they are

being paid by the Company”; and


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vii. “The Company was put on the Watch List in March 2008 and was

removed from the Watch List on 28 January 2010. One of the

reasons for the removal was that it had posted profits for the last 2

years. Further, the Company had not satisfied the $40m threshold

of market capitalisation but was given a waiver by SGX pursuant to

Listing Rule 107 as announced.”

1.2 Background

1.2.1 The Company is principally engaged in the design, development, integration,

implementation, maintenance and project management of information

technology and advanced technology systems. The Company (together with its

subsidiaries, the “Group”) delivers large-scale complex, real-time, mission

critical systems in areas of intelligent Vision, intelligent Transport Systems and

e-Systems for governments and businesses, serving industries such as

aerospace and defense, financial services.

1.2.2 On 29 December 2006, the Company announced the change in its financial

year end from 31 December to 31 March. Based on the announcement, the

reason for the change in financial year end was “to avoid the rush for

professional audit resources at the end of each calendar year and with the view

of improving the engagement economics.”

1.2.3 Pursuant to Rule 1311 of the SGX-ST Listing Manual, on 5 March 2008,

Stratech was placed on Watch-List1 as it recorded pre-tax losses for the last

three consecutive years and a less than S$40 million daily market capitalisation.

1.2.4 Under the Watch-List, Stratech is required to provide quarterly updates on its

financial performance, including its future direction and any other material

developments that may have a significant impact on its financial position.

1.2.5 On 29 January 2010, the Exchange approved the Company’s application for

removal from the Watch-List2. The Company delivered consolidated pre-tax

1 An issuer placed on the watch-list has 24 months to restore its financial health to meet the requirements for removal from the watch-list, failing which it will be delisted or have trading in its listed securities suspended with a view to delisting. 2 The Exchange will place an issuer on the watch-list, if it records:- (1) Pre-tax losses for the three (3) most recently completed consecutive financial years (based on the latest announced full year consolidated accounts, excluding exceptional or non-recurrent income and extraordinary items); and (2) an average daily market capitalisation of less than S$40 million over the last 120 market days on which trading was not suspended or halted.


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profits for the two most recent consecutive years and has on 12 November

2009 announced an unaudited net profit of S$1.1 million for the half-year ended

30 September 2009. Although the Company did not achieve S$40 million

average daily market capitalisation over the last 120 market days, SGX had

waived the criteria for the removal as the Company had achieved an average

daily market capitalisation of close to S$40 million over the last 120 market

days notwithstanding the global economic crisis.

1.2.6 The Group’s consolidated audited pre-tax profits for FY2007, FY2008, FY2009

and FY2010 are set out below:

FY2007

S$’000

FY2008

S$’000

FY2009

S$’000

FY2010

S$’000

Pre-tax profit (10,567) 786 1,180 1,169

[Table 1]

1.3 Overview of the engagement

1.3.1 The scope of EY Advisory’s work covers the period from 1 January 2007 to 31

July 2010.

1.3.2 In general, our scope of work (our “Review”) focuses on the abovementioned

allegations raised in the anonymous letters as follows:

i. To review all cash/bank disbursements made by Stratech from 1

January 2007 to 31 July 2010 to Directors and Dr Chew and his

family to identify any irregularities;

ii. Analyse research and development cost to identify any irregularities

and/ or anomalies;

iii. Analyse and assess the matters surrounding the registration of

patents;

iv. Analyse the use and/ or the proposed use of the funds from fund

raising exercises and loan from IFS Capital Ltd;

v. Discussion with the Company’s statutory auditors and/ or Directors

to gain an understanding of the Company’s sales/ revenue in


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relation to revenue recognition. Depending on the assessment of

the discussion, perform additional procedures, if deemed

necessary;

vi. Analyse the adequacy of provision made for accounts receivables

and litigation suits;

vii. Assessment on Interested Person Transactions for any non-

compliance with SGX’s rules for the following:

a. Payments to and/ or contracts with Directors; and

b. Loans from/ to director/ shareholder

viii. Analyse and assess the procedures and findings previously

performed in relation to the delay and/ or non-announcement of the

issues highlighted in the anonymous letters. Depending on the

assessment, perform additional procedures, if deemed necessary;

ix. Assess the internal control and governance structure specific to the

scopes mentioned above as deemed appropriate; and

x. Any other incidental work, as deemed necessary, under the

instruction of Stratech’s Audit Committee (“AC”)3 and the Exchange.

1.3.3 During the course of our work, we had on 26 October 2010, 3 December 2010

and 15 December 2010 met up with the Company’s statutory auditors, LTC LLP

(“LTC”) to understand certain matters which are relevant to our engagement.

Additionally, we had also on various occasions for the period from December

2010 to January 2012 discussed our findings and/ or obtained relevant

clarifications from the Management and/ or AC.

1.3.4 The terms of our engagement require us to provide, upon the completion of our

work, a combined written report to SGX and the AC (the “Report”) on our

findings for the matters raised under our engagement letter dated 1 September

2010. The Report will include our procedures, factual findings and improvement

options, where relevant.

