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Noble Group probe extends to auditors, critic Dee calls for wider investigation

Jeffrey Tan
Jeffrey Tan12/5/2018 11:04 AM GMT+08  • 8 min read
Noble Group probe extends to auditors, critic Dee calls for wider investigation
SINGAPORE (Dec 3): Singapore authorities have summoned EY (Singapore), the auditor of Noble Group’s subsidiary, Noble Resources International, to assist in a joint investigation that was announced on Nov 20. NRI is under investigation for potential non-
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SINGAPORE (Dec 3): Singapore authorities have summoned EY (Singapore), the auditor of Noble Group’s subsidiary, Noble Resources International, to assist in a joint investigation that was announced on Nov 20. NRI is under investigation for potential non-compliance with accounting standards under Section 201 of the Companies Act.

In a joint statement on Nov 28, the Commercial Affairs Department (CAD), Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) said they had directed EY (Singapore) to produce documents related to the audit of NRI. ACRA is also inspecting the work EY (Singapore) performed in the audit of NRI for the financial years 2012 to 2016.

The call on EY is the latest development in the investigation of Noble. The embattled commodities trader was just days away from completing its controversial debt-for-equity swap and restructuring when authorities announced it was under investigation for allegedly having made false and misleading statements, and breached disclosure requirements under the Securities and Futures Act.

Amid the probe, Noble has extended its restructuring deadline to Dec 11, from Nov 27. “The company will make additional announcements when there are further developments in relation to the restructuring, the schemes and/or the other matters contemplated by this announcement,” says Noble. “The board is confident that, other than the matters referred to above, the remaining conditions precedent to the restructuring effective date will be satisfied shortly, such that the restructuring can be completed by no later than [Dec 11].”

Separately, one of five of Noble’s independent non-executive directors, David Yeow, has resigned. Yeow is a senior partner and executive committee member at legal firm Rajah & Tann, and was appointed to the board in July 2015. He stepped down a day after receiving letters from CAD and MAS requesting that Noble furnish financial documents related to the investigations.

“He believes [he] has contributed all he usefully could in relation to the restructuring of Noble for the benefit of its stakeholders in the present circumstances whereby [the company] is working towards implementing its proposed restructuring within the previously disclosed timelines; and other demands professionally and otherwise of his time,” the company said in a filing with the Singapore Exchange on Nov 22.

Audited statements under scrutiny

The role of auditors is coming under increasing scrutiny in the wake of a wave of corporate scandals. In August, The Edge Singapore reported that SGX had highlighted the accountability of auditors, particularly in the case of Noble. In response to queries by The Edge Singapore, the exchange regulator said it was “putting the onus on Noble’s auditors to justify its audit, and their accounting practices were reviewed by a Singapore-registered auditor.

“If there is any failing by any auditor, we will refer the auditor to the appropriate accounting regulatory bodies.”

Since 2015, critics Iceberg Research and Michael Dee, a former director of Temasek Holdings and former CEO of Morgan Stanley’s business in Southeast Asia, have criticised Noble’s accounting methods, saying it inflated the value of its assets while undervaluing its liabilities.

In its reports beginning in February 2015, Iceberg alleged that Noble used accounting loopholes in every component of its financials, including its income statement, balance sheet and cash flows. Iceberg also alleged that Noble exploited the accounting treatment of its associates to avoid large impairments and fabricate profits.

However, Noble’s accounts had been cleared by EY (Hong Kong). It was only in 2015, after Iceberg’s first report alleging inflated asset values and accounting irregularities was published and picked up by short seller Muddy Waters, that Noble was obliged to appoint another auditor, PwC, to review the valuations of some of its assets.

PwC then found that Noble’s accounting practices complied with the relevant standards. PwC did not respond to queries by The Edge Singapore on whether it was still standing by its report on account of the investigations. Singapore Exchange Regulation did not directly answer queries on whether it was still standing by the report by PwC, The Edge Singapore reported last week.

