In a June 28th article titled “China Firms Face Research Armies,” the Wall Street Journal reported that research firms are swarming to Chinese companies to examine their financial reporting following revelations of accounting problems in dozens of firms.
Investors eager to share in China’s economic boom are discovering that risk management is far more difficult and more costly in China, where SEC regulations do not apply.
Even companies listed on U.S. exchanges through reverse mergers face minimal SEC scrutiny and a significant number of these have been exposed as potentially fraudulent in their accounting practice.
On December 3, 2010, Audit Integrity published an INSIGHT column (Download AI_20101203_Insights_China) in which we identified 29 U.S.-listed Chinese companies at high risk. Using our quantitative Accounting & Governance Risk (AGR®) metrics, we determined that these companies either did not have a viable business purpose, or that some kind of accounting misrepresentation was taking place. Six months later, we reported in Business Insider (Download AI Press 2011-0531 Bus Insider) that the stock price of the listed companies had fallen 32 percent.
The extreme volatility of the companies we listed is further evidence of the value of forensic measures in identifying areas of risk long before it becomes public knowledge.
This week we will provide our clients with an in-depth INSIGHT report on the subject of accounting and governance risk measures for U.S.-listed Chinese stocks.