3 AC comprised 3 independent directors during our review period namely Mr. Sajjad Akhtar (“Mr. Akhtar”), Mr. Chew Hai Chwee (“Mr. HC Chew”) and Mr. Lim Soon Hock (“Mr. Lim”). Mr. Lim was appointed as the Deputy Chairman and Executive Director of Stratech with effect from 10 August 2010 and resigned as AC member on 19 May 2011. Mr. Lim Kim Choon was appointed as AC member on the same day. Mr. HC Chew was Chairman of AC during our review period up till 29 July 2009 and Mr. Akhtar was appointed Chairman of AC on the same day.


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1.3.5 The purpose of our engagement was to provide SGX and the AC with an

understanding of the matters set out in our engagement letter and our findings

arising from our work performed. This Report sets out our key findings and

observations. Our fieldwork commenced on 3 September 2010 and was

concluded on 1 October 2010. For the period thereafter up till January 2012, we

had on a sporadic basis made certain requests for further information and

clarification as certain documents and information became available

subsequent to our field work.

1.3.6 During the course of our work, we kept SGX and the AC apprised of any

significant events and/or transactions that warranted their attention.

1.4 Forensic Technology Procedures

1.4.1 In the course of our work, we performed limited forensic technology procedures

on the hard disks of selected computers and laptops belonging to the Company.

The procedures include:

i. forensic imaging on the said hard disk drives through specific

computer forensic software and hardware, where forensic imaging

is defined as the process of creating a verifiable and complete bit

stream copy of a drive, volume or selected file(s) which is stored

within an image file or a series of image files;

ii. verification of the image files for completeness, accuracy and

usability; and

iii. analysis of the electronic data contained within the image files

derived from the forensic imaging process, including metadata such

as file properties (“computer forensic analysis”). Our analysis of the

emails extracted includes but not limited to, analysing the content of

the emails on a holistic manner and reading through the threads of

the emails, to the extent available, in order to understand events

occurring before and after each email.

1.4.2 The custodians to the Company’s laptops and computers that were subject to

the forensic technology procedures are limited to: Mr. Ben KY Yap (“Mr. Ben

Yap”) (HR Manager), Ms. Florence Khoo Ngiak Fah (“Ms. Khoo”) (Former


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Finance Director) and Ms. Jamilah Ibrahim (“Ms. Jamilah”) (Administration

Manager and Personal Assistant to all executive members).

1.5 General limiting conditions and constraints

1.5.1 Our Report has been prepared on the basis of management information,

financial data and documentation prepared by Stratech relevant to our scope of

work, as well as interviews and/or discussions conducted with relevant persons.

1.5.2 The findings in this Report are based on facts obtained from the interviews

and/or discussions as well as review of documents that were provided to us.

1.5.3 The procedures that we have performed in arriving at the findings in this Report

do not constitute an audit or a review made in accordance with the Singapore

Standards of Auditing or Singapore Standards on Review Engagements;

accordingly, no assurance will be expressed in this regard. .

1.5.4 The scope of work set out in this Report does not amount to an internal audit

and shall not be relied upon as the primary basis for assessing the adequacy of

the system of internal controls.

1.5.5 Unless expressly stated, the information contained in this Report has not been

subject to detailed verification procedures and no document expert has been

engaged to independently verify the authenticity of the documents. No

representation is made by EY Advisory as to the accuracy or completeness of

such information and nothing contained in this Report is or shall be construed

as a representation of the future.

1.5.6 All assumptions made for the purpose of this engagement are based on

information and representations provided by Stratech and persons in

connection with our work. We do not give any representation, warranty,

indemnity or undertaking expressly or impliedly as to the accuracy or

completeness of such information provided to and used by us in our

assignment.

1.5.7 We wish to highlight that the people we interviewed were not under oath.

Hence, certain judgments would need to be exercised as to the credibility of the

views and recollections of those interviewed and/or discussed.


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1.5.8 Any report issued by EY Advisory should not be used by Stratech for any other

purpose than that stated in our letter of engagement without our prior written

consent. In the event that we provide written approval to Stratech to use any of

our reports for purposes other than that stated in our letter of engagement, we

will need to approve the form and context of such a report to be released. In

addition, we shall require an appropriate indemnity from Stratech absolving EY

Advisory from any liability or consequence arising from the release of such

report for purposes other than that specified above.

1.5.9 Neither the whole nor part of our Report, nor any reference thereto, may be

circulated nor published in any way whatsoever, nor used for any other purpose

than that specified in the Report without our prior written consent pertaining to

the form and context in which it appears. Except if requested by SGX to furnish

the Report to the relevant authority and/ or regulatory board, this report should

not be used by and/or disclosed to third parties, without the expressed consent

of EY Advisory. No reliance should be placed by third parties on the report for

any purposes whatsoever and EY Advisory shall not be responsible to third

parties who have acted on the information contained therein.

1.5.10 We reserve the right (but we are not under any obligation) to review, alter and

amend our Report in the light of any matters not previously brought to our

attention as a result of new developments, which may or may not materially

affect our opinion both prior to and subsequent to the date of this Report.

1.6 Specific limiting conditions and constraints

1.6.1 Ms. Khoo who was the former Finance Director was critical for the performance

of our work. However, our attempts to reach Ms. Khoo were unsuccessful

whether independently based on the contact details provided by the AC or

through the assistance of the AC and/or the management4 of the Company (the

“Management”). Had we were able to speak to her, there may be information

that may or may not be consistent with the findings stated in this Report.

