Posted by: donmihaihai | May 8, 2010

CEO wants it, accountant does it and auditor bless it

Aussino posted Sales of $82 million and loss after tax of $3 million in FY2009 down from $95 million and profit after tax of $2 million in FY2008. Executive Chairman was relatively pleased with it comment started as

Dear Shareholders,

FY2009 saw the world faced one of its most challenging downturn that affected almost all business globally. Against this backdrop, I am pleased to report that our foresight in the previous financial year to consolidate our base and remain nimble, with the objective of sharpening our competitive edge amidst a changing retail landscape, has yielded a relatively soft landing for the Group amidst the turbulent environment as compared to many other businesses. For the financial year ended 30 June 2009, the Group registered sales of $81.6 million with loss before tax limited to $3.7 million.

What he did not point out was that the $3.7 million loss before tax was helped by having posted other income of $4.6 million under profit guarantee. This arises due to acquisition of 2 Australian subsidiaries where the previous owners will pay Aussino whatever the shortfall of profit by cash. Post acquisition, they were doing badly which is why Aussino has these “incomes”. Let leave the poor insight to acquire lousy businesses aside. After year ended, Aussino has commenced legal proceeding to demand the payment from previous owners. Nothing special here as the previous owner might think otherwise as these shortfalls may due to the downturn but whatever it is, what is in the sale agreement win. But on 7 May 2010, Aussino filed an announcement that previous owner has declared bankrupt.

The whole story is actually very simple. Poor business combined with downturn, add in bad acquisitions. Aussino was making huge losses. But they had a trump card which was the profit guarantee and Aussino used it even when legal action is required to beautify their Income statement. Can Aussino recognise the guarantee profit when they are having collection problem? Here it doesn’t matter what is right or wrong, or even accounting policy. What matter is “The CEO wants it, accountant does it and auditor blesses it.”

What happened in Aussino is not something special or one-off case. It is a minor one as the real impact is limited to beautifying the number as despite doing badly for last couple of years, Aussino financial position was actually quite strong at FY2009.

Let look at 2 potential cases.


EZRA posted revenues of US$329 million and PAT of US$70 million in FY2009. Revenues increased by 23% from US$268 million in FY2008 but the increased in trade receivables was 110% from US$87 million in FY2008 to US$183 million in FY2009. Using revenues of US$329 million, EZRA has receivables that are outstanding for 203 days which was more than 6 months. Anyone that work related to sales and collection or some ideas on this will understand how crazy is when your customers are taking at least 6 months to pay. But this was just the beginning for EZRA.

At Balance sheet date, of the US$183 million receivables, US$75 million belong to Deep water subsea services which were actually the total revenues generated from Deep water subsea services for FY2008 and FY2009. FY2008 revenues were US$29 million and FY2009 revenues were US$46 million. That mean US$29 million of receivables was outstanding for more than 1 year!! But EZRA has a trump card as well, because if their customer is unable to pay, EZRA has the right to a permit held by debtor for drilling activities. But does this trump card workable? At FY2009, I don’t think anyone really knows and these US$75 million of receivables had not been impaired or written off. Well “CEO wants it, accountant does it and auditor blesses it”.

6 months into FY2010, these receivables seem to be rotting on the balance sheet.

4Q2009 revenues – US$93 million, trade receivables – US$183 million

1Q2010 revenues – US$61 million, trade receivables – US$164 million

2Q2010 revenues – US$74 million, trade receivables – US$157 million

The situation is not improving despite the fact that receivables dropped by US$26 million. EZRA generated revenues of US$135 million for the past 6 months. Compared that with US$157 million of receivables mean their customers are still taking more than 6 months to pay. I can also safely conclude that US$75 million of receivables from Deep water subsea services is still outstanding and every single cent of the US$75 million has been outstanding for more than 1 year!!!

If these continue for another 6 months, will the auditor continue to give it blessing?

Raffles Education Corp

REC posted revenues of $202 million and PAT of $52 million. Revenues increased by 6% from $190 million but trade and other receivables jumped by 112% from $77 million to $162 million. Using receivables of $162 million, it means outstanding day stood at 282. But this was not the whole picture. Trade receivables were actually down from $24 million in FY2008 to $16 million. The increases came from Other receivables which jumped from $53 million to $146 million which include deposit, prepayment and recovery. But the most important item is receivables of $58 million from sales of land in OUC. REC had been selling land in OUC for every single quarter in FY2009. But not a single cent was collected in FY2009. Are they really being sold? I don’t know.

Fast forward, at 3Q2010 my answer is I doubt.

1Q2010 revenues – $52 million, trade and other receivables – $180 million

2Q2010 revenues – $47 million, trade and other receivables – $163 million

3Q2010 revenues – $45 million, trade and other receivables – $162 million

The trick for REC is that $58 million make up a smaller portion of total trade and other receivables. But like EZRA, the 1st sign is that REC generated revenues of $143 million for 9 months. $19 million lower than total trade and other receivables of $162 million. That means outstanding days actually increased. Is it possible that receivables for sale of OUC land collected while prepayment, deposit and recovery increased? Possible. But before the increased in FY2009, other components of other receivables actually did not add up much. Then why is it keep increasing? If it is the case, then I may be opening up another can of worms.

So in short, there are good reasons to believe that what was outstanding as at 30 Jun 2009 remind so at 31 Mar 2010. The same question pops up again. Will the auditor give it blessing in another 3 months time assuming that it is still outstanding then.

Rational actions

For EZRA and REC, if I am the CEO, the rational actions I would take is to continue, act blur, bid my time and wait it out.

Why should I rock my boat when US$75 million and $58 million will blow a hole in my balance sheet by putting spotlight on them? Banks will be after me like hell. The longer I held on, the better it is assuming that the rest of the businesses working doing fine. It is like inflation that keep inflating the B/S and keep hole look smaller as time pass by. But if the other businesses are doing badly, by there are still chances of raising capital with top quality PR.

But this kind of thinking is very dangerous. So beware.



  1. Very interesting about accounting loopholes. So observing revenue growth vs receivables growth should unveil Ezra and REC problems.

    But did Aussino states theirs as other income? Guess it will be hard to find out, except reading more details about sidenote and knowing of the potential problem?

  2. Not loopholes. Accounting has never cast in stone.

    Aussino FY2009 annual report has 104 pages. 50 pages for notes to financial statements. 50 pages for someone who want to look for facts is nothing.

    For any real reader of financial statements, it is not hard to find something is wrong just by reading Aussino P&L.

  3. adam foh,

    accounting loopholes? ezra problems? so many ppl have been pointing their long receivables as ‘problems’ for YEARS and i still can’t see how these ‘problems’ are affecting them at all. they survived thru the worst global financial crisis with these ‘problems’. their share price tripled with these ‘problems’. i think we r missing a great opportunity to make money while we r so concerned abt these ‘problems’. i wonder how long do i have to wait for ezra to ‘crumble’ with these ‘problems while the share price just keeps going up and up….

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