For those of you short on time and/or attention span, here’s Public Company Accounting Oversight Board Erica Y. Williams on Bloomberg today discussing the long-awaited inspection results for two firms inspected in 2022: KPMG Huazhen LLP in mainland China [PDF] and PricewaterhouseCoopers in Hong Kong [PDF]. PCAOB inspectors found Part I.A deficiencies in 100% (4/4) of […]
Some time last year PCAOB inspectors visited China and while details of their visit were kept somewhat quiet from both sides, we were told that the inspectors gained unprecedented access to Chinese audit work. This event did not come about because China suddenly warmed to the PCAOB, rather Congress urged their cooperation along with the […]
People who presumably aren’t paid by the Chinese government to say “everything is great!” have told Reuters that the PCAOB’s trip to Hong Kong to finally inspect Chinese audit work went pretty well. Reuters: U.S. regulators gained “good access” in their review of auditing work done on New York-listed Chinese firms during a seven-week inspection, […]
The Securities and Exchange Commission has charged Deloitte China with failing to comply with fundamental U.S. auditing requirements because in numerous audits over numerous years Deloitte China asked clients to select their own samples for testing and to prepare their own audit documentation. From the SEC press release: The Securities and Exchange Commission today charged […]
Earlier this week, we learned that the PCAOB was dealt a blow last month when their negotiations with China fell through. Paul Gillis weighed in earlier today with a grim prognosis: There are no good options left for the PCAOB. Successful short seller attacks indicate that fraud and auditing failures continue to be a problem […]
Welp. After years of negotiation and Chairman Jim Doty saying this past summer that the PCAOB was "very close" to reaching an agreement to inspect audit firms in China, this happened: Last month, a final agreement that would have allowed a U.S. regulator to examine the audits of Chinese companies listed on American stock exchanges […]
As you know, the much-awaited SEC settlement with Big 4 China affiliates hit the pages on Friday. This particular dust-up came about over some workpapers the SEC has waiting on since the Ming Dynasty or thereabouts. Here's the TL;DR ICYMI: The Securities and Exchange Commission today imposed sanctions against four China-based accounting firms that had refused to […]
The SEC has been pretty busy lately, what with tongue-lashing the PCAOB about their duties and all. But somehow they found time in their busy schedule to get around to that whole sanctioning Big 4 affiliates in China thing: The Securities and Exchange Commission today imposed sanctions against four China-based accounting firms that had refused […]
When you die, no one is going to come to your funeral and declare "wow, that guy could tie out like no one's business!" But your kids will certainly remember whether or not you showed up to 12 of their 55 soccer games. EY Global Chairman and CEO Mark Weinberger is all about the work-life. […]
When we talk about accounting firm culture, we often talk about the tone at the top. Besides being a really good buzzword that helps HR wonks convince the lowly serfs that The Powers That Be really care about their well-being, it basically means that what's good for the goose is good for the gander. Or, […]
As you know, I sat through the SEC Open Meeting webcast yesterday just to catch the copious number of thank yous, Doty giving the prepared remarks I already had, and the conclusion we all knew the SEC would come to, which was approving the 2014 PCAOB budget. BOR-ING. Well out of that meeting, everyone seemed […]
In case you missed the thank fest that was today's SEC Open Meeting, the PCAOB showed up to get its 2014 budget of $258.4 million approved by the Commission after everyone went around the room and thanked one another for their hard work for capital markets. Repeatedly. Chairman Jim Doty validated the $12.8 million increase […]
In the ongoing battle to get their paws on Chinese workpapers, one battle seems to be won… er, solved? I don't know what you'd call this, exactly, but as long as the SEC has the "substantial volume of documents" it has been asking for all this time, then I guess everything is cool (for now): […]
Ugh. This doesn't sound good. An in-house lawyer for PwC has gone missing in China. Steve Leavenworth is American but has lived China for 17 years, according to the Telegraph. He recently left PwC after 15 years and was on a solo backpacking trip through Yunnan province when the bus he was believed to be on […]
A paper presented in August at the annual meeting of the American Accounting Association in Anaheim, Calif., found that “the current Sino-phobic reaction to Chinese reverse mergers may be overblown.” In an effort to assess the performance of these often maligned companies, the study concluded that “as an asset class, Chinese reverse-merger firms (CRMs) have performed […]
The U.S. Securities and Exchange Commission has been struggling to obtain papers from China to investigate possible accounting fraud at dozens of Chinese companies listed on U.S. stock exchanges. China has resisted for years turning over documents because of state-secrets and sovereignty concerns. The China Securities Regulatory Commission (CSRC) is now ready to transfer audit papers […]
When fraud allegations first arose in 2011 against China MediaExpress, CEO Zheng Cheng countered with confidence, telling shareholders that everything was tip-top and the company had a 'reputable and well-known' audit firm behind them. Of course, later that firm — Deloitte — resigned, along with the CFO. I suppose when you're in a situation like […]
Yes, the PCAOB got a lousy deal by putting Jim Doty's name on the Memo of Understanding with China's Securities Regulatory Commission and Ministry of Finance, but Professor Paul Gillis writes in the Wall Street Journal that the Chinese don't have any room to talk, either: Without inspections, investors can't trust Chinese audits. Investors in Chinese […]
Cruising around el Twittero this morning, we came across something interesting shared by Francine McKenna: Which auditor has most China fraud problems? Deloitte by a landslide. RT @chinajinrong: @retheauditors tradingfloor.com/posts/china-fi… — Francine McKenna (@retheauditors) May 29, 2013 This post by Fredrik Oqvist, founder of China RAI, has a table that shows which audit firms have had […]