1.6.2 There were certain documents that were considered relevant to our work but

unavailable to us as the same could not be located and/or missing during our

4 Management comprised Dr. David Chew, Ms. Leong Sook Ching (“Ms. Leong”) (Executive Director and Chief Corporate Officer) and Mr. Chua Ah Leng (“Mr. Chua”) (President and Chief Operating Officer).


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fieldwork. A listing of these documents is set out in Appendix 35. As such, we

only relied on available documents that were provided to us.

1.6.3 In the performance of our work, we are to rely on accounting records from

January 2007 to March 2010. However, the complete set of accounting records

for January 2007 and February 2007 were missing from the Company’s

records. In January 2012, the Company informed that these accounting records

were located but we did not perform further work on these documents as we

were finalising the Report. Additionally, the accounting records for the period

from April 2010 to July 2010 at the time we commenced our work i.e., on 3

September 2010 were not yet prepared.

1.6.4 Except for the custodians mentioned in preceding paragraphs in which forensic

technology procedures were applied, we did not apply the same to any other

custodians and/or employees of the Company. Had we done so, other emails

and documents relevant to our work may come to light which may or may not

have an impact to this Report.

1.7 Maxwellisation

1.7.1 We had on 3 January 2011 provided AC with our draft Report. A copy of the

same was provided to the Management through the AC on or around the same

time. This allowed the Management and the AC the opportunity to submit their

written responses as they relate to our findings and observations. This exercise

is known as Maxwellisation.

1.7.2 On 1 February 2011, we received the Management’s written responses from the

AC (“Management’s response”). Extracts of the Management’s responses

pertaining to specific paragraphs can be found in the relevant sections of the

Report.

1.7.3 On 23 February and 21 April 2011, we met with the Management to gain further

understanding and/or clarification in relation to certain comments raised by the

Management. Arising therefrom, there were exchanges of information and/ or

documents from the Management up till January 2012..

5 As the Company moved office in December 2011, certain documents were retrieved by the Management but we did not perform further work on these documents.


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1.7.4 For the same period up till January 2012, we continued to be in discussions

with the Management and the AC, and on certain occasions, AC and SGX to

address some of the matters which were raised during the course of our work.

1.8 Summary of our key findings and observations

1.8.1 Key findings and observations identified are summarized in this section. Details

of the key findings and observations are provided in Section 2 of this Report.

Revenue recognition and development expenditure

1.8.2 During the course of our Review, we noted that additional accrued revenue

amounting to S$1,468,000 and S$2,738,000 were recorded on the last day of

FY2008 and FY2009 respectively.

1.8.3 We were provided by the Management with the project costing worksheets in

support of the accrued revenue. From our analysis of the project costing

worksheets, we noted the following:

i. Percentage of completion method was used for revenue recognition

for all projects, save for one particular project. The basis for the

revenue recognition for this project in FY2008 was inconsistent with

that of FY2009. For the same project, the basis for revenue

recognition for FY2008 was based on delivery of goods and/or

services whereas in FY2009, the revenue was recognized based on

percentage of completion which was measured by the percentage

of costs incurred for the work performed to the estimated total

contract costs. Assuming that the basis for revenue recognition for

FY2009 was adopted, the cost for FY2008 may have been

understated by S$568,527 or, the revenue may have been over-

stated by S$623,719. Although we have not performed an audit of

the financial statements of the Company, the possible

overstatement of revenue or understatement of cost could have a

downward impact on the net profit by the corresponding amount for

FY2008 if the change in revenue recognition method was applied

retrospectively and prior year adjustments pertaining to the same

are made accordingly;


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ii. In support of the basis for revenue recognition for FY2008 based on

delivery of goods and/ or services, the Management had provided

us with the submission documents to the customer for the designs

of the individual modules. However, from the remarks indicated on

the submission documents, we noted that out of the 10 submissions

before 31 March 2008, 6 submissions appear to be rejected by the

customer for reasons unknown to us. Based on these documents, it

also appears that although designs were submitted by the

Company, not all had been accepted and approved by the

customer. In the absence of approval and acceptance by the

customer, the risk and rewards of the services performed by the

Company may not have passed on to the customer. As such, the

basis of revenue recognition i.e., based on delivery of goods and/ or

services without taking into account the acceptance by the

customer, may not have adequately fulfilled the criteria as set out in

FRS18 for accruing/ recognizing revenue for the design stage in full;

iii. Further, we noted that the billing to the customer for the delivery of

the above modules only took place after FY2008. The 20% design

revenue was only fully billed by the Company to the customer on 3

November 2008. We sought clarification from Mr. Chua who

informed us that the difference in timing between revenue

recognition and progress billing was due to changes and requests

constantly made during the course of work and customer will only

be billed when such changes or requests were fully completed;

iv. Third party and manpower costs incurred specifically for projects

were capitalized as development expenditure during the course of

the projects. In particular, manpower costs amounting to

S$443,585, S$640,187 and S$1,115,934 were capitalized in

FY2008, FY2009 and FY2010 respectively. In FY2009 and FY2010,

the amount of project costs that was reversed and capitalized as

development costs were S$927,000 and S$684,000 respectively.

