The Sino Forest scandal last year put the spotlight on dodgy Chinese accounting. Chinese companies listed in the West and, were likely to become uninvestable, the Angry Analyst argued. Such negative publicity was also likely to damage confidence in Hong Kong listed stocks. Since then, a wave of new frauds has hit Chinese companies in New York and Hong Kong, leading to growing pressure on Western regulators to take action. In the last week alone, Nasdaq halted trading in Tibet Pharmaceuticals and Global Sources, and a Chinese pork processing company Zhongpin became the focus of a US Securities and Exchange Commission investigation on insider trading. Another heavily promoted Chinese reverse merger stock, Deer Consumer, a small Chinese kitchen and home appliance producer, delayed its 2011 annual report in March.
More significant was the resignation of Ernst & Young as Sino-Forest’s auditor. Ernst & Young, which faces lawsuits over its work for Sino, says Sino still cannot resolve outstanding issues in relation to its 2011 annual financial statements. This followed Deloitte’s resignation as auditor of two Hong Kong-listed Chinese companies, in March: Boshiwa International, a maker of children’s wear, and Daqing Dairy Holdings, which produces milk formula.
Further auditor resignations are expected to follow, given the increasing damage to their reputations. A review of the big four firms – Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers – by the Canadian Public Accountability Board, has found that roughly a quarter of audits fall below accepted auditing standards.
Of the 215 or so companies with operations in China that were listed in the US, 20 were delisted last year as a result of claims of fraud and insider trading, the FT reports. Another rash of fraudulent accounting will now finally force the Public Company Accounting Oversight Board to inspect the works of Chinese accounting firms auditing US public companies. Bizarrely, the PCAOB, which was created in the wake of the Enron accounting scandal, is presently barred by Chinese securities regulators from doing so. Putting profit before oversight, may explain why the PCAOB has allowed these Chinese accounting firms to audit US public companies, the FT suggests.
Likewise, the Ontario Securities Commission’s review of Canadian stock listings, by companies with most of their operations in China and other emerging markets, has found weak links at every stage of the listing process, including the role played by auditors.
Not surprisingly, shares in the Bloomberg China Reverse Merger index, which tracks 82 small Chinese companies that joined US bourses in reverse mergers, has tumbled 67% since its peak at the start of 2010. The index is now trading on a price-to-earnings ratio of just 4.6, compared to a ratio of 14.4 for the S&P 500.
Related: Beware This Chinese Export [Barron's],
How Long Before Eastern Europe Rebels Against EU Austerity?
It can only be a matter of time before Eastern European countries reject the EU’s austerity plans. By cutting their lending to central and eastern Europe, the western banks which dominate CEE banking are causing a full-blown credit crunch.
Western European bank deleveraging poses an especially big threat to Eastern Europe, as I warned in The Game is UP for the Commodity Super-Cycle As the Yo-yo Years Begin. After all, this is a region still struggling to recover from the last credit recession, and facing further financial turmoil from the euro-zone crisis (see Central Europe’s Special Hell).
The IMF and the European Bank for Reconstruction and Development continue to present a united front on the need for austerity to tackle the debt crisis. But as Emerging Markets magazine reports, the battle over austerity and growth has moved east, as hostility to further cuts in spending and tax hikes spreads across large swathes of Europe.