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Auditor Challenges: Another U.S.-listed Chinese Firm Accounting Scandal

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Auditor ChallengesChina Electric Motor said (On Wednesday) that its auditor, MaloneBailey, resigned over discrepancies in its bank records. It is one of many U.S.-listed Chinese companies with accounting irregularities. Last month, Longtop (listed on the New York Stock Exchange in 2007), disclosed that its auditor Deloitte Touche Tohmatsu CPA had resigned, alleging the company falsified some of its financial records, noted by Reuters on one of its headline.

Longtop’s shares are now suspended pending an SEC investigation, joining another 15 Chinese firms currently subject to a trading halt on the NYSE or Nasdaq. Deloitte’s resignation letter claimed Longtop’s bank told the auditor previous financial confirmations they provided were false and omitted details of significant borrowings and incorrectly stated the deposit figures.

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In fact, there are now more than 200 Chinese companies listed on the New York Stock Exchange or Nasdaq according to the Reuter’s headline. U.S. investor keen for tapping into China’s huge economic potential is starting to sour as scepticism grows about the veracity of many of these companies’ financial records.

CSRC (China Securities Regulatory Commission) periodically keep combating fraud in the domestic market, and there have been few high-profile crackdowns in recent years. The frauds involving U.S.-listed Chinese companies put U.S. regulators in a difficult spot that they can suspend or delist companies’ shares and penalize the U.S.-based auditors who signed off on their accounts, but cannot easily punish Chinese executives.

America hopes one way to improve accounting standards and detect potential fraud earlier will be if China allows the Public Company Accounting Oversight Board (PCAOB) to inspect auditors working for U.S.-listed companies on the mainland.

It is a big challenge for auditors, however, as some experts say that what PCAOB effort trying to do would be of limited value because many Chinese companies do not accept corporate governance standards expected in the global capital markets. For a start, it’s not necessarily the case that most U.S.-listed Chinese companies have worse auditors than those in the rest of the world—indeed, many use the local offices of the big four accounting firms. And auditors are operating in an environment where not all listed companies accept corporate governance norms required for publicly owned enterprises in the west. (Via: Reuters)

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