1.1 Audit findings and opinions
1.1.1 Project of the Torch International Conference Center
In October 2016, Parafuturo de Macau Investment and Development Limited (hereinafter referred to as “Parafuturo de Macau”) recommended to purchase the Zhongshan Torch International Conference Center (hereinafter referred to as “the Center”) for building the Guangdong-Macao Youth Innovation Entrepreneurship Base, the headquarter of Parafuturo de Macau in Zhongshan, the training and exchange center for young entrepreneurs from Mainland China, Taiwan, Hong Kong and Macao, the product distribution center for Portuguese-speaking countries and the exhibition center for Macao’s distinctive products. Even though it was aware that the conditions for the sale of the Center were not satisfied without the property ownership certificate, it still propose to buy the Center based on the fact that the Center could put into operation immediately and the property owner repeatedly stated that he would collaborate with it during the procedure for property rights. Therefore, Parafuturo de Macau did not fully consider the timeliness and cost-effectiveness of other options, and the option it chose was full of uncertainty because of the lack of property ownership certificate.
In order to start the aforementioned projects in Zhongshan as early as possible, Parafuturo de Macau adopted the strategy of “rent before buy” and officially signed a 18-year lease contract with the property owner (including a one-year rental exemption period) to rent the four-storey Center in July 2018, without conducting due diligence to ensure the possibility of the use of the Center and its legal consequences. After that, due to the lack of the property ownership certificate of the Center, Parafuturo de Macau did not utilize the first to third floors of the Center to start its business as originally planned and only renovated the first floor for trial operation; regarding the second and the third floor, it intended to rent to third parties.
However, without the property ownership certificate, Parafuturo de Macau not only failed to rent the second and the third floor to third parties, but also was unable to conduct the fire safety inspection and acceptance procedure for the first floor that was put into trial operation after the completion of the renovation works. Under this circumstance, the insurer can reject claims for fire or other related accidents on the ground of lack of the fire safety inspection, and more serious situation is that if fire or related serious accident occurs in the place where fire safety inspection is not conducted, managers and other persons directly responsible for the property may be subject to criminal liability according to the law.
In view of the prolonged delay in solving the problem of property ownership certificate, Parafuturo de Macau asked the property owner to change the clauses of the lease contract, namely shortening the contract period to one year, extending the rental exemption period and reducing the leased area to only the first floor.
1.1.2 Participation in the share capital of a financial institution
In mid-2017, Parafuturo de Macau invested 18 million patacas to become one of the shareholder of a financial institution, holding 15% of the shares. To this end, the Executive Committee of Parafuturo de Macau submitted an investment proposal to the Board of Directors for the aforementioned project, indicating the expected results and benefits of the project, and it was approved by the Board of Directors. Subsequently, Parafuturo de Macau directly reported the resolution of the Board of Directors to the SAR Government. Before making this important investment decision, Parafuturo de Macau neither conducted thorough and holistic analyses of its own conditions and the external situation, nor did a comprehensive due diligence on this new project in Macao. Besides, when the management submitted the proposal, it also failed to clearly explain the crucial factors that would influence the decision-making to the Board of Directors, such as the advantages and disadvantages of the project, the risks and the prerequisites.
In October 2019, the financial institution notified Parafuturo de Macau that it had received a letter from the Monetary and Foreign Exchange Authority of Macao requiring an increase in capital. According to the proposal for expanding share capital, the capital was increased in proportion to the shares held by the shareholders due to the requirements of Macao’s financial regulation, the current status and difficulties in the operation of institution as well as the planning for future development, so Parafuturo de Macau had to invest another 30 million patacas in accordance with the shares it held. In order to reserve funds for the capital increase, the Board of Directors passed a resolution to increase capital, and then Parafuturo de Macau reported this matter to the SAR Government and Macao Investment and Development Limited, referring to the difficulties faced during the operation of the financial institution. In August 2020, Parafuturo de Macau was advised by MID that it could use the balance of company for the capital increase.
Currently, there is no a specific and complete regulatory regime for the trading of financial assets in the existing legislation of Macao, and the SAR Government only set some restrictions on the identity and operation of the related institutions. However, the most crucial thing in financial infrastructure is legislation; at present, there is no relevant legislation, especially to regulate the exchange or the trading platform of financial assets. Owing to the lack of comprehensive regulation, the government needed to make regulations more prudently in a bid to minimize the occurrence of risks, and some investors would also lack confidence without such regulation, thus limiting the quality, quantity and speed of development.
Besides, it is inappropriate that Parafuturo de Macau, which is responsible for regional cooperation between Macao and Zhongshan, was arranged to participate in the creation of a financial institution whose aim is to become an exchange. What’s more, this arrangement was not conducive to effective management and control of the financial project, failing to ensure that the expected results could be achieved. Based on the above situation, Parafuturo de Macau neither noted nor anticipated the operational difficulties that had existed in early time, not to mention being able to control its participation in the project effectively. Actually, most of these difficulties are the truths that have obviously existed, but Parafuturo de Macau pointed out them a year after participating in the shares, reflecting the lack of relevant professional knowledge.
1.2 Audit suggestions
It is necessary to conduct a thorough and in-depth analysis of the project when making decisions and formulating plans. To this end, decision-maker should consider the economy, efficiency, effectiveness and risk of the feasible plans, and decide whether to do it, when to do it, what method is chosen, what legislation is needed, etc., in order to make the right decisions and ensure that the expected results would be achievable and cost-effective. Moreover, if the decision is more important or the project is more challenging, decision-maker should fully grasp the internal and external situation, and conduct a more detailed and rigorous analysis.