Earlier this year, SGX said: “We are committed to holding issuers and professionals responsible for their actions and opinions. If there is any evidence of wrongdoing, we will refer it to the appropriate authorities.”

Alex Turnbull, managing partner of Keshik Capital and the son of former Australian prime minister Malcolm Turnbull, who welcomed the joint investigation when it was announced, has since suggested that PwC should be called in as well to assist in the probe. This is because there was apparently a “divergence in views” between the Hong Kong and Singapore offices of PwC at the time the report was issued, he claims. “If that is true, and it is documented, then @SGX and @mas_sg should look [into it],” Turnbull said in a Twitter posting on Nov 27.

Dee says a clean auditor’s opinion does not mean much today, in the wake of numerous corporate financial and accounting scandals. In an email to The Edge Singapore, he points to the cases of Enron, Lehman Brothers and WorldCom, among others. “Every one of them had a clean auditor opinion and none of them were found out by auditors. There is no justification in relying on auditors to determine fraud.”

Dee is also critical of the reason some have cited for the investigation starting only now — that Noble’s main accounts were audited in Hong Kong, where the company is headquartered.

“Saying you cannot investigate accounting fraud if the auditor is not in Singapore is to invite the world’s scoundrels to list with SGX with an offshore auditor and cook the books,” he ­says. “Any company that lists in Singapore should agree to the full legal system in Singapore.”

Bigger picture missed?

It remains to be seen what investigations turn up. However, Dee also emphasises that investigations should not only focus on NRI and says a full and independent forensic audit should be completed before Noble can be restructured and allowed to list the new entity. “Only investigating NRI misses the bigger picture of fraud and corruption in which banks were complicit.”

In his view, Noble’s sale and purchase agreements need to be scrutinised. Under such deals, Noble sold a physical commodity to banks in return for cash, while agreeing to buy back the commodity later. These were recorded as buying and selling transactions and allowed Noble to secure short-term borrowings. Dee argues that these are, instead, repurchase agreements and, therefore, Noble’s debt levels are much higher than what it reported.

On its part, Noble said in a June 2015 statement rebutting Dee’s allegations that the group does execute “optional inventory sales”, but “on a limited basis to manage our inventory levels”.

“This structure is common with many, if not all, of our competitors. We have also been transparent with our auditors and the ratings agencies about these structures,” it said.

In the statement, signed off by then CEO Yusuf Alireza, Noble argued these transactions were off-balance sheet because, firstly, the group has the option to take back the securities, or not; and, secondly, the commodities were highly liquid and can be turned easily into cash. “While more often than not we exercise the option to take them back, because it is in our economic interest to do so, that does not change the fact that in an extreme-liquidity event, we would have the option not to.”

But Dee says: “I heard from bankers that the sale and purchase agreements were really debt hidden off balance sheet because it was agreed Noble would always buy the commodity back at the specific date and price to provide the banks with a healthy return on capital on the loan. On the other side, I was told the banks booked these same deals as loans, which I believe they were. Well, it can’t be both a sale and a loan now can it? I asked Noble to cite just one specific instance where they did not repurchase the commodity. The silence was deafening.”

Dee also takes issue with the costs associated with the restructuring. “Recent restructuring costs exceeded the entire market value of the company,” he says. “One of the lead restructuring bankers told me it was one of the biggest paydays ever by multiples.”

According to Noble’s financial statements for 9MFY2018 ended Sept 30, of the total restructuring expenses amounting to US$146.6 million ($201 million), the bulk comprised fees associated with the group’s interim trade finance facilities, a work fee to the ad hoc group, and legal and financial adviser fees. The remaining restructuring expenses include a waiver fee to holders of the group’s senior unsecured revolving credit facility, ING work and support fees and others.

Noble’s market capitalisation, before the stock was suspended from trading, was $107.5 million.

This story appears in The Edge Singapore (Issue 859, week of Dec 3) which is on sale now. Subscribe here

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