The amounts capitalized were a percentage of the project costs

based on internal design rates. Such accounting treatment on

development expenditure may raise questions as to whether it

meets the attributes as prescribed in FRS38. Further, the


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capitalisation of project costs as development costs would have an

impact on the costs of sales and correspondingly on the net profit of

the Company; and

v. The basis in which the percentage for capitalisation was applied

appears to be inconsistent for the various projects during FY2009

and FY2010. Based on our Review of the information provided by

the Company, the percentages used for the projects were 20% or

33%. We sought clarification from the Management on the different

percentages applied to the various projects and we were informed

that the differences were due to the different nature of each project.

Accordingly, we did not attempt to quantify the impact to the net

profit, if any, arising from such differences.

1.8.4 In a meeting with the Management and LTC, the Management clarified and

asserted that the costs that were capitalised satisfied the attributes as set out in

FRS38 i.e., it generates future benefits to the Company. Further, according to

the audited financial statements, development expenditure is amortized on a

straight-line basis over their estimated useful lives of 3 to 5 years.

1.8.5 Based on our observation as noted in paragraph 1.8.3(iv), the capitalisation of

project costs including third party hardware/ software and manpower costs for

specific on-going projects based on an internal design rate appears to be

inappropriate as such costs attributable to the intangible asset may not have

been reliably measured and not complied with FRS38 where an intangible

asset shall be recognized if, and only if, an entity can demonstrate, among

others, its ability to measure reliably the expenditure attributable to the

intangible asset during its development.

1.8.6 As revenue for the design stage of the project had already been recognized in

FY2008, the capitalisation of the design costs in FY2009 and FY2010 does

raise questions as to whether there was timing issue in terms of revenue

recognition vis-à-vis costs.

1.8.7 From our forensic technology procedures, we identified several emails which

appear to be a concern as it relates to the discussion on (i) revenue recognition;

(ii) cost capitalisation; and (iii) achieving the target of S$1 million net profit for

FY2008. Specifically, we identified an email from Ms. Khoo to Dr. David Chew

Khien Meow (“Dr. David Chew”) (Executive Chairman) in May 2008 which


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states “… thanks for understanding in my over-zealousness in maintaining the

S$1 million profit. Can’t fault me for trying?...” As we could not speak to Ms.

Khoo, we are unable to adequately assess the underlying reasons as well as

the context of her email.

1.8.8 Further, we also noted several other emails in relation to recording of accrued

revenue and development expenditure. Man hours incurred for development

and for specific projects by the employees of the Company are recorded based

on the timesheets from the relevant employees. From our forensic technology

procedures, we noted discussions via emails between Ms. Khoo and several

other staff within the Company which appear to suggest that the timesheets

may not have been prepared on a timely basis but may have been prepared

retrospectively upon request by their statutory auditors. Different versions of

timesheets were also noted during the course of our Review for the same

employee and for the same period wherein hours and description of work done

were different for the two versions of timesheets. We discussed our

observations with the Management who clarified that the employees could have

been less than timely in preparing the timesheets but nevertheless, the hours

recorded reflected the actual hours incurred for development purposes. Be that

as it may, we are unable to match the hours recorded in the timesheets to the

development expenditure worksheet that forms the basis for capitalisation.

1.8.9 The proximity of timing of the observations and its accounting impact together

with the emails associated with it may raise questions as to whether the

Company will be able to meet the requirement under SGX-ST Listing Rule

1314(1)6 to be removed from the Watch List.

1.8.10 In response to the above, the Management clarified that the profit achievement

for FY2008 was attributable to new businesses secured and the observations in

relation to revenue recognition and development expenditure had been

appropriately assessed by the AC and the statutory auditors.

1.8.11 Further, the management also had on 18 April 2011 provided us with a

computation to assess the net profit for FY2008 and FY2009 on the assumption

that EY Advisory’s observations as set out in the preceding paragraphs are

6 An issuer on the watch-list may apply to the Exchange for its removal from the watch-list if the issuer records consolidated pre-tax profit for the most recently completed financial year (based on the latest full year consolidated audited accounts, excluding exceptional or non-recurrent income and extraordinary items) and has an average daily market capitalisation of $40 million or more over the last 120 market days on which trading was not suspended or halted.


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adopted. The computation revealed that the Company would still record a net

profit of S$1.5 million in FY2009 but a net loss of S$241,000 in FY2008.

However, in this computation, we noted that an amount of S$2 million (forming

part of the other operating income of S$3.58 million as reported in the annual

report of the Company for FY2009) which relates to write-back of trade and

other payables and other provisions was included to derive the net profit of

S$1.5 million in FY2009.

1.8.12 We analyzed the S$2.0 million write-back of the trade and other payables in

FY2009 and noted that it was primarily attributed to the following three (3)

categories of write-back and one adjustment which aggregated to S$1.7

million7. The remaining S$0.3 million was due to write-back of trade and other

payables from the subsidiaries. The Management confirmed that LTC was duly

apprised of the write-back as well as the reasons pertaining to the same at the

time the financial audit was performed for FY2009. We set out below our

observations on the write-back of the S$1.7 million and the adjustment in

FY2009::

i. S$703,668 was due to the write-back of trade and other payables

i.e. amounts due to suppliers and external service providers

(hereinafter collectively referred to as “vendors”). We do not have

the underlying supporting documents for each of such write-back for

our assessment but based on the information and/ or explanation

provided by the Management, we understand that:

a. S$140,783 (approximately 20%) had aged more than six

(6)8 years which resulted in the write-back in FY2009 and

we were told that some of which were in dispute and the

respective vendors had ceased to pursue the payments;

b. S$206,516 (approximately 29%) did not age more than six

(6) years when the write-back was made in FY2009 but

based on the Management’s recollection (of which

S$183,589 was without supporting documents), most of

7 There was a provision for foreseeable losses for PT PGI amounting to S$1.7 million in FY2009. Based on the documents and/or explanation provided by the Management, we understand that the provision for foreseeable losses for PT PGI of S$1.7 million has no relevance to the S$1.7 million of write-back of trade and other payables. Please see paragraph 1.8.22 on details to PT PGI litigation suit. 8 The six (6) years benchmark was provided by the Management.


