MIND THE GAAP: Ringing in the New Year
New Year’s resolutions come in all shapes and sizes. This year, investors may seek refuge in the adage “older but wiser” with respect to the flurry of questionable financial reporting during 2011 at Chinese companies listed in the United States.
Auditors have been caught directly in the crossfire. As we highlighted last quarter, the SEC is seeking to compel a Chinese affiliate of Deloitte to produce documents in connection with allegations of accounting fraud at Longtop Financial Technologies, Ltd. In early January 2012, a federal judge ordered the affiliate to appear in court on February 1, 2012 in order to defend against such production.
Notwithstanding recourse against auditors, investors should continue to be attuned to the risk of accounting irregularities at Chinese companies listed in the United States. The Financial Times reported striking empirical evidence from 2011 attributable to accounting irregularities, including that:
- the amount of money raised by Chinese companies via IPOs on U.S. exchanges was outpaced by the value of Chinese companies delisting from U.S. exchanges;
- Chinese companies listed on U.S. exchanges raised only half of what such companies raised in 2010; and
- not a single Chinese company became publicly traded on any U.S. exchange during the fourth quarter of 2011.
OUR TAKE: Action by U.S. regulators and judicial bodies with respect to accounting fraud is evolving, and 2012 likely will see developments in this area. Investors have been responsive to, and should continue to scrutinize, the risks associated with foreign companies listed in the United States.
If you would like to catch up on our series tracking developments related to allegations of accounting fraud at Chinese companies, our posts are available at the links below: