Director B: Let’s convene a meeting to discuss potential audit issues. We need to take action now to:

• Ascertain the Listing Rule and legal implications of the transfers and the loans. For example, do we need to consult professional advisers, and take steps to procure the issuer’s Rule compliance as soon as practicable, including announcing the transactions? 
• Arrange an investigation into the transfers and the loans, including ascertaining how they had happened. 
• Arrange for a review of the issuer’s internal controls, to ascertain why the transfers and the loans had taken place without the knowledge and approval of the other Board members and why they had not been detected until the audit. 
• Take steps to recover the transfers and the loans, including, where appropriate, bringing legal action, reporting the matters to the police and/or suspending the duties of the ED and the CFO. 
• Ensure that the internal control reviewers’ recommendations on improving the internal controls are implemented properly and in a timely manner.

Director C: There is no need to look into the FY1 and FY2 financial reporting delay.  The annual results were only a few days late which did not impact the market.

In terms of the audit committee work, let’s wait for the draft results from the issuer’s management or its auditors. They should have highlighted and addressed the issues by the time we need to approve the results.

The executive directors will sort any potential audit issues out. Let’s wait for them for updates.

Director A: We must press the executive directors to provide all Board members with monthly updates which give a balanced and understandable assessment of the issuer’s performance, position and prospects in sufficient detail to enable the Board as a whole and each director to discharge their duties. 

We must be proactive and ask for monthly updates from the issuer, review them carefully, and raise any questions which we may have.

Director B: I have made requests for monthly management updates to the company secretary but have received nothing to date. I will make requests to the Board chairman and the executive directors in writing, so that there will be a written record of my requests. I will also raise the matter for discussion at the coming Board meeting.

Director C: This arrangement is absolutely fine – it weeds out unnecessary information which does not require our review and therefore saves our time. The executive management would let us know if problems arise and/or our input is required.

Director A: I don’t think we should rely on the executive directors and the CFO, and we should review the accounts in detail to see
if there are any issues which need to be raised for discussion. 

What is the commercial rationale for the circular payments involving the same amount and counterparty within two days? 

What are the reasons for the significant increase in the amount of receivables? 

We should ask for more information from the executive directors, including the purpose and/or nature of the payments and receivables.

Director B: We should also consider whether there are any Listing Rule implications and if so, we should take steps to procure the issuer’s Rule compliance. If in doubt, we should insist that professional advice is obtained, and arrange for management to share the advice with us and update us on the steps taken to procure Rule compliance.

Director A: I knew I would not be available to attend the meeting but I reviewed the draft report in detail before the meeting. The report mentioned certain disposals of subsidiaries but I was never informed about them. I have circulated my comments to the Board before the meeting, and have asked for more information regarding the disposals – including the reasons for and commercial rationale of the disposals; why we were not previously told about them; whether there are any Listing Rule implications and, if so, what steps are being taken to re-comply with the Rules. 

I also asked why the internal controls have not been able to identify and detect any failings; and what are the steps taken to improve the internal controls so that such failings do not happen again. I will also read the draft and final version of the minutes of the meeting to fully understand what has happened, and to see whether there are any matters which require follow-up.

Director B: I have the same issues which Director A raised. I attended the meeting and have raised them for discussion with the Board. The issuer did not comply with the Listing Rules for the disposals, and there were internal control deficiencies – steps will now be taken to address these matters. To ensure that we can properly follow up on these matters, we have established a reporting mechanism in respect of the implementation of the remedial measures. I will also make sure that the issues I raised are fully recorded in the meeting minutes.

Director A:

• We need to carry out appropriate due diligence, and make due enquiries, on the Target and relevant parties to the transaction.
• We need to take steps to verify the documents and the accuracy / reasonableness of the information provided by the vendor and raise questions.
• We need to critically assess the valuation, including the reasonableness of the assumptions adopted. In addition, we should consider seeking professional advice on the merits of the proposed acquisition and any legal implications (e.g. extension of the licence and other licensing requirements).

Director B:

• We should critically assess the proposed business plan of the Target and the benefits of the acquisition.
• We must consider the reasonableness and adequacy of all the terms of the proposed acquisition, including the financial capability of Mr X to fulfil his obligation under the profit guarantee.
• Have we considered the Listing Rule implications? We must set up mechanisms to ensure that the Listing Rules are complied with. Now that the acquisition has been approved, we need to set up a reporting mechanism to ensure that the business and operations of the Target are reported to us on a regular basis. We should also review the internal controls to ensure that they take into account the new business.

• We already have the company registration documents for the Target. Let’s not waste further money on due diligence.
• The vendor has given us lots of materials about this acquisition. Let’s rely on them.
• The valuer is reputable, and we can safely rely on its valuation. I don’t have any expertise in this new business.
• The business forecast looks profitable. What a great deal! Let’s proceed anyway.
• Let’s sign the papers now. Don’t worry – we have a profit guarantee to fall back on.
• The company secretary will take care of the Listing Rule requirements. Let’s just focus on the business aspects of the acquisition.
• We have approved the acquisition. The staff will take care of the rest. No doubt, they will let us know if there are any issues requiring our attention.

• If these transactions were executed by an executive director without the knowledge of the rest of the Board, we need to investigate how this was possible under the internal controls and applicable policies. A proper independent internal investigation may have to be conducted.
• While investigations are ongoing, we may have to place a temporary hold with the relevant departments to avoid further similar transactions being executed.
• Subject to the outcome of the investigation, we will have to consider whether the internal control systems with respect to the granting, monitoring, and recovery of loans and prepayments are adequate and effective.     
• We should obtain all necessary financial information, including monthly management accounts and reports, in order to understand the impact of the loans on the issuer's performance.

For more information on red flags in loans and lending activities, please see the Enforcement Bulletin (April 2024).

Director C:

• We have obtained sufficient explanations from the executive director. The executive director is in charge of the day-to-day business and would know best if a new business opportunity arises or any of the suppliers would need a prepayment.
• It is not a red flag that most of these loans are overdue – it is common practice that counterparties pay late and the executive director has ensured us the issuer will be repaid in full at some point. 
• INEDs are not responsible for chasing repayment of loans – this is the responsibility of the  management and the finance department.
• We do not need to look at our internal controls – they have worked fine so far and, in any event, the issuer does not conduct a loan business.