Last Friday, the PCAOB announced it had reached Memorandum of Understanding on Enforcement Cooperation with Chinese Regulators. While not a great deal for the Board, most people agreed that, at the very least, it's good for formally asking the Chinese, "Pretty please with sugar on top, may we have a peek at these documents?" Which […]
As is its wont, the PCAOB has made a major announcement in very close proximity to a major American holiday. I've been assured in the past that this bad timing is not intentional, but from a PR perspective, it has the tendency to soften the thunder of an important message. But whatever, we'll go with […]
Deloitte Touche Tohmatsu CPA Ltd. lost a bid to delay a lawsuit brought by the U.S. Securities and Exchange Commission seeking documents in an investigation of the auditor’s former client Longtop Financial Technologies Ltd. U.S. District Judge Gladys Kessler in Washington today rejected Shanghai-based Deloitte’s argument that the case should be put on hold while an […]
Just when you thought Deloitte's China rash had gone into remission, some investors come along who don't think too highly of the audit performed by D to the T. In this particular case, the investors are a group of investment funds including Columbia Pacific Opportunity Fund LP and Fir Tree Value Master Fund LP who, according […]
Oh are we still on this?: The head of the U.S. audit watchdog said on Wednesday his organization may need to resort to enforcement actions against auditors based in China if they fail to hand over documents to U.S. regulators. Jim Doty, head of the Public Company Accounting Oversight Board, told the U.S. Securities and […]
Welcome to this week's edition of busy season problems. Got a busy season problem? Email us at [email protected] with "Busy Season Problems" in the subject line. The final days of January are upon us so that means that for many of you, your lives are about to get infinitely worse. What that all entails will […]
The SEC's move against the Big 4's Chinese affiliates on Monday has people all worked up. On the one hand, yes, if the SEC were to delist a lot of Chinese companies that would make a lot of people sad. Also, if fewer Chinese companies were to consider accessing U.S. markets because they aren't so […]
China has been a thorny issue with the SEC and the PCAOB over the last couple of years. You see, there's been some concern that some Chinese companies have accessed U.S. markets through dubious means and then provided financial reporting and disclosures that weren't accurate in material respects. Audit firms charged with providing an opinion […]
Does anyone think that this sounds strange? This week, accounting firm PricewaterhouseCoopers announced that to help avoid layoffs, employees in mainland China and Hong Kong will be offered a chance to take an additional 12 days’ holiday in the coming months, of which eight of them will be unpaid. The company is also launching a […]
Board member Lewis Ferguson tells of China's teasing ways in a speech that he's giving at the California State University SEC Financial Reporting Conference in Irvine: As a first step toward further cooperation [with China], we are working toward and have tentatively agreed on observational visits where PCAOB inspectors would observe the Chinese authorities conducting […]
SGOCO Group, Ltd. issued a press release this morning to let everyone know that Grant Thornton's Chinese affiliate decided to take a walk on May 14th. They disclosed this with the SEC around 10 am on Friday, but with the Facebook circus going on, no one noticed. What's interesting is that the company filed Form […]
As you may have heard, the Chinese government has told the Big 4 that they only want homers running their audit firms that are located within the Big C. While you might think that this might be problematic – what with all the troubles over there – the Big 4 obviously saw this coming because not […]
The firm has had about all the fun it can handle trying to audit Chaoda Modern Agriculture. In a statement Thursday, Chaoda said that in a letter on Apr. 26, BDO said that despite continuing with the audit for a prolonged period, it was not in a position to conclude. It said the move was […]
Muddy Waters Director of Research, Carson Block wrote an op-ed for the Wall Street Journal today and he sheds some light on problems that Big 4 auditors are facing in China. And from the sounds of it, if you're used to the auditing standards in the west, then you have your work cut out for […]
Floyd Norris notes: Several Chinese companies that are registered in the United States missed the May 1 deadline for filing their annual reports and received two-week extensions. There are many reasons that a company’s report can be delayed, but given the recent history there is speculation that one or more companies might be fighting with […]
Earlier today we learned that Deloitte resigned as the auditor of Daqing Dairy Holdings Ltd, a Hong Kong-listed Chinese company. It was notable because this is the second resignation for Deloitte in [counting on fingers] seven days! That's not good! The other one was "baby products maker" and licenser of Harry Potter and Bob the […]
And it's probably just a matter of time before they start winning all the Elijah Watt Sells awards. Here's the ICMA with the spectacular news: Of the approximately 4,200 individuals who took the two-part CMA exam during the September/October 2011 testing period, medals were awarded to the following individuals for their exceptional performance: Wen […]
PCAOB Chairman James Doty shot the breeze with the SEC for awhile today, speaking about, among other things, how the Board would handle this boatload of Chinese filers who don't seem to know their asses from their elbows when it comes to accounting and their auditors who are similarly clueless. Doty assured the Commission that […]
Remember Longtop Finanical? That's the Hong Kong-based company that Deloitte kicked to the curb last May for a number of sketchy reasons that included the "the unlawful detention of DTT's audit files." We came to learn later that not only were the precious audit files taken hostage but that Deloitte auditors were thisclose to becoming hostages themeselves. […]
It's not really that odd that someone would sue an auditor for $100 million. It's also not unusual that a company (usually through some PR flak) would publicly rebuke the auditor in a news report or press release. What is unique is a company issuing a press release announcing their lawsuit against their audit firm that […]
