Wang Yaoyu, executive chairman of Darco Water Technologies has stepped down from his position, following a whistle blower’s report that audited statements of its China-based subsidiary has been modified on Wang’s instruction.
The whistle blower alleges that Wuhan Kaidi Water Service Company’s (WHKD) head of finance had changed certain key financial figures in WHKD’s audited financial statements for FY2019 ended Dec 2019.
Instead of a loss of RMB23.2 million, WHKD was shown to have recorded a profit of RMB1.7 million for FY2019.
The accounts had been signed off by WHKD’s statutory auditors, Crowe Shanghai.
The modified accounts were then submitted to a bank in China that has been extending banking facilities to support WHKD.
According to Darco, the banking facilities granted to WHKD by the bank, which wasn’t named, comprises facilities for the issuance of performance bonds amounting to RMB13.58 million ($2.83 million) as guarantees for the performance by WHKD of its obligations specified in the contracts entered into with WHKD’s customers.
The facilities were also for the advancement of a short term loan of RMB3 million collateralised against a share pledge and corporate guarantee by Wuhan Lian Kai Investment Co, which holds a 13% stake in WHKD.
Based on preliminary investigations, Wang, the unnamed head of finance of WHKD, and another staff from the finance department were involved and they have admitted so.
According to Darco, the trio have assured that the misrepresentation was purely meant to ensure that the bank continues to extend the lending facilities. They did derive any personal benefits doing so.
In addition, Wang and WKHD’s head of finance have “verbally and in writing” assured the company of the veracity of the financial information that WHKD had periodically provided to Darco for its financial reporting.
“Notwithstanding the aforesaid intention and even if no personal benefits were accrued to the involved personnel, the board regards the act of modifying the audited accounts of WHKD and submitting the modified accounts as wholly unacceptable and a serious misconduct on the part of the involved personnel,” says Darco, which has sought legal advice.
Wang, as such, has agreed to resign, and that WHKD’s head of finance and the other involved finance staff placed on leave of absence.
According to Darco, its current cash position stands at $20.2 million and that the company did not provide any guarantee for the business and operations of WHKD.
Darco closed June 24 at 18 cents, up 4.79%.