SINGAPORE (Apr 30): In July 2015, Trek 2000 International’s ThumbDrive was selected as one of 50 made-in-Singapore products to be displayed at the National Museum in conjunction with the country’s 50th birthday celebrations. It was a proud moment for the Mainboard-listed electronics company, which was already having a good year. Shares in Trek reached a five-year high of 50.5 cents in May that year, trading at 51.5 times earnings.

Little did investors know things were going terribly wrong in the company. Shortly before midnight on April 23, Trek released a forensic accountant’s report produced by RSM Corporate Advisory detailing various potential breaches at Trek: round-tripping, fictitious sales transactions and the fabrication of documents going as far back as 2007. The report suggests that Trek founder, chairman and CEO Henn Tan as well as other former and current top executives were closely involved in some of these breaches. Shares in Trek have plummeted nearly 35% since the report was released, closing at 15 cents on April 26.

Tan’s actions and those of Trek’s other executives do not seem to have accomplished much. If the various transactions RSM has highlighted were fraudulent, Trek’s sales from FY2010 to FY2015 may have been overstated by a total of US$9.8 million and its earnings overstated by US$949,196. In that same period, Trek’s total revenue and earnings were US$578.6 million and US$7.6 million, respectively, according to Bloomberg data. Trek made losses of US$5.2 million in FY2012 and US$6.6 million in FY2015. So, what did their moves accomplish? And why did it take so long for the lapses to surface?

Damning evidence

RSM’s 297-page report has some damning evidence of suspicious behaviour at Trek. For instance, in 2008, there was a chain of email exchanges between Tan and other Trek executives about setting up a retail outlet in Sim Lim Tower. T-Data Systems (S), a company owned by Loo Soo Hooi, would rent the retail outlet from S-Com System (S), a Trek unit. Loo is the wife of Poo Teng Pin, who served as group director of R&D and an executive director at Trek from 2006 to 2016.

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In emails, Tan reminded executives to distance Trek from T-Data. “This company must be made to look nothing more like any independent retail outlets in Sin [sic] Lim,” Tan said in an email to Trek president of regional sales Foo Kok Wah and Gurcharan Singh, who served as Trek’s chief financial officer and an executive director from 2000 to 2016. “Remember, explicitly he [Simon] must disassociate T-Data from Trek for future entrapment exercise [sic],” Tan said in another email to Foo and Singh. Simon, Tan’s brother, had been approached to run T-Data’s business from the retail outlet.

Another email exchange suggests company executives forged documents. On Feb 29, 2016, Trek Technology (HK) Co sales coordinator Emily Chin sent an email to Foo attaching a delivery order for 500,000 UM1G chips to a company called Colite Technology. The DO was purportedly stamped by a company called Jumbo Logistics (China) Co. Foo replied three minutes later: “Cannot! Do not look like real… No signature also.” Thirteen minutes later, Chin sent another email to Foo with a signed and stamped DO attached. “It is inconceivable that Emily would have been able to obtain the signature of the logistics company within 13 minutes,” RSM says in its report. Foo has denied giving instructions to Chin to fabricate the documents.

Tan, for his part, has denied any financial impropriety or malicious intent. Speaking to The Business Times, he labelled the various actions highlighted by RSM as “shortcomings”.

‘Poor signal’

According to the RSM report, the first trigger that something was wrong occurred in February 2016 when its audit committee found certain interested party transactions between Trek and T-Data. A month later, Trek’s auditors highlighted some issues encountered during the audit of the FY2015 financial statements.

Jarrod Baker, senior managing director for forensic and litigation consulting at FTI Consulting, says in similar situations, indications of fraud may not be easily apparent. “Senior management will know where to hide things and how to cover their tracks. Paper trails can be put in place to give the appearance to an outsider that all is in order. The appearance that all is in order may lower the degree of scepticism someone will apply to look beyond the surface,” he says.

Lem Chin Kok, head of risk consulting at KPMG Singapore, says there are a couple of reasons such cases happen. “Many companies and their boards may not understand how best to mitigate third-party risks effectively, and the perceived costs of mitigating third-party risks discourage action,” he says.