Focus Media Chief Financial Officer Kit Low disputed Muddy Waters’ claims on a conference call Tuesday with analysts, saying that the firm’s report misinterpreted LCD-display numbers and financial data. He said Muddy Waters concentrated largely on Focus Media’s mergers and acquisitions, but the company hasn’t made any “major acquisitions in the past three years” because it is putting more emphasis on its core business. Focus Media Chief Executive Jason Jiang criticized short-sellers in a message posted on his verified account on China’s Sina Weibo microblog service. “Why isn’t anyone suing these short sellers who are just spreading malicious rumors everywhere?” the message said. “These people should be punished according to the law!!!” [WSJ]
The request, sources said, is seen as a direct response to the move by the U.S. regulators in the case of scandal-hit Longtop Financial Technologies Ltd, and to ensure that firms do not succumb to pressure to hand over documents to regulators outside of China. Last month the U.S. Securities and Exchange Commission (SEC) asked an American court to enforce a subpoena it sent to Deloitte Touche Tohmatsu’s China practice for documents from its audit of Longtop.Two sources from the audit industry told Reuters that the Ministry of Finance and China Securities Regulatory Commission (CSRC) met last week with the so-called ‘Big Four’ audit firms — KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte — along with two smaller firms. The firms were requested by the government to conduct an urgent review of all audits they had done on U.S.-listed Chinese firms in 2010 along with work on U.S. initial public offerings by Chinese companies. [Reuters]
As you probably heard, the PCAOB officially put out a proposal earlier this week for audit partners to be named in the annual reports of public companies. It would also require “registered firms to disclose the name of the engagement partner for each audit report already require the form” and “disclosure in the audit report of other accounting firms and certain other participants that took part in the audit.”
While most Big 4 audit partners are probably feeling a little chapped by this whole proposal, there is at least one person going on record (by way of PCAOB comment letter) that feels that it doesn’t go far enough. That would be Carson Block, the CEO and founder of research firm Muddy Waters. In Block’s letter (in full on page 2) to the Board he writes that not only should the engagement partner be identified but that he or she should be putting their name on the audit opinion because “[it] will decrease investors’ future losses to fraud and gimmicky accounting by billions of dollars.”
That on it’s own is enough to get more than a few people riled up. But as we indicated, there are some conspiracy and fraud accusations as well:
Even the most reputable auditors in China seem to be in a race to the bottom. We believe that there are particularly egregious situations in which some Big Four partners in China offices have actually conspired with their clients to defraud investors. Further, it is a reasonable proposition that the conflict of interest inherent in the Chinese auditors’ business model also affects the quality of US company audits.
Now before your knickers in a twist, don’t forget that this is the guy who called Sino-Forest a “Ponzi Scheme for the 23rd Century” which more or less looks to be accurate. Further, if you consider all the trouble Big 4 firms have had with Chinese companies listed in the U.S. and elsewhere, it doesn’t seem to be that much of a stretch that some partners would just say fuck it and work with their clients to keep a lid on the shenanigans than go through the pain of actually doing their jobs.
Regardless, with these accusations the PCAOB may try to make another run at getting the Chinese to play ball.
Your auditor-of-a-Chinese-company-resignation news du jour:
Deloitte Touche Tohmatsu Ltd , the world’s largest accounting and consulting firm, has resigned as auditors of Hong Kong-listed Real Gold Mining , more than four months after the Inner Mongolian miner was reported to have filed conflicting accouting [sic] reports.
Real Gold, which halted trading in its shares on May 27. is under investigation by the Securities and Futures Commission for corporate governance breaches. The miner’s announcement to the Hong Kong stock exchange late on Thursday said it was looking for a replacement for Deloitte, which resigned on October 12.
“The company is disappointed that Deloitte has decided to resign at this time but respects its decision,” the firm said.
Can you guys imagine what would happen if this were to go down in the good old USA?
According to China Daily, answers to China’s national accounting exam (similar to the CPA exam in that it’s an exam professional accountants take to work in accounting, duh) were leaked over the Internet last week and some are concerned that this unfortunate turn of events might erode trust in the exam and – worse – the profession. As if China’s sketchy accounting practices didn’t already achieve as much.
Answers were posted to an Internet forum just before the 2011 Chinese National Uniform CPA Examination was to be taken on September 17 and 18.
Here in America, CPA review providers are given retired CPA exam questions to distribute to their students but are not allowed to share actual exam content. Not like they’d know what’s on the exam anyway – many major review course providers haven’t taken the CPA exam in 10, 15 or even 20 years. Back in those days, they’d hand out copies of old exams to study. Like actual exams. Since the CPA review crew is a close-knit bunch of OGs, it’s highly unlikely that any one of them would risk their close relationship with the AICPA to hand out exam questions to needy students.
In China, a former writer of architect exam questions was sentenced to 18 months in prison for leaking state secrets after he was caught giving his students copies of exam questions during tutorials. Different world, eh?
Anyway, according to the few Chinese media reports we’ve seen, five audit multiple choice questions and answers were posted to the Internet and the Chinese CPA exam folks are understandably in a tizzy over this. To put it in perspective, their audit section consists 47 questions worth a total of 105 points, and candidates must answer at least 60 correct to pass. So really? Five questions?
That’s not all. Apparently some candidates received texts asking if they might be interested in, er, peeking at the upcoming exams’ content.
“I began to receive at least five text messages a day selling exam questions a month before the exam took place. All of them claimed they could provide genuine questions and answers. They also promised a full refund if the questions were not genuine,” 28 year-old Zhu Hua told China Daily. “I wonder how they got my number in the first place, because I only provided my contact information when I registered for the exam.”
