What our AI fraud detector says about this troubled Singapore seafood institution

Picture of Mark Jolley
Posted by Mark Jolley
  • Shares of No Signboard suspended since 2022
  • Transparently.AI’s AI engine ranked company in worst 2% of all APAC companies for account manipulation risk in 2019

Anyone familiar with SpongeBob SquarePants will understand the travails of the restaurant industry. 

It’s a tough game. Who couldn’t sympathize with poor Plankton. His restaurant, attractively named the Chum Bucket, has been failing for years but somehow manages to survive merciless competition from the Krusty Krab across the road. Doubtless this is due to some clever accounting techniques to manipulate earnings. After all, Plankton’s wife is a waterproof supercomputer. 

But Plankton needs to be careful because one day he might wake up and find that the Chum Bucket’s assets have almost completely disappeared and that his restaurant is insolvent. 

This is precisely what happened to a real-life restaurant group in Singapore, No Signboard Holdings Ltd. This institution has been around for more than 40 years and its signature white pepper crab is legendary. The company listed with fully paid up capital of S$100 million in 2017 but somehow saw its assets magically disappear between 2020 and 2022. The shares were suspended in January 2022. 

No Signboard's disappearing assets

What happened? Could this have been picked up earlier? 

The answer is yes, if anyone had looked closely enough, early enough. Our AI system saw the assets disappearing all the time: It ranked No Signboard in the worst 2% of all Asia Pac companies in 2019 for risk of account manipulation and potential failure.

Picture of a crab dish from No Signboard.

Regardless of the competitive advantage wrought by its secret recipes, the owners of the No Signboard restaurants are in financial trouble. Their auditors are certainly concerned, as the Straits Times reported recently. 

According to the newspaper, No Signboard Holdings lost S$4.7 million in the year ended September 30, 2022, with negative operating cash flow of S$982,000. In addition, the company missed payments and is insolvent to the tune of S$7.1 million on total assets of just S$3.8 million. In its 2020 numbers, the company had assets of S$23.8 million.

How can a company lose 84% of its assets in just two years and 96% in just five years? Part of the answer can be found in the Straits Times article, which states that in its 2022 financials, the auditor forced the company to take an impairment charge of S$1.4 million and S$807,564, respectively on its right-of-use assets and plant and equipment. After the impairment, these assets were valued at S$136,388 and S$438,177, respectively.

Hidden losses

Clearly the company had failed to write down impaired assets and failed to depreciate assets correctly. In all probability, this was the tip of the iceberg. 

A speculative explanation to the lost asset conundrum is simply that the No Signboard Holdings had been hiding losses for some time by utilizing a variety of techniques to artificially inflate its earnings. Many techniques that manipulate earnings invariably also inflate assets.

The difficulty is that actual assets deteriorate during this process and eventually a company runs out of runway to manipulate and must start reporting losses.

It is likely No Signboard ran out of runway in early 2019, which is when it reported its first quarterly loss, that being for the three months through March 2019. At the time, the company also restated its previously reported net profit of S$1,444,475 for Q1 2018 to a net loss of S$414,727. 

The company claimed that this was due to the application of the principles of Merger Accounting instead of Actual Group Accounting Principles following a reassessment of the Group’s accounting principles. Almost every single item in the company’s profit and loss statement was restated. Cost of raw materials and consumables rose a staggering 73%. Wages rose 43%.

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Exchange queries

A restatement of this magnitude is difficult to explain. The SGX issued several queries. The company said the discrepancy reflected a restructuring exercise involving the acquisition of a restaurant and beer business from its holding company. 

On 8 August 2019, No Signboard announced that it was closing its hawker-themed fast food (Hawker QSR) outlets due to unsustainable sales and continuing losses. It was only about a year prior when it announced the launch of its new fast food business.

The company saw its losses balloon in Q1 2020, citing the adoption of new accounting standards with respect to depreciation expenses as the reason. The net loss for the financial quarter ended 31 Dec, 2019 widened to S$1.21 million, from S$574,000 the year before 2019. 

When COVID-19 struck, the impact was so catastrophic that the company was no longer able to hide its crippling losses. 

On 29 April 2020, the company announced the findings of an independent review by Nexia TS, undertaken in response to SGX queries.

Flexible accounting standards

The findings concluded that the company changed from the use of Merger Accounting Principles, used in preparing the financial statements in its IPO offer document, to Actual Accounting Principles for Q1, Q2 and Q3 of FY2018 following its listing, and then moved back to Merger Accounting Principles when reporting its full-year financial results for the 2018 financial year. 

It did so without revising the previous corresponding financial quarters. This resulted in non-compliance with financial reporting standards for the relevant quarters.

It also resulted in “non-comparability of the financial statements and double-counting of the same financial information in two consecutive accounting periods due to a restructuring exercise undertaken in conjunction with its IPO.”

In response, SGX Regco said that it “will be reviewing the Nexia report very carefully for possible breaches of the listing rules.”

Manipulation Risk Analyzer

One might think that company would have cleaned up its accounting act when it reported its results for 2019. After all, the company was reporting big losses. What was there left to hide?

Plenty, according to our Manipulation Risk Analyzer, which gave the company a risk score of 84% for the year. This put it among the worst 2% of all Asia Pacific companies for accounting risk. 

Figure 1:  Excerpt of No Signboard’s risk assessment for 2019

Excerpt of an accounting risk report for No Signboard Holdings from 2019

Source: Transparently.AI

Our risk engine found grounds for “extreme care” with respect to income quality, smoothing activity, credit, corporate governance and cash quality. It found grounds for “high caution” with respect to valuation signals and asset quality. 

It would take pages to detail everything our system found wrong with this company. The most important issues were non-operating income, discontinued operations, long-term assets and intangibles. 

In other words, the system flagged that there were big problems with the company’s core operations and indicated there were likely significant problems with its assets. This is precisely the story that unfolded in 2020 and thereafter. 

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Disclaimer: Views presented in this blog are the author’s own opinion and do not constitute financial research or advice. Both the author and Transparently Pte Ltd do not have trading positions in the companies it expresses a view of. In no event should the author or Transparently Pte Ltd be liable for any direct or indirect trading losses caused by any information contained in these views. All expressions of opinion are subject to change without notice, and we do not undertake to update or supplement this report or any of the information contained herein.

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