Chinese Stock Investment Fraud?

Separating Fact from Fiction

By Tim Harvey, CFE, JP;Richard Hurley, Ph.D., J.D., CFE, CPA

richard-hurley-80x80.jpg   tim-harvey-80x80.jpg   Global Fraud Focus 

Examining Cross-Border Issues

According to a June 5 article, "China foreign listings dogged by scandal," by Robert Cookson in the Financial Times, a spate of scandals at Chinese companies listed in New York, Hong Kong and Toronto is unsettling investors. 

"It seems to have bubbled into a hysteria and creates an unfortunate overhang over all Chinese companies seeking to raise capital in the U.S. markets," said William McGovern, Hong Kong-based partner at Kobre & Kim and former enforcer at the U.S. Securities and Exchange Commission. "It has become hard for investors to separate fact from fiction." 

And a May 26 article in The New York Times, "The Audacity of Chinese Frauds," by Floyd Norris, explains how Deloitte Touche Tohmatsu exposed fraud at one of its long-time clients, the Chinese financial software company Longtop Financial Technologies. Apparently, the company fooled some smart people into buying devalued stock. 

Are these stock scandals "legitimate" frauds aided by backdoor investment listings and outsourced by auditing firms? Or are they works of fabrication initiated by short sellers reaping profits selling on stock price declines either by allegations or innuendo? The reality is that there is probably a mixture of everything from fact and fraud to analysis and anxiety within the perceived red-hot Chinese stock market. 

Would-be investors should be aware of the potential for fraud in any investment no matter its national origin. The U.S. Public Company Accounting Oversight Board (PCAOB) released a report on March 14 on the "Activity Summary and Audit Implications for Reverse Mergers Involving Companies from the China Region" (the China region refers to the People's Republic of China, Hong Kong Special Administrative Region and Taiwan) from Jan. 1, 2007, through March 31, 2010 (Research Note #2011-P1). 


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By Anonymous
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By William_35
I am not sure what to make of this article. Having worked in China for a number of years I find the approach of most Americans to be simplistic and lazy. It is true that the pace of industrialization far out paced the growth in governance and accounting. I would think that potential investors should do their own due diligence and not depend on third parties. One company I worked for was seeking investors. The Americans asked for the annual reports, audited financial statements and similar documents (all translated). The Japanese, Chinese, Germans and Singaporeans all visited the winery, viewed operation,the machinery and inventory. They for good or bad had a much clearer view of the operation. I believe Americans need to do the same.