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such payments were in dispute and were no longer

pursued by the respective vendors;

c. S$356,369 (approximately 51%) did not age more than six

(6) years and was without any supporting documents or

journal vouchers and/ or explanations by the Management;

and

d. Although items (b) and (c) above did not age more than six

(6) years at the time the write-back was made in FY2009,

some of the write-back amounting to S$139,992 has

lapsed more than 6 years till to date and we were told by

the Management that there were no further follow-up

actions undertaken by the respective vendors in relation to

these payables.

ii. S$796,844 was due to the write-back of accruals. This was

subsequently adjusted to S$666,844 due to an audit adjustment of

S$130,0009. For the aggregate accrual write-back of S$666,844, we

were informed by the Management that this write-back was

primarily due to an accounting oversight as the accruals made in

FY2008 were not reversed when the same was paid in FY2009. We

set out below the explanations provided by the Management:

a. The project cost for a project of S$550,000 was accrued in

FY2008 but the same amount was erroneously taken up as

an expense in FY2009 when payments were made. The

write-back of this accrual was incorrectly recorded as other

operating income in FY2009 instead of crediting against

cost of goods sold; and

b. The remaining S$116,844 relates to write-back of provision

for professional fees, legal fees, project material costs for a

project and staff claims made prior to FY2009.

iii. S$329,488 was due to the write-back caused by the reversal of

provision of excess unconsumed leave. In support of this write-back,

9 The audit adjustment of S$130,000 was made as a result of an excess provision for foreseeable losses for a project.


09 March 2012

20

the Company had on 21 February 2012, provided us with an email

memo from the human resource (“HR”) department (also previously

provided to LTC and AC) which communicated the change in the

Company’s policy where only five days of leave can be carried

forward and there was a clean-up exercise in FY2009 to effect the

same. However, the Management was unable to provide us with

prior data which includes the detailed listing and supporting

documents in support of this reversal as the data in the HR

database had been overwritten.

1.8.13 SGX-ST Listing Rule 1314(1) states that “An issuer on the watch-list may apply

to the Exchange for its removal from the watch-list if the issuer records

consolidated pre-tax profit for the most recently completed financial year (based

on the latest full year consolidated audited accounts, excluding exceptional or

non-recurrent income and extraordinary items)….”. Premised on the annual

reports of the Company, with the exception of FY2009, we did not note write-

back of trade and other payables which formed “other operating income” of the

Company in other financial years i.e. FY2007, FY2008 and FY2010.

Accordingly, prima facie, it may appear to suggest that the write-back in

FY2009 could be a one-off occurrence. In relation to the same, the

Management had informed and provided us with certain supporting documents

that there were similar write-backs in other financial years but recorded

differently i.e. set off against accruals.

1.8.14 However, in the absence of (i) adequate supporting documents for write-backs;

and (ii) a specific definition in the accounting standard and relevant guidelines

for the assessment on the recurring nature of such write-backs, we are unable

to opine on whether such write-backs of payables and provisions should be

considered recurring in nature and hence included in determining the

Company’s recorded consolidated pre-tax profit for FY2009 for the purposes of

Rule 1314(1) of the Listing Manual.

1.8.15 Be that as it may, based on the information available to us, the amount of write-

back without supporting documents amounting to S$869,446 may potentially

have a downward impact to the profitability to the Company’s recorded

consolidated pre-tax profit for FY2009 for the purposes of Rule 1314(1).

However, this is unlikely to impact the removal of the Company from the Watch


09 March 2012

21

List as the Company would still be recording a consolidated pre-tax profit for the

same year.

Payments made by the Company

1.8.16 For the period between 1 January 2007 and 31 March 2010, the Company was

predominantly funded from the cash flow generated from the various fund

raising exercises which took place in the same period as well as personal loans

from Dr. David Chew and Ms. Leong. The loans from Dr. David Chew were for

the payment of damages awarded to PT Panasonic Gobel Indonesia (“PT PGI”)

and for working capital purposes.

1.8.17 Generally, the cash flow generated from the above was used for working capital

purposes with more than 33% being utilized for salary costs. Of which,

approximately 33% of the total salary was salary to senior management10.