Was this an inside job?
The Chinese Institute of Certified Public Accountants (CICPA) has sworn to conduct an investigation into the leaks and to prosecute anyone found to have leaked this information to the full extent of the law. Prepare for hangings, people, this is serious shit.
The Public Company Accounting Oversight Board today announced a cooperative agreement with the Financial Supervisory Authority of Norway for the oversight of audit work performed by public accounting firms that practice in the two regulators’ respective jurisdictions. “With this agreement, Norway’s FSA and the PCAOB are joining forces to improve audit quality and protect investors,” said PCAOB Chairman James R. Doty. “I am pleased that the PCAOB is continuing to make progress in overcoming the obstacles that have in the past prevented PCAOB inspections in Europe.” [PCAOB]
Remember Longtop Financial Technologies? Deloitte resigned as auditors of the Chinese company back in May after LFT took some actions that were, shall we say, unusual for an audit client. Among them, “interference by certain members of Longtop management in DTT’s audit process; and […] the unlawful detention of DTT’s audit files.” And there may be some financial statement fraud going on, to boot. What’s even slightly weirder is Deloitte’s resig nt to Longtop’s Audit Committee that laid out the specifics:
[A]s a result of intervention by the Company’s officials including the Chief Operating Officer, the confirmation process was stopped amid serious and troubling new developments including: calls to banks by the Company asserting that Deloitte was not their auditor; seizure by the Company’s staff of second round bank confirmation documentation on bank premises; threats to stop our staff leaving the Company premises unless they allowed the Company to retain our audit files then on the premises; and then seizure by the Company of certain of our working papers.
Right. The auditors-almost-taken-hostage situation. Quite a doozy, this one. Based on the history between Deloitte and Longtop, one would think that Green Dot would jump at any chance to exact a little revenge on these shady bastards. NOPE!
From the crack squad at the SEC:
The Securities and Exchange Commission today filed a subpoena enforcement action against Deloitte Touche Tohmatsu CPA Ltd. for failing to produce documents related to the SEC’s investigation into possible fraud by the Shanghai-based public accounting firm’s longtime client Longtop Financial Technologies Limited.
According to the SEC’s application and supporting papers filed in U.S. District Court for the District of Columbia, the SEC issued a subpoena on May 27, 2011, and D&T Shanghai was required to produce documents by July 8, 2011. Although D&T Shanghai is in possession of vast amounts of documents responsive to the subpoena, it has not produced any documents to the SEC to date. As a result, the Commission is unable to gain access to information that is critical to an investigation that has been authorized for the protection of public investors.
“Compliance with an SEC subpoena is not an option, it is a legal obligation,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The ability of the SEC to conduct swift and thorough investigations requires that subpoena recipients promptly comply with that legal obligation. Subpoena recipients who refuse to comply should expect serious legal consequences.”
Maybe the email/hand-written letter sent by carrier pigeon (whatever method of communication the Commission is using these days) got lost OR maybe no one at Deloitte Shanghai was in the translating mood that day but it seems slightly strange that Deloitte would just blow this off especially since Longtop screwed them 70 ways to Sunday. Of course these documents could show that Deloitte was really a bunch of pansies and we’re letting LFT run the show until the gross negligence got to the point that they simply couldn’t ignore it anymore. It’s anybody’s guess, really.
You may remember that the Big 4 have BIG plans to go on a hiring binge here in the States and around the globe over the next few years. Just last year, Deloitte announced that they were adding 250,000 new employees over the next five years (although we were a bit skeptical as to what the final numbers would actually shake out). The latest in job creation PR, comes from PwC who has announced that they will be adding 15,000 new professionals in Hong Kong and China:
Accounting firm PricewaterhouseCoopers plans to hire 15,000 graduates and experienced professionals over the next five years in China and Hong Kong, it said Tuesday, as it capitalizes on growing business opportunities in the region, particularly mainland China.
The Big-Four firm said the new hires will be “across all lines of service,” adding it hopes to recruit more than 2,000 university graduates in the coming months in Hong Kong and China. The company is conducting campus recruitment in Hong Kong and three mainland Chinese cities this month.
Adding to this glowing news was Fitch Rating’s vote of confidence in the Big 4 who “should inspire confidence in terms of corporate governance” in Chinese companies. Right. Because it’s been clockwork so far.
Jonathan Weil has a column today on the train wreck that is Sino-Forest, the Chinese-Canadian timber company. In case you need caught up, there have been some questions about the company’s ability to report accurate disclosures and accounting. This led the research firm Muddy Waters to issue a not-so-flattering analysis of the company. Things like “Ponzi scheme” and “investing for the 23rd Century” don’t exactly get people jumping up and down for your company. Ask John Paulson.
Of course Sino-Forest didn’t do this all by themselves. They had credit rating agencies and auditors telling them everything was hunky dory for years and that’s Weil’s point. He reports that Fitch pulled its rating on S-F back in July and S&P finally pulled their rating this week. That just leaves Moody’s but guess who else is still hanging in there? Ernst & Young, baby! They’re still standing behind their audit opinions and showing no sign of budging. And JW is really curious to know who’s going to jump out of this tree first.
One question lingers: Which of the company’s paid opinion merchants will be the last to step aside? Will it be a credit rater? Or will it be the company’s auditor, Ernst & Young LLP in Toronto, which has yet to rescind any of its reports on Sino-Forest’s finances?
