Market Turnover


What to do, if…

The following real-life case studies are designed to offer practical guidance on what is expected from INEDs in different situations. 

Case Study Topic
 Case 1
Issues flagged in financial reporting
 Case 2
Insufficient information provided
 Case 3
Suspicious transactions or other red flags
 Case 4 Undisclosed transactions in financial reporting
 Case 5 Red flags in acquisitions of new businesses
 Case 6 Unauthorised loans


While these case studies are presented from an INED perspective, the tips provided are also relevant for other directors.   

For more information on the duties of INEDs please consider: INEDs' Duties in Practice. For an overview of recent enforcement actions taken by the Exchange’s Enforcement team against issuers and directors (including INEDs), please consider the Exchange’s list of Disciplinary Sanctions.


Case Study 1

Auditors flag issues with potential implications for financial reporting 

Fact scenario: The issuer had been late for a few days in publishing its annual results for two consecutive financial years (FY1 and FY2). It started preparing its annual results for FY3 in mid-December. 

The issuer’s financial year ends on 31 December. During the audit of the issuer’s financial statements for FY3, the issuer’s auditors discovered that one of the executive directors (ED) and the CFO had transferred significant sums of the issuer’s cash into their own bank accounts and caused the issuer to make significant loans to the ED’s wife which were repayable on demand and interest free. The transfers and loans were made without the Board’s approval or anyone else’s knowledge and they were not properly documented or recorded in the issuer’s books and records. The issuer’s auditors reported these matters to the Board.

What should the INEDs / Directors do?

Case Study 2

INEDs do not receive sufficient information – how to keep appraised of issuer's affairs?

Fact scenario: The issuer’s monthly management accounts are only circulated to the executive directors. 
The non-executive directors and INEDs do not receive any monthly updates. They only receive information when they are asked to attend Board meetings for reviewing and approving transactions and/or financial results.

What should the INEDs / Directors do?


Case Study 3

Suspicious transactions / other red flags

Fact scenario: The issuer’s monthly management accounts for July showed circular payments involving receipt of a significant sum from one of the controlling shareholder companies on 30 June, and the return of the same amount to the same controlling shareholder company on 1 July (i.e. just one day later – either side of the issuer’s end of year financial reporting period). In addition, the management accounts show that the amount of receivables as at the end of July are significantly higher than as at end of June.

What should the INEDs / Directors do?

Case Study 4

Undisclosed transactions in financial reporting

Fact scenario: The draft annual report of the issuer for the financial year ended 31 December 2021, which was presented at the Board meeting for consideration and approval, recorded disposals of the issuer's subsidiaries at nil or minimal consideration during the year.

What should the INEDs / Directors do?

Case Study 5

Red flags in acquisitions of new businesses
Fact scenario: The issuer principally manufactures and sells clothing and shoes. It intends to acquire a target company (Target) which is engaged in the manufacture and sales of Product A (totally unrelated to clothing and shoes) in Country Y. The government of Country Y has granted a licence to the Target to manufacture and sell Product A for five years. The Target has no track record and has not commenced business. None of the issuer’s directors have experience in the Product A business or the laws of Country Y. 

The proposed consideration for the acquisition is $200 million, being 75% of the issuer’s market capitalisation. The valuation of the Target is based on, amongst others, the following assumptions: (a) the business of manufacturing and selling Product A can last for ten years; (b) the estimated sales volume for the first year would be 3 million units; and (c) the sales volume would increase 100% per year for the second and third years. The sole director and shareholder of the Target (Mr X) will provide a profit guarantee (twice the amount of the difference in the profit amount per year). 

Professional advisers including a valuer, an accountant, a financial adviser and lawyers, advise on the proposed acquisition (but do not advise on its merits). All the documents and information in respect of the Target and its business are provided by the vendor.

What should the INEDs do to demonstrate exercise of due care, skill and diligence regarding the acquisition?

Case Study 6

Unauthorised low-interest loans

Fact scenario: During the audit of the annual results, the issuer’s auditors draw the attention of the INEDs to several transactions recorded in the financial records.  These transactions are described as advances and prepayments on the financial records and involve large payments being made from the issuer’s accounts to various third parties.  None of these transactions have previously been approved by the Board.

The very limited supporting documents that the auditors were able to identify suggest these transactions are similar to low-interest loans.  The interest rate of these transactions is lower than the issuer’s cost of financing.  The supporting documents do not include any evidence that due diligence or credit assessment of the counterparties was conducted.  The auditors looked at the identity of the counterparties and noted that they may be related to one of the executive directors. Minimal repayments were made on one of the loans, while the principal and interest for all other transactions remain outstanding, even though most of them are already past the contractually agreed due date.  

When the relevant executive director involved in the transactions was asked about them, he explained that for the payments described as advances in the financial records, the issuer had made use of idle cash to generate interest income. For the payments described as prepayments, the executive director explained these were necessary to secure production capacity at a new supplier despite no other director being aware of such new supplier and no orders for production having subsequently been placed with that new supplier.

What should the INEDs do to demonstrate their exercise of due care, skill, and diligence regarding the low interest loans?

Our Guidance Materials

The Exchange has developed training and published comprehensive guidance materials on a variety of topics relevant to INEDs. External resources provide additional guidance.

Publications and Training
External Resources