1.8.18 Based on our analyses of the payments made by the Company, we noted the

following:

i. Dr. David Chew travelled on first class flights for business on certain

occasions during the period from May 2008 to February 2010

although cash flows appear to be challenging for the Company

whilst being on the Watch List during the same period. The service

agreement dated 1 January 2008 between Dr. David Chew and the

Company specified that Dr. David Chew “…shall be entitled to travel

on such class of travel (not including SIA suite class or equivalent)

as he deems fit taking into consideration factors including but not

limited to the Company’s financial condition.” Be that as it may, we

were informed by the AC that the service agreement for Dr. David

Chew was only finalized sometime in end November 2008 or early

December 2008 and was back-dated to 1 January 2008 which

resulted in the above observation. Total cost for first class tickets for

the mentioned period amounted to S$140,537 via-a-vis total travel

spending of S$259,621 over the three financial years. We did not

10 Senior management encompassed Dr. David Chew, Ms. Leong, Mr. Chua, Mr. Joe Ong (Director of Sales), Dr. Kennedy Chew Khien Mien (“Dr. Kennedy Chew”) (Director of Alliance and Technical Fellow), Mr. John Lim (Ex-Chief Technology Officer) and Mr. Jules Yap (Ex-Group Director of Homeland Security Products and Capabilities)


09 March 2012

22

note any travel costs that were paid by the Company for the family

members of Dr. David Chew.

ii. We also noted other payments to Dr. David Chew and Ms. Leong

and accruals made for Dr. David Chew’s credit card expenses which

are not provided for in the service agreements for both persons

dated 1 January 2008. These, included inter-alia: the credit card

expenses for Dr. David Chew of S$154,690, interest for late

payment charges for Dr. David Chew’s credit cards of S$15,377 and

club membership dues of S$4,852. We also noted accrual of

S$102,182 of credit card expenses for Dr. David Chew that were

not supported with credit card statements and/ or invoices or

receipts.

iii. The receipts, bills and invoices in support of certain reimbursements

of expenses from the Company to Dr. David Chew and Ms. Leong,

amounting to S$76,038 during our review period were not properly

and adequately kept and maintained by the Company’s accounting

department, but were instead kept separately and in an unsorted

manner, and the nature of some of these expenses were not

indicated on the accompanying payment vouchers. We are

therefore unable to verify that these expenses were adequately

supported to be for Company’s expenses.

iv. As such, the total expense reimbursements to Dr. David Chew and

Ms. Leong as well as accruals made for credit card expenses which

were not adequately supported or not provided for in their service

agreements dated 1 January 2008 amounted to S$96,282 for paid

expenses and S$102,182 for accrued expenses for the period

between 1 April 2007 and 31 March 2010.

v. In response to the above observations, the Management notes that:

(a) the expenses amounting to S$76,038 were incurred for the

Company’s business, and included payments for hotel

accommodations, airport transfers and car hires for

business trips, restaurant charges for business purposes,

corporate gifts for officers and employees of the Company,

online anti-virus software for the Company’s laptops, petrol


09 March 2012

23

charges for the Company’s vehicle, medical fees,

periodicals, bank and interest charges. The Company has

since implemented and/ or tightened procedures to

improve its filing and maintenance of supporting

documents for expense claims;

(b) expenses and reimbursements amounting to approximately

S$20,229 (interest charges of S$15,377 and club

membership dues of S$4,852) were incurred for the

Company’s business, and is in the process of updating and

tightening provide clear guidelines, rules and regulations in

the areas highlighted by us; and

(c) the accrued credit card expenses amounting to S$102,182

were neither claimed by nor paid to Dr. David Chew and

were instead accrued as part of the Company’s annual

external audits on grounds of prudence. These accrued

expenses have since been written back in FY2011 as Dr.

David Chew never submitted claims for the credit card

expenses and hence, were subsequently reversed.

1.8.19 Payments for independent director fees (Mr. HC Chew, Mr. Akhtar and Mr. Lim)

were made through Dr. David Chew but later reimbursed to Dr. David Chew by

the Company. We understand from the Management that such arrangement

was due to the lack of cash flow by the Company at the time the payments

were made to the independent directors.

1.8.20 In addition to the payments of independent directors’ fees, we also noted

payments to Mr. HC Chew’s sole proprietorship Surecanlah Consultancy

(“Surecanlah”) and Mr. Lim’s company Plan-B ICAG Pte Ltd (“Plan-B”). Total

payments made to Surecanlah and Plan-B during our review period amounted

to S$49,074 and S$75,000 respectively. These payments were made for the

consultancy services provided by Mr. HC Chew and Mr. Lim’s companies

respectively and duly disclosed in the annual report of the Company for

FY2008, FY2009 and FY2010 in accordance to Chapter 9 of the SGX-ST

Listing Manual. We understand that on 1 August 2010, the contract with Plan-B

was terminated in view of Mr. Lim’s appointment as the Deputy Chairman and

Executive Director of Stratech with effect from 10 August 2010. We also


09 March 2012

24

understand that the contract with Surecanlah ended in March 2011 upon

completion of the project.

1.8.21 The Company paid for company cars’ installments purchased in the name of Dr.

David Chew to UMF (Singapore) Pte Ltd (“UMF”) for vehicle SDT8884K and

Citibank Singapore Ltd (“Citibank”) for vehicle SJF8884M amounting to

S$26,065 and S$70,742 respectively. SDT8884K was disposed and replaced

with SJF8884M on 8 May 2008. Based on the vehicle log card, the date of

purchase of vehicle SJF8884M was on 8 May 2008 and purchased in Dr. David

Chew’s name11 . However, a Trust Deed between Dr. David Chew and the

Company was only signed a year later i.e. on 8 May 2009 although the vehicle

SJF8884M was recorded as an asset of the Company in FY2009.

