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When regulators ask companies to explain their accounts, most jump to it, at least publicly. Not so China Sky Chemical Fibre, the latest in a line of overseas-listed Chinese groups with questionable books. This week the Singapore stock exchange geared up for its first court action to enforce a special audit demand, an action it has now dropped.

The fact that SGX initiated the action is to be welcomed. The exchange first asked for a special audit of China Sky in November, having raised questions about related party transactions, land acquisitions and unusually high, one-off maintenance costs. China Sky, which has a market value of $64m, claims to have explained the issues to the exchange. SGX says it has not done so. Unfortunately, this is not a one-off case. In addition to China Sky, 17 companies on the SGX, most of them Chinese, have undergone special audits since 2009. Investigators have encountered some novel problems. Sino Techfibre claimed last year that its accounting records were largely lost in an office fire. Two years previously, China Sun Bio-chem Technology said it lost its records in a lorry that was stolen.

Any company that can even contemplate dog-ate-my-homework excuses has no business offering shares to the public. And stock exchanges have no business allowing these companies to list, or remain listed. Investors get it. In the past six months, the volume of Chinese shares traded on SGX (S-chips) has fallen by nearly two-fifths year on year; that of non-Chinese shares fell by just over one-fifth. The combined market value of S-chips has also dropped by more than two-fifths – nearly three times the non-Chinese stocks’ decline.

The Singapore exchange should pursue this matter further. It needs to protect its own reputation and ensure that the interests of investors come first.

Email the Lex team in confidence at lex@ft.com

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