So far Ernst looks like the favorite, with only one rating company left in the hunt. Think of it as a contest between giant tortoises to see which one is slower. This time-honored ritual — of market gatekeepers waiting to blow the whistle until long after a scam has been exposed — has become so familiar, we might as well revel in the spectacle.
So these “gatekeepers” Weil speaks of – obviously this includes the Big 4. And it’s true that we’re all used to them waving their arms, screaming “DANGER!” in front of the burning heap that everyone has been aware of for ages (I didn’t say Lehman Brothers. Did you say Lehman Brothers? Who said Lehman Brothers?).
ANYWAY, E&Y should know that they have choices:
Ernst does have options, aside from bracing for the inevitable years of litigation and investigations. It could resign, explain why it is doing so and face criticism for acting too late. It could withdraw its previous audit opinions. It could insist to Sino-Forest’s directors that it be permitted to answer questions from the public about the work it has performed, as a condition of remaining onboard. Or it could hang on in silence, as it’s doing now, and watch its reputation endure more damage.
Could be that this is just another part of E&Y’s strategy. Sit tight while things play out, wait until things get really serious (i.e. bankruptcy, severe economic turmoil, civil charges, etc. etc.) and then come out swinging.
Tree Falls on Sino-Forest, Auditor Can’t Hear It [Bloomberg]
James Li and David Chow used to run a shop called Syntax-Brillian Company as the CEO and Chief Procurement Officer respectively. They sold high-def, LCD TVs under the Olevia brand in China. Problem was, they didn’t really sell TVs under the Olevia brand in China. According to the SEC:
[F]rom at least June 2006 through April 2008, Li and Chow engaged in a complex scheme to overstate Syntax’s financial results by publicly reporting significant sales of LCD televisions in China, when in fact the vast majority of these sales never occurred. Li and Chow initially concealed the scheme through the use of fake shipping and sales documents.
Of course, they couldn’t do it alone. They needed a CFO. A CFO who would backdate things when asked and ignore obvious signs of bogus revenue. That man was Wayne Pratt who, from the sounds of it, wasn’t too concerned about ANYTHING:
The SEC alleges that Wayne Pratt, Syntax’s Chief Financial Officer, ignored red flags of improper revenue recognition and participated in preparing backdated documentation that was provided to Syntax’s auditors to support fictitious fiscal 2006 year-end sales. Pratt also ignored indications of impaired assets, agency sales, and potential collectability issues.
So, budding criminals, get on the look out for a guy/gal who is accustomed to shrugging their shoulders and responding “Meh. Whatever.” to your demands. Should work out well for you.
With GE slowly but surely shipping most of its important business over to the People’s Republic of China, this could work out to be quite the lucrative deal for the folks at Becker.
Becker Professional Education announced last week that it has entered into an agreement with GE China to provide, through its licensee in the People’s Republic of China, its complete, four part CPA Exam Review course to GE employees in the People’s Republic of China. Becker will also be providing extensive assistance with the CPA Exam application process to GE China employees.
“This partnership represents a tremendous opportunity for Becker to expand our leading international position with a strong partner in GE China,” said Matt Kinnich, Vice President, International and Business Development of Becker Professional Education. “We will be able to help a great number of GE China employees achieve their career goals through our quality course offerings.”
What this means, in simpler terms, is that some guys in China will be authorized to teach out of Becker books, likely using Becker’s own “lesson plan” text which all Becker instructors receive to teach from. I wonder if they’ll edit out some of the written-in jokes to translate for a Chinese audience?
Becker already offers live courses in Shenzhen, Guangzhou, Shanghai and Beijing.
It’s been quite the year for the Chinese-based, reverse-merger clients of accounting firms. There have been curious press releases, audit workpapers held hostage, and the run-of-the-mill blowing off of auditor recommendations among other things. With all that, you probably figured the fun was over.
Not so! The latest in China-doesn’t-really-know-what-the-hell-it’s-doing news is the report that Ernst & Young has walked out on Zungui Haixi, an athletic footwear and apparel company listed in Canada. Why? Well, it’s not really clear but it sounds like Zungui has some explaining to do:
Zungui said auditor Ernst & Young LLP has advised its board that its has suspended its audit for the year ended June 30, 2011, until the company “clarifies and substantiates its position with respect to issues pertaining to the current and prior year”.
Ernst & Young recommended that the issues identified be addressed by an independent investigation, the company said in a brief statement that did not provide any details on the issues.
As we all know, “issues” could be just about anything from missing cash, to a CFO resigning. Hopefully it’s nothing quite so serious and the crack squad of investigators assigned to the task will get to the bottom of it and not wait for Roddy Boyd to pick it up.
Today in odd things found in SEC filings, we were pointed to this 10-Q from Harbin Electric, Inc., “a Nevada Corporation, incorporated on July 9, 2003.” However, this gives you a little better idea about what Harbin’s business is:
Through its subsidiaries, the Company designs, develops, engineers, manufactures, sells and services a wide array of electric motors including linear motors, specialty micro-motors, and industrial rotary motors, with focus on innovation, creativity, and value-added products. Products are sold in China and to certain international markets.
There it is! Another reverse merger company operation. Of course, this could be a completely legitimate business that is making money hand over fist but if Roddy Boyd is writing about you, that could be a bad sign. But that’s neither here nor there. One interesting thing we found in the company’s Q is just how much the company depends on their SEC Reporting Manager (I’ve added some italics for emphasis):
We rely on the services of our SEC reporting manager to assist us in researching and resolving certain US GAAP accounting issues and preparing our consolidated financial statements.