Adequacy of provision for litigation suit

1.8.22 An announcement was made by the Company on 23 January 2010 that the

court has awarded PT PGI damages in the sum of S$1.83 million with interest

and costs. While provision for foreseeable losses of S$1.7 million was made in

FY2009, total damages which include interest fees and legal fees amounted to

S$2.19 million was paid on 28 January 2010, resulting in an increase of

S$481,769 from what was previously provided. Provision for foreseeable losses

of S$1.7 million made in FY2009 is fairly close to the damages awarded by the

court of S$1.83 million before interest and legal costs.

1.8.23 Under SGX-ST Listing Rule 703, an issuer must disclose information “that

would be likely to have a material effect on the price or value of securities of

that issuer.” Taking into account the Company’s basis for disclosure i.e. more

than 5% of annual turnover, the amount for legal fees and interest costs did not

appear to fall within the disclosure threshold for FY2009 and hence the non-

announcement.

Delay of AGM and non-announcement of litigation suits

1.8.24 We performed a litigation search on the Company and noted 11 other litigation

suits during our review period. No provision for foreseeable losses or 11 Dr. David Chew is entitled to a company car as provided for in his service agreement dated 1 January 2008.


09 March 2012

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announcements was made for these cases. We enquired with Ms. Leong who

explained that the non-provision and non-announcement was due to the

following reasons:

i. Amounts in dispute (which ranged between S$9,004 and S$86,670)

with regards to the 11 cases were immaterial i.e. below 5% of

Group’s annual turnover;

ii. Amounts had been fully accrued for as trade or other payables;

iii. Amounts in dispute were not frivolous and fully supported; and

iv. Amounts in dispute were specified in the writs of summons.

1.8.25 SGX-ST Listing Rule 703(4)(a) requires an issuer to provide timely disclosure of

material information12 in accordance to the Exchange’s corporate disclosure

policy. However, as materiality is not defined in the listing rule, the Company

had considered amounts below 5% of Group’s annual turnover to be

immaterial. We reviewed the writs of summons and noted that the amounts in

dispute are below 5% of the Group’s annual turnover

1.8.26 For FY2010, the Company had decided to produce its annual report in CD-

ROM. However, due to the omission of the option form to shareholders to

request for a printed annual report, there was a delay in the annual general

meeting (“AGM”) which was originally scheduled for 29 July 2010. The request

for extension of the AGM date was granted by SGX on 28 July 2010 and the

Accounting & Corporate Regulatory Authority (“ACRA”) based on a written

confirmation from the Company that it is not aware of any information that will

have a material bearing on investors’ decision which had yet to be announced

by the Company.

1.8.27 In relation to the above, we noted the following from our computer forensic

analysis:

i. On 10 June 2010, the printing company sent a sales confirmation

order to Ms. Coreen Kuo (Manager, Marcom & Corporate

12 Material information includes information, known to the issuer, concerning the issuer’s property; assets; business; financial condition and prospects; mergers and acquisitions; and dealings with employees, suppliers and customers; material contracts or development projects, whether entered into in the ordinary course of business or otherwise; as well as information concerning a significant change in ownership of the issuer’s securities owned by insiders, or a change in effective or voting control of the issuer, and any developments that affect materially the present or potential rights or interests of the issuer’s shareholders.


09 March 2012

26

Communications) for the printing of the annual report and requested

for 50% down payment amounting to S$27,746;

ii. On 5 July 2010, the printer sent another email to Ms. Coreen Kuo to

ask for initial deposit before proceeding with the artwork;

iii. On 9 July 2010, Ms. Coreen Kuo forwarded the email to Dr. David

Chew seeking his permission to ask Finance to proceed with the

down payment for annual report;

iv. On 22 July 2010, the Company requested for the quotations again

from the printing company and the printer provided two options:

(Option 1) annual report in CD-ROM format for S$20,660; and

(Option 2) annual report in hard copy format for S$27,280; and

v. On the same day, Ms. Phoebe Heng (Manager – Planning &

Strategy) forwarded the email to Ms. Leong citing that the CD-ROM

option is cheaper and suggested that they proceed with the CD-

ROM option.

1.8.28 Based simply on the chain of emails and the chronology of the events, it

appears that the Company had only decided to have the annual report in CD-

ROM format on or after 22 July 2010. The option to proceed with the CD-ROM

format suggests that it was selected because it was cheaper.

1.8.29 We sought clarification from Management who explained that due to the

omission of the option form to print the hard copy annual report, re-printing of

the annual report was required and hence, the request for quotation on 22 July

2010. Ultimately, the Company resolved with the CD Rom format for pricing

reasons. Further, we have also been provided by the Management with an

invoice and sales confirmation from the printer dated 5 July 2010 which

included 7,000 copies of CD replications and CD mailers as a proof that the

decision to have the annual report in CD-ROM format was already decided on

or around 5 July 2010. A copy of the cheque of S$21,333 dated 9 July 2010 that

was paid to the printer for the same was also provided to us by the

Management to prove that the decision to have the annual report in CD-ROM

was made in early July 2010.


