FRC probably investigating Esprit
20 September 2015
Update 2, 26-Sep-2015
On Friday (18-Sep-2015), the HK Government announced that the Chief Executive has appointed Nicholas Robert Sallnow-Smith (Mr Sallnow-Smith) as acting Chairman of the Financial Reporting Council (FRC) from this Monday until the end of November, in the event that the incumbent Chairman, John Poon Cho Ming (Mr Poon), "is not able to perform the functions of his office as Chairman as a result of his disclosure of interests".
Mr Sallnow-Smith has been a regular member of the FRC since 1-Dec-2012, so his first term expires at the end of November but will probably be renewed.
This standby role is a highly unusual step and would only be necessary if Mr Poon had a conflict of interests due to an "investigation" by the Audit Investigation Board (AIB) into possible auditing and reporting regularities in a HK-listed entitiy, or an "enquiry" by the Financial Reporting Review Committee (FRRC) into possible non-compliance with accounting requirements by a listed entity. Both committees sit under the FRC.
Looking at Webb-site Who's Who, which covers all directors of listed entities since 1990, the only listed entity with which Mr Poon has been associated in the last 16 years is Esprit Holdings Ltd (Esprit, 0330), of which he was Deputy Chairman and Finance Director until 20-Jul-2008. So it seems highly likely that an investigation is underway into the accounts of Esprit. Once a market darling, the retailer is now very much out of fashion, having topped out with the market on 30-Oct-2007 with a market capitalisation of HK$161bn. Since then, the total return is -92.12%, compared with -8.85% on the Tracker Fund of HK.
Under Schedule 2, para 6(4) of the FRC Ordinance, the quorum for a meeting of the FRC is 2/3 of its members. There are currently 11 members (including the CEO of the FRC and the Registrar of Companies), so at least 8 must be present. Obviously anyone with a conflict of interests cannot attend, so if Mr Poon is conflicted, then they need 8 out of 10. But it is worse than that, because two other members would have a potential conflict if the FRC was discussing Esprit:
- Chew Fook Aun (Mr Chew) was Finance Director of Esprit from 1-Feb-2009 to 1-Jun-2012. It's a small world, because before joining Esprit, until 16-Jan-2009 Mr Chew was the Finance Director of Link Asset Management Limited, the manager of Link REIT (0823), of which Mr Sallnow-Smith has been INED and Chairman since 1-Apr-2007.
- Wong Kai Man (Mr Wong), was an audit partner of PricewaterhouseCoopers until mid-2005, and PwC has been auditor of Esprit since 1995. If the FRC is investigating Esprit, we don't know how far back the investigation of its audit or accounts may go.
With Mr Poon, Mr Chew and Mr Wong potentially conflicted out, that would reduce the FRC quorum to 8 out of 8, so it would only take one member to be unavailable and the FRC would have no quorum and could not make decisions on matters of Esprit. That's probably why the Government has also appointed two "temporary members" from Monday until 30-Nov-2017, to "serve on a rotating basis in the event that the FRC is not able to meet the statutory quorum for a meeting in which any of the appointed members cannot perform the functions of his office as member as a result of his disclosure of interests."
The temporary members are Vincent Duhamel and Wong Tak Jun, Dean of the business school and a Chair Professor of accounting at CUHK. Prof Wong should know accounting problems when he sees them, having served as an INED and Audit Committee Chairman of the doomed China Forestry Holdings Co Ltd (0930) from its 2008 IPO. That stock was suspended on 26-Jan-2011 with a market value of HK$9.03bn and the company is now in liquidation after a second set of books were found at its main subsidiary. He stepped down as Chairman of the audit committee on 5-Jul-2011 and resigned as director on 1-Aug-2012.
This evening Esprit has announced that it has not been notified by, or received any communication from, the FRC relating to any investigation of the Company by the FRC.
Comment: it would be helpful if the FRC would make an announcement too explaining exactly what conflict of interests Mr Poon has. In order for a formal investigation by the AIB or an enquiry by the FRRC to be initiated, the Council of the FRC must make a decision under Section 23 or Section 40 of the FRC Ordinance respectively. It can only make a decision if it has a quorum. Therefore it is entirely possible that a listed company would be unaware of a pending investigation until after such a decision is made. Matters concerning listed company accounts are often referred to the executive staff of the FRC by the Stock Exchange or SFC, at which point the FRC staff would need to gather information and present it to the Council for a decision on whether to launch an investigation or enquiry.
We have just found on the FRC web site (which has no visible mailing list subscription system) a press release dated 22-Sep-2015 responding to "recent market speculations and news reporting". The FRC does not specify what conflict Mr Poon has, but refers to Section 53 of the FRC Ordinance regarding conflicts of interest, which it describe as "very broad, and covers even very remote conflicts, for example being a client or former client of an accounting firm".
Perhaps Mr Poon has a private company with an auditor and that auditor is under investigation in relation to another listed company. On further analysis, the entity under investigation can't be PwC, given that PwC also audits Link REIT, of which Mr Sallnow-Smith is Chairman, otherwise he would have a conflict too.
The FRC also says that "similar appointments have been made before - in January 2014." The press releases page of the FRC web site has nothing on those appointments, but we have checked the Government Information Services Department web site and find this press release dated 30-Jan-2014 in which Mr Sallnow-Smith was appointed acting Chairman for 11 months from 31-Jan-2014 to 14-Dec-2014, which coincides with the end of Mr Poon's then-current term. At that time the Government also appointed 3 temporary members from 31-Jan-2014 to 30-Nov-2015. So it appears that there are currently 5 temporary members, of which 3 appointments expire at the end of November.
© Webb-site.com, 2015
Organisations in this story
- CHINA FORESTRY HOLDINGS CO., LTD.
- ESPRIT HOLDINGS LIMITED (BM)
- FINANCIAL REPORTING COUNCIL
- Link Asset Management Limited (HK)
- Link Real Estate Investment Trust
People in this story
- Chew, Fook Aun
- Duhamel, Vincent
- Poon, John Cho Ming
- Sallnow-Smith, Nicholas Robert
- Wong, Kai Man (1950)
- Wong, Tak Jun