We employ an SEC Reporting Manager who is a Certified Public Accountant in the United States to assist our internal accounting and finance personnel in resolving complex US GAAP accounting issues. From time to time we rely on her to conduct research on complex accounting issues relating to US GAAP and to provide advice to the Company as to how to comply with US GAAP. Although our SEC Reporting Manager is not involved in our day to day operations or the management of our accounting functions, she also assists us in our consolidation process and in preparing our consolidated financial statements and footnotes. If we were to lose the services of our SEC Reporting Manager, we would attempt to hire another similarly qualified person to replace her. The loss of the services of our SEC Reporting Manager, in the absence of a qualified replacement, could adversely impact our ability to accurately prepare our consolidated financial statements on a timely basis.
There’s really no way to know who this poor, lonely SEC Reporting Manager is but based on the disclosure, it seems pretty clear that if she were to meet with an unfortunate accident, Harbin would be up shit creek without a paddle (and there’s probably a hole in the boat).
Why, exactly, isn’t there an intern, temp, custodian, someone, ANYONE that serves as the backup QB? This is not immediately known. Perhaps the company broke the piggy bank paying for the reverse merger but it seems prudent that they at least throw in Ms. SEC Reporting Manager’s best girlfriend from high school or something.
Of course if you’re job hunting and have a decent résumé, you could always ring them up.
Perhaps you’ve heard that some U.S.-listed Chinese companies have had some trouble with their financial reporting. Often times this leads to CFOs quitting, auditors resigning or workpapers being held hostage. None of which are good. Occurrences such as these have been going on for a little while and more recently the SEC admitted that they had, in fact, heard something about it. Perhaps even more surprisingly, a Chinese official also confessed that some of these companies weren’t exactly on top of their shit and in some may not have the faintest idea of what they’re doing.
All this excitement has finally gotten the teams at the SEC and PCAOB worked up enough that it has been decided that they’re popping over to Beijing to meet with the country’s Ministry of Finance and the China Securities Regulatory Commission next Monday and Tuesday to see what’s what.
“This meeting is the commencement of our accelerated efforts with the People’s Republic of China to forge a cooperative resolution to cross-border auditing oversight. I believe we share a common objective with Chinese regulators to protect investors and safeguard audit quality through our mutual cooperation,” said James R. Doty, PCAOB Chairman.
The delegation will be led by Board Member Lewis H. Ferguson and include staff from the PCAOB’s Office of International Affairs and Division of Registration and Inspections, and the SEC Office of International Affairs and Office of the Chief Accountant. The delegation will meet with senior leadership of the Ministry of Finance and the CSRC.
“The purpose of this meeting is to provide an opportunity to exchange information about how each country conducts inspections of auditing firms and to move toward a bilateral agreement providing for joint inspections of China-based auditing firms registered with the PCAOB,” said PCAOB Board Member Ferguson.
Reuters reports that Ferguson considers the trip a “confidence-building exercise,” just in case you were still a little queasy on Sino-Forest, et al.
China is looking into accounting issues involving Chinese companies listed in North America, an official at the country’s securities regulator said in the watchdog’s first public remarks since a series of accounting scandals. Corporate misbehaviour, unfamiliarity with the U.S. market and some practices involved in overseas listings had all contributed to recent investor distrust of Chinese companies, said Wang Ou, vice head of research at the China Securities Regulatory Commission (CSRC). “First, we have to admit that some of our companies may have flaws. Second, our (companies’) understanding of the U.S. market and the measures to tackle risk there may be inadequate,” Wang said at a conference in Beijing this weekend. “We have contacts with the U.S. and its relevant regulatory bodies and we’re studying the issue together.”
Oh, and it isn’t necessary to issue a press release when your auditor ties out your cash balances.
The Securities and Exchange Commission warned investors about the risk of fraud, accounting problems and other abuses at companies that obtain stock listings through so-called reverse mergers.
The warning on Thursday comes amid a rash of accounting scandals involving China-based companies listed on U.S. exchanges through reverse mergers, or mergers with U.S. shell companies. “Many companies either fail or struggle to remain viable following a reverse merger,” the SEC said in an investor bulletin. Investors should be especially wary of reverse merger operating companies that are “nonreporting,” meaning they are not required to file reports with the SEC, the agency said. “Keep in mind that information from online blogs, social networking sites and even a company’s own website may be inaccurate and sometimes intentionally misleading,” the SEC said. [Reuters]
Chinese companies certainly have had their share of problems with financial reporting in the U.S. but I had no idea that it would come to this.
The Audit Committee of the Board of Directors of Weikang Bio-Technology Group Co., Inc. (OTC Markets: WKBT.PK – News) (“WKBT,” “Weikang” or the “Company”), a leading developer, manufacturer and marketer of Traditional Chinese Medicine (TCM), Western prescription and OTC pharmaceuticals and other health and nutritional products in the People’s Republic of China, today announced that Grant Thornton (“GT”), one of the world’s leading organizations of independently owned and managed accounting and consulting firms, has verified that the cash amounts listed on the Company’s SEC filings for 2010 and the first quarter of 2011 are consistent with account statements obtained from WKBT’s banks directly by GT.
“Given the recent change in auditors and my new chairmanship of the WKBT Audit Committee, we authorized the Grant Thornton review to take place last week, and are now releasing the results,” said Jeffery Chuang, independent director and Chairman of the Audit Committee of WKBT. “Weikang continues to advance as a U.S. publicly-traded company and we are committed to high standards in the thoroughness of our financial information,” said Mr. Chuang, a U.S. CPA who is based in Southern California.