Mak Yuen Teen, co-director of the Corporate Governance and Financial Reporting Centre at the National University of Singapore Business School, adds, “The internal audit function is likely to be ineffective, if it indeed exists.”

Between FY2007 and FY2012, Trek’s audit committee included electronics industry veterans Chay Yee Meng, Noel Hon and Seah Moon Ming. The latter is the current chairman of SMRT Corp but had previously served as president of ST Electronics, a unit of Singapore Technologies Engineering. Chay founded IT company Infowave and Hon was a former chairman of the Singapore Federation of Computer Industry (later the Singapore Infocomm Technology Federation).

In 2013, Hon and Seah continued to serve on the audit committee with another member — Francis Heng, former chief financial officer at Wilmar International, ST Engineering and Singapore Telecommunications. In 2014, the audit committee was comprised of Heng, Hon and Ng Chong Khim, who held a senior position at ST Electronics. In 2015, the audit committee consisted of Chay and two other members: Khor Peng Soon and Chan Leng Wai.

Mak says external audits are not designed to detect fraud. “[External auditors] may find it particularly difficult to do so where there is collusive fraud involving senior management. However, there may be legitimate questions as to whether the external auditor should have uncovered this,” he says.

Mak is surprised that Tan has not been booted off the board and that Trek’s shares continue to trade. “I think the board, by deciding to keep him, is sending a poor signal of the low priority it places on tone at the top,” he says. He highlights that Neo Gim Kiong, an independent non-executive director, was not re-elected at the company’s AGM on April 24. Neo had a “difference in opinion with [a] certain board member over the process involving the RSM Corporate Advisory report”, according to an SGXNet filing.

On April 26, Singapore Exchange Regulation issued a notice of compliance to Trek. In it, SGX RegCo says it has “immediate and serious concerns about the suitability” of Tan to continue as a director and executive officer of the company and Foo as an executive officer. It also highlights the roles that Poo and Singh played.

SGX RegCo is therefore objecting to the appointments of Tan, Foo, Poo and Singh as directors and/or executive officers at any listed company for the next three years. Trek has also been asked to hold an EGM as soon as practicable on the continuing appointments of Tan and Foo. It wants Trek to appoint an independent professional to review internal controls and corporate governance practices. And it wants all of Trek’s board members to submit by May 4 a confirmation that procedures to safeguard Trek’s cash are adequate.

Round-tripping at Trek 2000 and how it was uncovered

Nov 27, 2007 — T-Data Systems (S) is incorporated; 100% owned by Loo Soo Hooi, wife of Poo Teng Pin. Poo was group director of R&D and executive director at Trek 2000 International from May 24, 2006 to July 12, 2016.

April 30, 2008 — Henn Tan, Trek chairman, CEO and executive director, becomes sole shareholder of S-Com Solutions (Hong Kong) Co. Interviews and reviews of documents conducted by RSM Corporate Advisory suggest that affairs at S-Com HK were handled by Trek employees.

May 31, 2011 — Trek Technology (Singapore) sells US$135,000 worth of merchandise to S-Com HK. On Jan 11, 2012, S-Com HK sells what may be the same batch of stocks to Trek Technology (HK) Co for US$400,000. Assuming the transaction is for the same batch of stocks, S-Com would have earned US$265,000, or a 196.3% profit margin. Four other similar transactions are recorded involving S-Com HK and various units of Trek. In total, S-Com appears to have earned US$266,214.38 from the transactions.

July 7, 2011 — S-Com System (S), a unit of Trek, makes a payment to Tan’s bank account. The payment is associated with an invoice for purchases made by Trek from Key Asic.