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Corporate governance

1.8.30 During the course of our work, we noted various corporate governance lapses

as follows:

i. Poor maintenance of accounting documents (including supporting

vouchers and schedules, timesheets etc) by the Company for the

period between 1 April 2007 and 31 March 2010. Certain of these

documents were either missing, misplaced or overwritten which

resulted in various challenges in the course of our work. We

understand from the Management that this was partly due to the

less than adequate handover from Ms. Khoo who left the Company

at a very short notice. Be that as it may, the Company would need

to consider the proper maintenance of its accounting documents in

compliance with Chapter 199 of the Singapore Companies Act

which provides that “every company and the directors and

managers thereof shall cause to be kept such accounting and other

records as will sufficiently explain the transactions and financial

position of the company and enable true and fair profit and loss

accounts and balance-sheets and any documents required to be

attached thereto to be prepared from time to time, and shall cause

those records to be kept in such a manner as to enable them to be

conveniently and properly audited”;

ii. Ms. Ho joined the Company in April 2010. However, she

represented that she had no access to accounting records

maintained by Ms. Khoo since the day she joined. As a result, on

the day Ms. Khoo left, no other people in the Finance department

had knowledge of the accounting matters. The Finance department

from April 2010 to July 2010 comprised only Ms. Khoo and Ms. Ho.

iii. Since the departure of Ms. Khoo in July 2010, there were no proper

accounting records maintained by the Company up until October

2010 except for a cash book which is maintained by Ms. Ho Wei Li

(“Ms. Ho”) (Finance Manager).

iv. There was no proper segregation of duty in relation to payment

approval for Dr. David Chew and Ms. Leong’s claims. We noted

payments which relate to repayment of loans, salaries and


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28

reimbursements to both Dr. David Chew and Ms. Leong that were

either self-approved or approved by Dr. David Chew for Ms. Leong

or vice versa. Total payments to Dr. David Chew which were

approved by Ms. Leong or not approved at all amounted to

S$2,447,788. Total payments to Ms. Leong approved by Dr. David

Chew or not approved at all amounted to S$207,703. Total

payments to Ms. Leong which were self-approved amounted to

S$86,769. Considering that Dr. David Chew and Ms. Leong are

husband and wife, such payment approval arrangement may

appear to be inappropriate. We informed the AC on the observation

and they had taken an active role in rectifying the issue and

represented that going forward, all Dr. David Chew’s expenses will

be reviewed and approved by Mr. Lim, who is currently based in the

Company as an Executive Director;

v. Lack of information and/ or description for documentation in support

of payments to or payments made on behalf of directors and

journals raised;

vi. Payments were made to credit card companies (including interest

for late payments) for expenses incurred by Dr. David Chew. Some

of these expenses are unsupported and based on the description

on the credit card statements, the nature of these expenses i.e.

whether it is business-related expenses or otherwise, could not be

adequately assessed;

vii. Timesheets in support of the accrued revenue and capitalisation of

development costs were not properly maintained during the period

between 1 April 2007 and 31 March 2010. We were only provided

with timesheets for FY2010 as timesheets for FY2008 and FY2009

are missing from the Company’s records. Additionally, hours stated

on the timesheets did not necessarily reconcile to the capitalization

worksheet in support of development costs. As timesheets are

critical supporting documents and form the basis for accrued

revenue and capitalisation of development costs, timesheets would

need to be prepared on a timely basis and properly maintained; and


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29

viii. Certain of the timesheets provided to us by the HR department

were not duly verified by Finance Department and Dr. David Chew

or Mr. Chua.

1.8.31 The Management responded to the above observations and commented on the

efforts undertaken to address the same which are extracted and set out below:

i. “The Company has taken the necessary steps to improve its

approval processes. Dr. David Chew and Ms. Leong have ceased to

sign for each other’s reimbursements”;

ii. “The Company has already appointed a CFO and boosts the staff

strength of its Finance team, and improves process flow to improve

this.”;

iii. “The Company has already implemented new processes to improve

the expense claims procedures…” and

iv. “…New processes and time sheet format have been implemented

and monitored on a weekly basis…HR department keeps its

independent assessment through regular dialogues with the project

teams and management as checks against and support for the

timesheets.”

1.8.32 The Company had taken steps to address the above findings by us, some of

which were implemented prior to the finalisation of our Report. Such

implementations were monitored by the Company’s Quality &

Excellence Department and include the followings:

i. The implementation of new processes and formats for timesheets,

and the periodic monitoring of the same, as well as the independent

assessment by the HR department of the Company on the

timesheets through regular dialogues with the various project teams

and the management of the Company to ensure that any

capitalisation of development expenditure is in compliance with the

relevant accounting standards;

ii. The implementation of a new financial accounting system to

enhance the financial reporting structure of the Company;


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iii. The improvement of the filing procedures for, and the maintenance

of, accounting documents;

iv. The implementation of new financial processes to improve checks

and balances and the segregation of duties;

v. The renaming and expansion of the role of the AC as the Audit Risk

Management Committee (“ARMC”) with effect from 11 July 2011, in

line with the recommendation of the Singapore Code of Corporate

Governance 2005; and

vi. The ARMC monitors the compliance of financial policies and

procedures periodically through discussions and confirmations with

Management that such policies and procedures are being complied

with, and through reviews of timesheets and senior management

expense claims on a sample basis.

factual investigation into certain matters of …...factual investigation into certain matters of...

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