Obviously this is completely harmless compared to, say, threatening to take auditors hostage but as far as giant wastes of time go, it’s right near the top.
You may have noticed that a number of Chinese companies have had some issues with their accounting. This typically leads to the company’s auditor quitting, the CFO resigning, an SEC filing explaining all of it and then the revelation of some embarrassing details to accompany it all. Like a video of company’s employees sleeping. Or taking audit workpapers hostage. The best part about these stories is that the companies typically go on the defensive, and some make claims about their prestigious auditors just moments before the shit hits the fan.
Today we bring you Li & Fung, Ltd., a supply chain manager out of Hong Kong. L&F has reacted to a recent report from UBS that has…wait…yes, called attention to an accounting change and that “the company’s future GAAP earnings might not fully reflect the profitability of operations and that the new revenue recognition policy may distort a declining margin trend.”
Li & Fung has reacted right on cue:
“These statements are misleading,” Company Secretary Terry Wan said in the statement.
“The company has disclosed the relevant accounting policies in note 1.1 of its 2010 accounts, which have been audited by PricewaterhouseCoopers and are in full compliance with the HKFRS (Hong Kong Financial Reporting Standards),” Wan said.
And yes the perpetrator, Longtop Financial Technologies, is a Chinese company.
As we mentioned, Deloitte had some decent reasons for kicking LFT to curb, among them:
(1) the recently identified falsity of the Company’s financial records in relation to cash at bank and loan balances (and possibly in sales revenue); (2) the deliberate interference by certain members of Longtop management in DTT’s audit process; and (3) the unlawful detention of DTT’s audit files. DTT further stated that DTT was no longer able to rely on management’s representations in relation to prior period financial reports, that continued reliance should no longer be placed on DTT’s audit reports on the previous financial statements, and DTT declined to be associated with any of the Company’s financial communications in 2010 and 2011.
And because it seems to be the standard narrative in stories such as these, Longtop’s CFO has resigned and “The Audit Committee has also initiated a search for a new auditor.” Although were not sure if there’s a firm out there that will pick up a client who has engaged in hostage taking.
The House of Klynveld resigned as the auditor Shanghai-based ShengdaTech, Inc. effective April 29th after less than three years. According to the 8-K filed yesterday, KPMG was none too impressed with management blowing off their concerns:
KPMG previously informed the Company’s Audit Committee of certain concerns arising during its incomplete audits of the Company’s consolidated financial statements as of and for the year ended December 31, 2010, and the effectiveness of internal control over financial reporting as of December 31, 2010. These concerns included serious discrepancies and unexplained issues relating to, among others: (i) the Company’s bank balances; (ii) transactions with major suppliers; (iii) VAT invoices and payments; (iv) sales and payments for sales by third parties; (v) sales to the Company’s second largest customer; (vi) discrepancies between KPMG’s direct calls to customers and confirmations returned by mail; and (vii) concerns raised by directly confirming customer sales and accounts receivables.
In a letter dated April 19, 2011, KPMG informed the board of directors of the Company that in KPMG’s view the Company’s senior management has not taken, and the board of directors has not caused senior management to take, timely and appropriate remedial actions with respect to these discrepancies and/or issues, and KPMG stated that the continued lack of resolution of the issues would materially impact the financial statements for the year ended December 31, 2010 and possibly prior periods.
And as you might expect, this resulted in KPMG taking its audit reports and going home:
On April 29, 2011, we were also informed by KPMG, our former independent accounting firm, that disclosures should be made and action should be taken to prevent future reliance on their previously issued audit reports related to the consolidated balance sheets of ShengdaTech, Inc. and its subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for the years then ended and the effectiveness of internal control over financial reporting as of December 31, 2008 and 2009.
It’s been just over two weeks since the death of Angela Pan, an audit associate in PwC’s Shanghai office. One report of her death have quoted doctors stating that “Based on her symptoms and her low white blood cell count, it’s reasonable to conclude that overwork led to a weakened immune system, which makes her more vulnerable to infections.” It was also reported she told a friend she was working 18-hour days and about 120 hours a week prior to her sickness and death. However, Shanghaiist (yes, that’s the Gothamist for Shanghai) published a portion of a statement from PwC that stated that Angela died from viral encephalitis not acute cerebral meningitis as had been reported. An internal email from PwC in China found its way into our inbox late last week and it seems to echo the press release and provides other details.
[Ed. note: the second paragraph included HR and press contacts for those needing them so I’ve omitted those here. It did state that the information should only “be communicated verbally.”]
The date on the email was April 20th and the Shanghaiist article is dated April 15th, so whether this communiqué provides additional details, it isn’t entirely clear. The most confusing statement for me in this email is “as a sign of respect to Angela and her family, we have made a decision not to clarify the misreporting in the media at this time.” Seems to me that the respectful thing would be to correct the “misrepresented” facts if they are in fact correct. Of course this is happening in China where we can only assume what qualifies as a “respectful” action might differ from what is respectful in the U.S. Regardless, it’s terribly unfortunate that a young woman’s death had to serve as a reminder for everyone to take a closer look at their own health and behavior, as well as how culture and working environment may cause some to feel pressure to be at work when they shouldn’t.
Pan Jie was a 25 year-old auditor in PwC’s Shanghai office, starting her career with the firm last October. She died of acute cerebral meningitis on April 10th, having “ignored the illness until a fever surged,” after catching the flu on March 31st. Reports have stated that Jie told a friend that “she had been working up to 18 hours a day and about 120 hours a week,” prior to her death.
