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Chinese companies listed on U.S. stock exchanges fell, following two high-profile auditor departures

Posted by Author on March 15, 2011

(Reuters) – Shares of several Chinese companies listed on U.S. stock exchanges fell on Tuesday as investors became more wary of accounting shenanigans following two high-profile auditor departures.

China-based companies’ shares have been under pressure for months amid scrutiny of their books and a spate of shareholder lawsuits alleging accounting fraud.

Jitters intensified this week after one Chinese company said its auditor had resigned and another said an auditor was dismissed.
Hong Kong-based China MediaExpress Holdings Inc (CCME.O), accused last month of inflating results, on Monday said its auditor Deloitte Touche Tohmatsu severed ties with the company, citing an inability to rely on management information.

Also on Monday, Subaye Inc(SBAY.O), which provides online business services, said its chief financial officer resigned, while China Agritech Inc(CAGC.O) dismissed Ernst & Young Hua Ming as auditor, questioning its independence.

“Seeing auditors get fired or resign is a huge red flag,” said Jacob Zamansky, a lawyer and founder of Zamansky & Associates, which focuses on securities fraud. “I don’t think auditors want to have that exposure if they think there are problems at a firm.”

China Agritech said it questioned its auditor’s independence because it had hired another branch office of Ernst & Young to test its internal controls.

Pressure has also intensified this week ahead of a deadline to file audited annual reports, due for many companies on Wednesday.

Auditors are concerned about their own legal exposure if they sign off on a company’s books, Zamansky said.

REVERSE MERGERS UNDER SCRUTINY

Shares of China Sky One Medical Inc (CSKI.O), whose accounting was questioned by short sellers last year, fell 8 percent on Monday. Shares of China HGS Real Estate Inc (HGSH.O) fell nearly 20 percent, while Zuoan Fashion Ltd (ZA.N) shares fell almost 12 percent.

Shares of China Biotics(CHBT.O), whose accounting was questioned by independent Website Citron Research in September, fell 4 percent. Citron Research has said it almost always holds a position in the securities it profiles.

Shares of Orient Paper Inc (ONP.A), which was accused by research firm and short seller Muddy Waters in June of overstating revenues, fell 7 percent. Orient Paper has denied Muddy Waters’ allegations.

“I don’t believe that Orient Paper’s stock price today has much to do with people’s perception of fraud at the company,” said Drew Bernstein, co-managing partner at auditing firm Marcum Bernstein and Pinchuk LLP and chairman of Orient Paper’s audit committee. “It has gone through a massive investigation, and there was no wrongdoing found.”

Investors have been nervous because many Chinese companies went public in the United States through mergers with shell companies, known as reverse mergers, which entail far less scrutiny than traditional initial public offerings because no money is being raised.

“They can use accounting firms and law firms that don’t typically know the space or have good reputations because they’re not raising money,” Bernstein said.

What has made investors especially nervous is that now even companies audited by a Big Four auditor such as Deloitte are seeing their accounting questioned, he said.

Deloitte’s resignation letter said it “was no longer able to rely on the representations of management,” China MediaExpress said. China MediaExpress said it was starting an investigation into issues Deloitte uncovered.

Muddy Waters in February had accused China MediaExpress of inflating its revenues and overstating the number of buses it operated. China MediaExpress provides televised air time on buses in China.

– Reuters

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