Postings | China Accounting Blog | Paul Gillis


Schooling the auditors

Recently, a number of Chinese companies listed in the US have come under attack by short sellers alleging fraud. So far they have taken down one: RINO International, delisted from Nasdaq in 2010. A great deal of pressure has come down on the auditors of these companies.

Anyone who follows the market for Chinese companies listed in the US has probably heard of Austin based investor John Bird. Bird is credited for focusing the attention of short sellers on these stocks. Convinced he could not effectively sue China Sky One Medical in the US because all of the companies assets were in China, Bird sued its U.S. based auditor MSPC. “I just got pissed off, and I’m a stubborn man,” he says. Frazier Frost clients ended up on a list of short seller's targets after RINO failed. Auditors are back in the limelight in two other cases.

CCME and Deloitte

China Media Express (Nasdaq CCME). CCME traded at $22.81 on January 27, but plunged to $11.09 on February 3 when Citron Research declared it “Too good to be true”. Muddy Waters, the firm that brought down RINO, announced on February 3 that it was initiating coverage on CCME with a strong sell recommendation. The stock closed at $14.42 on February 18. With a price earnings ratio of six to one, I think we can fairly state that the stock is mispriced. If the allegations are true, it should be worth much less; if false, it should be worth much more. Unlike most of the other firms that have been alleged to be frauds, CCME is audited by a Big Four firm: Deloitte.

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