A doctor quoted by one of the reports explained the cause:
Dr Wang Guisong, an expert in the neurosurgery department at Renji Hospital, said overwork can make people more vulnerable to infections. “Based on her symptoms and her low white blood cell count, it’s reasonable to conclude that overwork led to a weakened immune system, which makes her more vulnerable to infections,” Wang said. “When an infection worsens over time, people can develop acute cerebral meningitis.”
According to the story, PwC has denied that Ms Jie died from work-related fatigue but it’s hard to argue that her fatigue was caused by anything else. The firm is providing psychologists for employees, has sent a “team” to comfort Jie’s family and has even offered to assist with the cost of her funeral and this kind of outreach is admirable but the overarching culture within Big 4 firms is really what is of concern here.
Fatigue from overworking is not uncommon in the Big 4 life but when someone dies as a result of the fatigue, that’s will obviously get some attention (even if it’s just for a little bit). At some point it became acceptable for sleep – and health in general – to become of secondary importance when it comes to having a successful career. If you don’t believe me, look around you; everyone is exhausted and that’s part of the life inside a Big 4 firm. The pressures of performance in the name of client service are so great that people regularly come to work when they should be in bed or, in some cases, an emergency room. Of course there’s the macho contingent inside these firms that say “sleep is for the weak” and that’s the kind of attitude that perpetuates the culture of “getting the job done.” How is this acceptable? Not only can lack of sleep kill you, it doesn’t really do much for job performance. We’ve all seen people make big mistakes when they’re lacking sleep and yet no one considers the root cause. If you think skipping a few hours of sleep a night is worth to a few thousand dollars a year (at best) then you’ve got some seriously fucked up priorities.
I admit that people aren’t dropping left and right inside these firms due to lack of sleep but let’s quit pretending like working hours upon hours, putting your health at risk and coming into work looking like – pardon the expression – death warmed up is some kind of badge of honor.
When is this officially a pattern? Or is it simply a trend? Qiao Xing CFO Jiang Aijun resigned today but have no fear investors! – the company has appointed a financial controller and is on the hunt for a new CFO.
Plus they’re planning to file their fiscal 2010 results a month ahead of schedule. The company’s stock was down 12% for the week prior to today’s announcement and unfortunately, all this fresh news doesn’t seem to have calmed anyone down. [Dow Jones, Earlier, Earlier]
Or in some cases, just plain fraudulent.
In prepared remarks at an investors conference, Luis Aguilar said he is increasingly concerned about the proliferation of small private companies that elect to merge with public shell companies in lieu of more rigorous methods of becoming public, such as a traditional IPO. “While the vast majority of these companies may be legitimate businesses, a growing number of them have accounting deficiencies or are outright vessels of fraud” Aguilar said, speaking at a Council of Institutional Investors conference here.
”There appear to be systematic concerns with quality of auditing and financial reporting,” he said. “Even though these companies are registered in the U.S., we have limitations when it comes to enforcing U.S. securities laws with them.”
US Securities Regulator Aguilar Sounds Backdoor-Merger Alarm [Dow Jones]
SEC official concerned with ‘back-door’ listings [MarketWatch]
“Companies are under pressure from investors to get the best auditor they can,” said Paul Gillis, an accounting professor at Peking University in Beijing. More than 200 Chinese companies are listed on U.S. exchanges, and hundreds more trade on over-the-counter bulletin boards. In the last five months, at least 15 have upgraded to a Big Four auditor — Deloitte, Ernst & Young, PricewaterhouseCoopers or KPMG — from a smaller firm, according to an analysis from Audit Analytics. [Reuters]
We Americans do love a good firing squad/lethal injection/electric chair/hangin’ but the Chinese make us look like a bunch of pansies by comparison. However, after several millennia, China might be getting soft in its old age. As the Associated Press reports, some economic crimes have been pulled from the “do this and die” list:
Thirteen economic, nonviolent offenses will be removed from the list of 68 crimes punishable by death, said Lang Sheng, who heads a legal committee for the National People’s Congress, China’s legislature. The 13 crimes include forging and selling invoices to avoid taxes, and smuggling cultural relics and precious metals such as gold out of the country.
However, it should be noted, “[A]n expert said the move was unlikely to significantly reduce executions, since people convicted of those crimes in the past have rarely received the maximum penalty and capital punishment can still be used to punish other economic crimes such as corruption.”
We’re not intimately familiar with all the potential criminal tax pitfalls in China, so it’s safe to assume there are plenty of other tax crimes that will still get you the dirt nap. International tax scofflaws should tread carefully.
Patrick Pichette admits that, despite some less than ideal position on censorship, the GOOG still has a mad crush on those 1.2 billion searchers and their right to know who won the Nobel Peace Prize:
Pichette told The (London) Times that it was not the end. “China has 1.2 billion people. For Google to say, ‘We’re going to live on our mission, but not serve 1.2 billion people’ — it just doesn’t work. China wants Google.”
He spoke of the “great firewall of China,” where censors filter the information that China’s internet users can view.
He said: “[If] you were in China last week, two weeks ago, and you typed in Nobel Peace Prize — there were no results. Think of Google’s brand now. You’re Chinese, you know that’s not true, that the Nobel Peace Prize has not disappeared from the face of the earth. There lies the issue of brand. There lies the issue of our mission.”
The Wall St. Journal’s China Real Time Report stumbled upon the BDO/Grant Thornton
poaching exodus merger situation (some may say, “clusterfuck”) in Hong Kong and we have no choice but to take issue with it.