Special auditors (KPMG) were initially engaged to review transactions of Daka Designs Ltd (DDL) and its subsidiaries, and its investee companies, Daka Manufacturing Limited (DML) and its parent, Daka Industrial Limited (DIL). The trigger was a profit warning issued shortly after its listing on the SGX. Serious irregularities were discovered in the financial management of the Group’s operations. These were:
- Non-consolidation of investment, DML, that was in substance controlled by the Group
- Non-disclosure of the Group’s plan to acquire DML in its IPO Prospectus. As a result of not consolidating the substantial losses of HK$19.2m incurred by DML for period ended 31 March 2004, the Group’s results were overstated.
- Significant fictitious sales transactions with 2 major customers to overstate revenue. As a result, its financial results for the intended IPO was overstated. Daka had been trying to boost profits by recording sales prior to goods being delivered as well as generating fictitious sales as early as 2002. Undelivered goods were also shifted away from the factory to avoid being accounted for in their stock. As a result, HK$12 million revenue was recorded for Daka in the final month of 2004, despite only earning HK$8 million in the first 11 months.
There was also non-disclosure of nominee shareholding, non-disclosure of loans to executive directors, and non-disclosure of acquisition of new subsidiaries. The repayment of outstanding loan owning by DIL to Group was by way of accounting adjustments and funds originating from the Group. The IPO proceeds were not used in purposes as stated in Prospectus. Daka design’s shares were suspended in January 2006. The company was sold, renamed but then delisted.
DAKA Designs: Circular to Shareholders, 14 Mar 2007
ISCA: Local Case 9
DAKA Designs: Annual Report,14 Jul 2005