Thursday, December 06, 2012

The SEC Sues Chinese Accounting Firms

This will have grave ramifications:

a) the interest in overseas listed China companies may dwindle even more, with the exception of those listed in HK as they are usually the biggest and more top in their industry; even so, those red chips in HK may see a slight pullback in interest;

b) You can forget about the smaller China companies wanting to list overseas now;

c) Other small exchanges may be "further convinced" to do even more due diligence and examination on those China companies already listed at their exchanges, and may use more of their regulatory powers to uncover any potential wrongdoing

d) the case basically ask the firms to release the papers for the China companies, which the accounting firms say they cannot as they are termed as "state secrets"; what will happen is that the US judge will rule that they have to release, then we have fireworks between Beijing and Washington; if Beijing insists, the China companies will have to delist from US exchanges

e) even now, shares of these China companies are weakening further, prompting many Venture Capital and Private Equity firms in the US to try and take the "good ones" private; for the rest it is doomsday, although some good one may be able to shift their listing back to Shanghai, HK or Singapore ... but only the decent ones will find a home.


The SEC Sues China Accounting Firms
The United States Securities and Exchange Commission (SEC) is suing subsidiaries of China’s five biggest accounting firms, the agency announced on Dec. 3. The SEC has been investigating nine Chinese companies for possible accounting fraud, but these firms declined to provide auditing drafts to the SEC.

The SEC claims that the Chinese subsidiaries of Deloitte, Ernst & Young, KPMG, Price Waterhouse Coopers and BDO International have violated the United States Securities Exchange Act and Sarbanes-Oxley Act. These laws require overseas accounting firms to submit auditing drafts when an overseas company plans an IPO in the United States.

Securities regulators took aim at the Chinese affiliates of big global accounting firms Monday, after a wave of accounting debacles at publicly traded Chinese firms that led to billions of dollars of shareholder losses.

In the U.S., the Securities and Exchange Commission brought an administrative proceeding against five accounting firms, alleging they refused to hand over documents sought in investigations of alleged accounting frauds at nine Chinese companies.

The U.S. Securities and Exchange Commission, investigating alleged accounting fraud in China, has charged the Chinese affiliates of five major accounting firms for refusing to produce audit work papers. The WSJ's Ken Brown talks about how this may affect multinational companies.

SEC Probe Puts China Listings in Doubt

In Canada, the top securities regulator accused Ernst & Young's Canadian affiliate of missing problems during its audit on Sino-Forest Corp., a timber company that filed for bankruptcy protection this year amid questions about its disclosures.

The accounting firm agreed to pay 117 million Canadian dollars ($117.8 million) to settle separate shareholder allegations that it misled Sino-Forest investors. The settlement disclosed Monday was the largest ever by an auditor in Canadian history, a plaintiff's attorney said. Ernst & Young didn't admit wrongdoing in the settlement, which must still be approved by the bankruptcy court.

Dozens of Chinese companies have raised billions of dollars in the past decade listing their shares on U.S. and Canadian exchanges, before their share prices plummeted amid questions about their bookkeeping and disclosures.

The SEC action, if an administrative law judge rules in its favor, could lead to the Big Four's Chinese affiliates being barred from auditing U.S.-traded companies—something that could complicate the audits of multinational companies doing business in China. The regulatory moves also stand to heighten a U.S.-China confrontation over how much U.S. officials can do to ensure that Chinese audit firms adhere to U.S. regulatory standards.


An SEC administrative law judge will hear the commission's cases against the China-based accounting firms. If the judge decides against the firms, they could be suspended from seeking new U.S.-traded clients, or even blocked entirely from auditing U.S.-traded companies.

In the Canadian case, the Ontario Securities Commission alleges Ernst & Young didn't exercise enough skepticism in its audits of Sino-Forest to verify the ownership and existence of the company's most significant assets.

According to the commission, for instance, one Ernst & Young auditor in its Canadian affiliate acknowledged in an email to another auditor that the firm had no way of knowing that the trees the audit firm was inspecting were actually owned by Sino-Forest: "I believe they could show us trees anywhere and we would not know the difference." In addition, the commission said, several of Ernst & Young's senior partners at the affiliate involved in auditing Sino-Forest couldn't read or speak Chinese.

Ernst & Young's Canadian affiliate said it was "confident" its Sino-Forest work had met all standards and that the firm "did extensive audit work to verify ownership and existence of Sino-Forest's timber assets."

Ernst & Young said its settlement with shareholders "is without admission of liability" and "will reduce the uncertainty and future burden on our business, and allow us to focus on our people and our clients."

Sino-Forest was one of the largest forest-product companies listed in Canada when a report last year by U.S. short-seller Muddy Waters LLC alleged fraud at the company. Since then, the Ontario Securities Commission has started administrative proceedings against Sino-Forest, and several of its former executives already face allegations from the commission that they inflated timber purchases; the company is currently trying to restructure under bankruptcy protection. Sino-Forest last year conducted an internal investigation into the allegations, but executives have denied fraud.


Unknown said...

Just to get your opinion...

Najib Announced recently a Slew of Megaprojects for Iskandar in Johor Totalling 200 Billion. Pardon the Ignorance but what has been total FDI in Malaysia lately? Say in 2011?

Isnt that a trifle too high for one state?

Joe Black

Unknown said...

Just to get your opinion...

Najib Announced recently a Slew of Megaprojects for Iskandar in Johor Totalling 200 Billion. Pardon the Ignorance but what has been total FDI in Malaysia lately? Say in 2011?

Isnt that a trifle too high for one state?

Joe Black

ronnie said...

The comment about the trees remind me of the timber plays in the 90s.

Many of which have vanished!