The release of MEMS Technology Bhd's delayed FY2007 annual report may have put to rest the uncertainty regarding its accounting issues. But the company's accounting woes have yet to be fully resolved.
For one, external auditor KPMG has qualified the accounts as a result of certain transactions in its books. Then, there is also an ongoing investigation by the Securities Commission because of its accounting issues.
To be fair to MEMS, KPMG says MEMS' accounts are "not subject to any other qualifications" apart from the several points it made pertaining to MEMS' wholly-owned subsidiary SenzPak (M) Sdn Bhd. KPMG will not be seeking reappointment at the company's AGM.
MEMS has proposed, instead, to appoint Atarek Kamil Ibrahim & Co as its external auditor at the AGM scheduled for May 30. Incidentally, Atarek was tasked to undertake a special audit on the company's accounts during the turn of events last year. It had done so and presented its findings to KPMG.
Some investors appear to have faith in MEMS' prospects, notwithstanding its accounts being qualified. Following a nine-week suspension of its shares for failing to submit its annual report on time, MEMS shares rose two sen, or 13.8%, to 16.5 sen on May 6, when it was requoted.
MEMS had hogged the limelight last year when it was unable to issue its audited financial statements for the year ended July 31, 2007, on time as its external auditors had "expressed concerns" over certain transactions relating to its revenue, as well as some of its assets.
On April 29, MEMS reported a variation of RM8.36 million in its audited net profit for FY2007 to RM13.11 million after reversing transactions that their external auditors had objected to.
The company also posted its first and second quarter results for the current year, which showed higher revenue, although its earnings were affected by a weaker US dollar.
MEMS explains that the deviation of its results in FY2007 was due to the reversal of transactions after it decided not to recognise revenue of RM19.72 million. The company also incurred operating expenses of RM11.7 million, in addition to the impairment of intangible assets amounting to RM345,000.
According to notes to its accounts, MEMS had entered into a business arrangement with a company, which then secured two contracts for the assembly of opto-sensors from two multinationals for MEMS' wholly-owned subsidiary SenzPak.
The said company guaranteed SenzPak a fixed minimum profit margin in return for a certain portion of revenue of new business that MEMS might obtain from one of the multinational companies, and a portion of sales of certain products that will be produced by SenzPak's planned manufacturing facility in Penang.
According to MEMS, SenzPak had initially recorded such sales as revenue, but after KPMG raised concerns regarding the transactions, it decided not to recognise the revenue. The reversal resulted in a net amount of RM6.43 million being owed to the said company.
The external auditors say they were unable to verify the authenticity of the revenue in question as they were unable to perform audit procedures to satisfy themselves as to the identity of the payers for the sales to the two multinational companies.
KPMG adds that while MEMS stated on Nov 27, 2007, that it would not recognise the revenue from the sales transactions between SenzPak and the multinational companies, and had reversed all the related entries, the auditors found that the alleged business arrangement was only formally rescinded on Feb 11 this year.
SenzPak had purchased machinery worth RM2.05 million from the said company, which was delivered during the year. There were also other transactions which resulted in RM4.06 million due to the said company as at July 31, 2007 .
With regards to MEMS' trade receivables, the company had included trade receivables amounting to RM5.14 million owed by an offshore company, whereas sales made to this offshore company was RM13 million.
However, the auditors were unable to satisfy itself as to the existence and, consequently, the ownership of the offshore company, adding that the deliveries made to this offshore company were to a non-existent address.
However, according to note 8 to its accounts, MEMS says an independent director of MEMS and special auditors appointed by an independent committee had "visited the customer in China to confirm the existence of its operations."
While it appears that there are accounting problems at MEMS, shareholders may agree that this may be the best outcome given the uncertainties that continue to trouble the company.
Still, by issuing the annual report so that it escapes the possibility of being delisted may only serve as a temporary measure to resolving its accounting issues. Unless the accounting problems are clearly resolved, investors will be deterred from investing in the company.