Saturday, March 1, 2008
"Investors who buy the U.S.-listed shares of small Chinese companies depend on financial auditors to offer independent and expert oversight on their corporate statements. ... There are many reasons accounting problems seem rife in Chinese companies. Kenneth Banet, the partner overseeing Grant Thornton's China practice, explains that Chinese reporting is tax-oriented, and companies don't report sales until customers pay their bills because sales tax is due immediately on receovables. Companies frequently underreport sales and profit to avoid being on the hook for taxes they haven't received. They also often borrow from related-party companies without repaying. ... Audits of Chinese reverse mergers are even more complicated. For one thing, the Chinese partners usually are opaque, with ownership structured through British Virigin Islands holding companies. The SEC doesn't scrutinize reverse mergers, until the new company raises funds", Leslie Norton (LN) at Barron's, 18 February 2008.
Having been involved in the audits of about ten Chinese companies which went public in the US through reverse mergers, I am sympathetic to Banet's observations. In my experience, Chinese companies, by and large lack competent accounting personnel and engage in many types of related party transactions which substance and form may differ.