Dubious Companies, Hapless Auditors

China Agritech. China MediaExpress Holdings. China Century Dragon Media. China Intelligent Lighting and Electronics. NIVS IntelliMedia Technology Group. Duoyan Printing. China Electric Motor. China Changjiang Mining & New Energy. Fuqi International. Heli Electronics. China Forestry Holdings. Longtop Financial Technologies. Real Gold Mining.

The roll of shame containing the names of mainland Chinese companies with a chequered past and present seems to be growing longer these days. The above enterprises listed in Hong Kong or the US have had their financial reports questioned in recent months. Trading in their shares has been suspended, and several have been delisted.
The latest disturbing case came to light just last week, when the Stock Exchange of Hong Kong suspended trading in the shares of Real Gold Mining, “pending the release of an announcement concerning price-sensitive information.” An investigation by local newspaper South China Morning Post had found contradictory financial reporting the company made in China and Hong Kong.
Days earlier, New York-listed software developer Longtop Financial Technologies was in the news after Deloitte (which coincidentally also audits Real Gold Mining) resigned as its auditor following threats by some Longtop executives against the auditors, their interference in the audit process, and Deloitte’s discovery of false financial records. Longtop CFO Derek Palaschuk also abruptly resigned.
In April, Hong Kong-listed China Forestry Holdings announced that its auditor, KPMG, will issue a disclaimer on its financial statements for the year ended 31 December 2010 due to incomplete books and records, among other shortcomings. Most of the company’s key accounting personnel “have left without notice,” and so the directors “were unable to ensure the genuineness and completeness of books and records.”
Too much, too soon
What’s going on? It seems to be a case of too much, too soon – a Gold Rush in which entrepreneurs and get-rich-quick schemers will do anything to raise capital. Perhaps they thought they could grow their way out of their fraudulent roots, given the Chinese economy’s continuing extraordinary growth spurt.
But if these companies are counting on hiding their tracks behind the complicated maze of Chinese regulations and procedures and the corruptibility of regulators and other parties, they are turning out to be mistaken. The transparency and speed made possible by the Internet, professionalising banks, increasingly sophisticated regulators, an assertive press and other trends are making it easier to unearth business shenanigans.
Sadly, auditors, accountants, investment banks, and other players are getting caught in the middle. It is possible that some of these professionals may be turning a blind eye to deficiencies for the sake of fat commissions and fees. But the seemingly substantial scale of the problem and the higher chances of damage to professional reputations and potential criminal and civil suits, should now give them pause.
Already, it seems that the negative backwash from these cases may be affecting in some way the credibility of the auditing profession in Hong Kong. In a survey of CFOs and Finance Directors across Asia conducted on behalf of the Institute of Chartered Accountants in Australia, only 34% of respondents strongly agreed with the statement that external auditors in Hong Kong demonstrate sufficient professional skepticism. A much higher proportion, 54% each, strongly agreed with the statement as it applies to auditors in Singapore and Australia.
Longtop’s tale
As Deloitte has found out, dealing with the problematic companies can be physically unsettling. As part of its audit of Longtop’s accounts for the year ended 31 March 2011, the Deloitte accountants examined the company’s bank confirmations. The process involved visits to certain banks.
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