Chinese CPAs, Audit Failures

(Press Release from Securities and Exchange Commission)

“Washington, D.C., Dec. 3, 2012 — The Securities and Exchange Commission today began administrative proceedings against the China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.

The SEC charged the following firms with violating the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets:

BDO China Dahua Co. Ltd
Deloitte Touche Tohmatsu Certified Public Accountants Ltd
Ernst & Young Hua Ming LLP
KPMG Huazhen (Special General Partnership)
PricewaterhouseCoopers Zhong Tian CPAs Limited”

“The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers. Through the work of a Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases involving more than 40 foreign issuers and executives. The SEC’s Enforcement Division has taken a series of actions against China-based audit firms. Earlier this year, the SEC announced an administrative proceeding against Shanghai-based Deloitte Touche Tomatsu for refusing to produce documents for an SEC investigation into one of its China-based clients.”

Over the last several years 2010 forward,  if you wanted to make several sure bets, shorting any reversed merged Chinese Company was about as sure a thing as existed.  The amount of fraud in these companies, the problem with transparency (there is little), slap dash audits that I have always maintained were complied to order, have all taken their toll on Chinese Companies listed in the US.  Now there is an effort to delist as many of these Chinese companies by the regulators at the same time the Chinese companies are exiting the US market by going private and trying to buy back all of the shares that were floated.

The Chinese style of business is ill suited for the regulatory schemes in the west, or the scrutiny of audits, and they rightly fear being subject to certain US laws such as FCPA. Chinese CPA audit failures were more or less predictable.

I can see no Chinese company I have ever worked with passing anything that could be expected to be “Due Diligence” and as the companies were being listed I too wonder how they have changed their ways to make it to the US market – well it appears they did not.

I also expect no small amount of fraud on the “Shell” company promoters.  Beguiling the Chinese businessmen about how they can cheaply access the US stock markets and raise new capital.  The old Denver and Salt Lake City shell promoters are still at work, they are just selling their snake oil to Chinese Businesses.  I am also more or less certain that as soon as these Chinese companies were listed in the US the shell promoters dumped their stock “The Box” that added even more significant downward pressure on the share prices.

It is a classic example, as the fraud after the fraud.

Leave a Reply