Sept 18, 2012 — Wayne Tan Joon Yong, Tan’s son, becomes owner of 80% of T-Data

Sept 30, 2013 — Trek Singapore sells US$18,000 worth of merchandise to T-Data. On Oct 14, T-Data sells what appears to be the same batch of stocks to Cloud Stringers (S), a unit of Trek, for US$20,250. Assuming the transaction is for the same batch of stocks, T-Data would have earned US$2,250, or a 12.5% profit margin. Three other similar transactions are recorded involving T-Data and various units of Trek. In total, T-Data appears to have earned US$4,699.20 from the transactions. Between Nov 12, 2012 and Nov 28, 2014, there were 287 sets of transactions conducted among Trek Singapore, T-Data and Trek Technology (Thailand) Co. T-Data appears to have earned US$1,701.31 from these transactions.

Oct 15, 2013 — Trek Singapore sells US$592,070.44 worth of components to Party B1. On Nov 14, it sells another US$558,824.13 worth of Toshiba NAND flash to the same party — for a total transaction value of US$1.15 million.

March 26, 2014 — Wayne transfers his 80% stake in T-Data to his cousin, Edwin Tan Chun Chieh

May 30, 2014 — Trek Singapore buys US$1.15 million of stocks from Party B1. RSM flags this as suspicious because the letterheads of the invoices issued by Party B1 carry the address of Trek HK’s office. Also, the transactions were booked, unusually for transactions with Party B1, as cash transactions. And Trek has no history of purchasing any stocks or goods from Party B1. Individuals interviewed by RSM claim to have no knowledge of the nature and composition of the stocks sold by Trek to Party B1 or those bought by Trek from Party B1. Trek is unable to contact Party B1. Similarly suspicious transactions are recorded with Parties B2 and B3.

Aug 1, 2014 — Winn Tan Joon Wei, Tan’s son, is employed as senior sales manager at T-Data with a monthly salary of $3,000

Jan 1, 2015 — Edwin is employed as sales executive at T-Data with a monthly salary of $2,000

Feb 1, 2015 — Lydia Tan Li Ping, Tan’s daughter, is employed as accounts executive at T-Data with a monthly salary of $2,000

March 24, 2015 — Shirley Tan Ai Ching, another cousin of Wayne’s, subscribes for new shares in T-Data, resulting in Loo’s shareholding being diluted to 0.2%

June 26, 2015 — Poo signs and confirms on an order requisition form for Unimicron Technology. The order is valued at US$3.2 million. The sale is later discovered to be to Colite Technology instead. Payment for the goods was made by S-Com HK and Tan. Trek Singapore later returned these funds to S-Com HK and Tan.

Feb 25, 2016 — Trek announces that its audit committee has found certain interested party transactions between Trek and T-Data dated from November 2007 to March 2014

March 18, 2016 — Shirley buys Loo’s shares in T-Data

April 26, 2016 — Trek announces that its independent auditors Ernst & Young have submitted a report to the Accounting and Corporate Regulatory Authority on matters that came to EY’s attention.

May 25, 2016 — Trek says its chief financial officer and executive director, Gurcharan Singh, is assisting the Commercial Affairs Department (CAD) of the Singapore Police Force

April 7, 2016 — Trek’s audit committee appoints TSMP Law Corp to review the transactions between T-Data and Trek

June 1, 2016 — Trek discloses that Poo, Tan and regional sales president, Foo Kok Wah, are assisting the CAD

June 8, 2016 — Trek appoints RSM as forensic accountants to review any interested party transactions

Sept 21, 2016 — EY says it is unable to obtain sufficient audit evidence to provide a basis for an audit opinion for FY2015 ended December

May 29, 2017 — EY issues another disclaimer of opinion, citing lack of audit evidence available

July 18, 2017 — RSM releases report on Trek’s interested party transactions. It is revealed that T-Data has transacted sales with Trek worth US$185.7 million; S-Com Solutions HK has transactions worth US$11.3 million.

Sept 8, 2017 — RSM identifies round-tripping interested party transactions between Trek and its subsidiaries.

April 23, 2018 — Trek releases 297-page forensic accountant’s report, with evidence that Tan and Singh were involved in suspicious transactions and round-tripping that caused overstatement of revenue, phantom sales and altering of invoices that aimed to increase Trek’s income. Trading halts but resumes later in the day. Trek holds AGM.