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Friday, Mar 05, 2021

Convoy’s auditor is under regulatory spotlight in Enigma crackdown

Convoy’s auditor is under regulatory spotlight in Enigma crackdown

The FRC’s unprecedented move, its first announcement of such an inquiry since its establishment in 2006, underscores the resolve by Hong Kong’s regulators in cleaning up corporate malfeasance and financial fraud in Asia’s second-largest capital market.

The Financial Reporting Council (FRC), Hong Kong’s top accounting regulator, said it has begun an investigation into the financial statements of Convoy Global Holdings, and singled out its auditor for failing to raise the red flag on the financial advisory firm’s state of accounts.

Convoy, which released its results for 2017 through 2019 on February 18 to fulfil its obligation to resume trading on the Hong Kong stock exchange, should have its accounts put under scrutiny “without delay” because of “the potential implications of the form of the audit opinions [on] Convoy’s listing status,” according to a statement by the FRC.

Zhonghui Anda CPA, which qualified each of Convoy’s three financial statements with multiple exceptions, failed to convey the risks in the results of the largest adviser to Hong Kong’s Mandatory Provident Fund, the regulator said, adding that the auditor would also become the subject of an investigation. Calls to Zhonghui’s office in Causeway Bay went unanswered.

“An auditor is not permitted to qualify the audit opinion if the unknown effects of such exceptions could be both material and pervasive,” the FRC said, adding that the auditor should have withdrawn from the audit, or added disclaimers in its assessment. “This is because a qualification would be inadequate to communicate the gravity of the situation in those circumstances.”

The FRC’s unprecedented move, its first announcement of such an inquiry since its establishment in 2006, underscores the resolve by Hong Kong’s regulators in cleaning up corporate malfeasance and financial fraud in Asia’s second-largest capital market. Billions of dollars of capital unleashed
by global central banks to help the world economy weather the coronavirus pandemic have flooded Hong Kong’s equity, real estate and money markets in recent months, keeping regulators on edge.

Convoy, which provides financial advice to more than 100,000 pension holders in the city’s retirement savings scheme, is the litmus test of Hong Kong’s regulatory ruggedness and probity. The firm, which last week reported a combined loss of HK$2.6 billion (US$335 million) over three years, was at the centre of a financial scam.

“We believe the auditor will fully co-operate with the regulator,” said a Convoy spokesman.

The city’s Securities and Futures Commission (SFC) and the Independent Commission Against Corruption (ICAC) charged a former Convoy director and two of his associates with conspiracy to defraud HK$89 million from the company. The trio were acquitted of all charges last November, a verdict which the ICAC is filing an appeal against.

Trading of Convoy’s shares has been suspended since December 2017 as the ICAC and SFC began their investigations. Hong Kong’s stock exchange announced last May that it would expel Convoy’s shares, a decision which the company appealed against. The release of Convoy’s financial results was a crucial condition for the company’s shares to resume trading.

Convoy reported a 2017 loss of HK$1.44 billion, narrowing to a HK$617.8 million deficit in 2018, followed by a HK$540.4 million loss in 2019.

Zhonghui Anda, which failed to raise the red flag on Convoy’s financial statements, will be the subject of an inquiry, FRC said. Convoy is part of the so-called Enigma Network, a cluster of interrelated, publicly traded companies that use layers of overlapping shareholdings to disguise their true owners, according to shareholder activist David Webb. It is also the subject of a number of legal proceedings claiming conspiracy to defraud, in relation to transactions involving Convoy, the FRC said.

Hong Kong’s regulators had tried for many years to bring down the Enigma Network amid widespread suspicions of fraud, market manipulation and corporate misconduct in transactions among the companies involved.

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