Ernst & Young finds irregularities in Blue Diamonds Rights Issue
View(s):Ernst & Young has released a report to the Securities and Exchange Commission (SEC) of Sri Lanka on the use of proceeds collected from the rights issue of Blue Diamonds Jewellery Worldwide PLC from January to September 2015 after complaints received from shareholders and investors. The SEC appointed Ernst & Young as a special purpose auditor in accordance with the SEC Act No.36 of 1987 to conduct a special purpose audit to assist the SEC in examining documents and other evidence produced. According to the report, out of the net rights issue proceeds of Rs.165,239,027, an amount of Rs.930,000 was paid as stamp duty at the point of issuance of shares.
The company invested Rs.30 million of the rights issue proceeds in a repurchase agreement in Seylan Bank PLC. The company has earned interest amounting to Rs.2.365 million from investing the rights issue proceeds in repurchase agreements during the period. However, Ernst & Young stated that Rs.41.8 million considered to relevant to the rights issue objectives by the management was unacceptable to them including expenses amounting to Rs.4.04 million on perusal of supporting documents was also not accepted due to the following reasons. A design centre and research and development unit was established at a cost of Rs.570,851.
This mainly included overhead costs of running an office in Colombo. The management produced some designs that were produced as a result of operating the centre. Further, management produced evidence of the increased number of designs now sold to SriLankan Airlines as a result of this centre. However, there was no conclusive evidence to support that these costs relate only to the design centre and does not relate to other functions such as finance. A further Rs.2.463 million was spent travelling to various destinations. Ernst & Young noted that no new retailers or customers were obtained through these repeated visits.In situations where the company stated they are currently negotiating with such customers and negotiations failed after a certain development, there was no evidence to support meetings with new customers and negotiations.
The report stated that Rs.384,426 was spent for salaries of marketing staff involved in day-to-day operations of the company. It had also spent Rs.623,825 to print catalogues and visiting cards. Ernst & Young stated that they were unable to ascertain if those were used for marketing since the majority of it was still available at the company premises. Expenses amounting to Rs.11.882 million were not accepted by Ernst & Young as no proper supporting documents were available, only photocopies and other forms of evidence such as internal memos and email correspondence.
This included inventory items amounting to Rs.7.369 million for which the goods receipt issued at the factory and the bin card maintained at the factory were checked. Furthermore, a balance amounting to Rs.25.934 million was not accepted as no conclusive supporting documents were made available. The report also stated Ernst & Young was unable to relate expenses amounting to Rs.89.074 million to the rights issue objective. The amount was spent for several recurring activities of the company for operational activities but not in relation to the rights issue objectives. -(NG)