Red flags in Linear Corp’s special audit

KUALA LUMPUR: Results of a special audit on financially distressed Linear Corp Bhd showed that the company’s previously announced King Dome project was among one of the components of a scheme designed to inflate the group’s profits for 2007 and 2008.

The special audit report by PricewaterhouseCoopers (PwC) also pointed out that the Linear group’s financial statements from 1999 to 2008 may have been overstated.

“In respect to the financial years ended Dec 31, 1999 to Dec 31, 2007, Linear group’s inventories may have been overstated by about RM8 million on an annual basis,” stated the report. The RM8 million was tied to the sale of cooling tower spare parts that involved non-existent stocks.

It should be noted that only the executive summary portion of the report was made available on Bursa Malaysia’s website. Ultimately, PwC summarised, there had been breaches in Linear’s internal processes in relation not only to the King Dome project but also in the purported sale of solar panels and non-existent cooling tower spare parts.

According to PwC, if the aforementioned sales are stripped out, Linear’s audited revenue for FY07 would decline from RM158.2 million to RM41.6 million. It would also mean the company registering a loss before tax of RM12.9 million compared with a pre-tax profit of RM6.7 million.

It would be a similar story for FY08, where audited revenue would drop to RM17.8 million from RM52.7 million. Linear would be in the red to the tune of RM3 million compared with its stated pre-tax profit of RM4.9 million.

Linear was thrust into the limelight in December 2009 when it announced that its subsidiary LCI Global had received a letter of award (LoA) from Seychelles-based Global Investment Group Inc for the design, construction, completion and commissioning of a 350,000 RT (refrigerated tonnes) district cooling plant in Manjung, Perak, for the King Dome project.

Eyebrows were raised over the project’s RM1.67 billion price tag, which some had questioned as being extremely high for a cooling system.

It was then announced that the project had been moved to Johor, but PwC said it had not been able to find evidence to support the existence of the project.

Linear’s troubles have been well documented in the press. The company had to pay out its entire cash hoard of RM36 million, twice without board approval, in order to secure the project.

But the cracks had already started to show even before the King Dome project came on the scene. In late September 2009, Linear was served a writ of summons by EON Bank Bhd for non-payment of interest of RM133,000 on an overdraft facility taken by subsidiary LCI Global Sdn Bhd.

Then in December the same year, Linear was served another writ of summons by RHB Bank Bhd for a RM2 million banking facility taken out by 70%-owned subsidiary BAC Cooling Technology Sdn Bhd.

Based on the truncated portions of the report made available on Bursa Malaysia, PwC named an individual “Alan” as one of the key individuals behind the troubles at Linear. Although his full name is not given, the Alan in question may be Linear’s former director Alan Rajendram Jeya Rajendram.

On June 21, 2010, Linear announced it had received a statutory declaration and letter of indemnity dated June 17 from Rajendram in which he endeavoured to “deliver the project” or “indemnify” the company in the event of losses.

Rajendram was charged by the Securities Commission on June 24 last year, ironically not for the saga at Linear, but for alleged securities fraud and eight other offences at LFE Corp Bhd, another public listed company in which he was a director.