Explanation from the Board of Directors
Asia Pacific (Group) CPA (Special General Partnership) issued a negative opinion internal control audit report for Kaired Holdings Co., Ltd. (hereinafter referred to as "the Company" or "Kaired") for the year 2019. According to the relevant regulations such as the "Stock Listing Rules," the Board of Directors provides the following explanation regarding the matters involved:
1. Basic Situation of the Matters Involved
The internal control audit report issued by Asia Pacific (Group) CPA (Special General Partnership) (Audit No. A 2020 0127) states: "Due to significant deficiencies and their impact on achieving control objectives, Kaired failed to maintain effective financial reporting internal controls in all material respects as of December 31, 2019, in accordance with the 'Basic Norms for Enterprise Internal Control' and related regulations."
(1) Significant Deficiencies in Internal Control Due to Previous Issues Not Rectified
The previous actual controller and chairman, Wu Lianmo, led issues related to asset sales, external investments, payments, external guarantees, and bill financing, which may involve fraud and have been missing since then. The China Securities Regulatory Commission (CSRC) conducted investigations in 2016 and 2017 for suspected information disclosure violations, resulting in the freezing of some bank and equity assets of Kaired, leading to uncertainty in its ability to continue operations, thus undermining the foundation for maintaining effective internal controls. Although Kaired has taken several measures, such as reporting responsible parties suspected of crimes to the police and protecting rights through negotiations and litigation, the significant deficiencies in internal control caused by historical issues remain unrectified.
(2) Failure in Execution of Accounts Receivable Impairment Testing Internal Control
Kaired's accounts receivable balance is 50,710,231.23 yuan, with a bad debt provision of 4,540,007.77 yuan; other receivables have a balance of 326,669,308.06 yuan, with a bad debt provision of 41,135,620.21 yuan. Kaired did not analyze the present value of expected future cash flows of receivables and did not recognize bad debt provisions based on the difference when the present value of expected future cash flows is below its book value. This significant deficiency affects the valuation of receivables in the financial statements and the related internal control over financial reporting.
(3) Significant Deficiencies in Execution of Internal Control for Equity Investment Management
In 2019, Kaired sold equity in seven companies. During the audit, Kaired failed to provide financial information for these seven transferred companies, preventing us from obtaining sufficient and appropriate audit evidence regarding their financial information. Additionally, in the 2019 semi-annual report, Kaired announced that its wholly-owned subsidiary, Beijing Yili Data Co., Ltd., was out of control. Through litigation and settlement, the company regained control of Beijing Yili Data Co., Ltd. in December 2019. The loss of control over the subsidiary indicates that Kaired failed to effectively execute the relevant internal control systems for investment management, resulting in significant deficiencies in managing investment activities and post-investment management.