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Chinese Auditors: Where Were You Yesterday?

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Last week, accounting firm BDO Global notched one of the latest entries in what can now only be described as a hilarious debacle in China. On Thursday, China-Biotics (Nasdaq: CHBT  ) filed an 8-K with the Securities and Exchange Commission, sharing BDO's lengthy resignation letter with investors.

The letter detailed familiar-sounding shenanigans for anyone following companies such as Longtop Financial (NYSE: LFT  ) -- which allegedly had help from lying bankers -- and Yuhe International (Nasdaq: YUII  ) -- which pulled a switcheroo on investors when a major acquisition fell through.

In China-Biotics' case, the auditors described "irregularities" in sales contracts and other suspicious incidents. For instance, when reviewing online bank accounts, they were "directed by staff of the Company to access a suspected fake website of the Bank." Classic.

The letter also thoroughly relates management's refusal to cooperate with the audit team or address the problems. In one of the few stabs that the company made at mollifying the auditors, it sent a response letter that wasn't signed by the CEO or CFO. The CFO later told auditors that he hadn't reviewed the letter before it was sent.

As a result, BDO concluded "that it is likely that the irregularities identified in our letter ... constitute illegal acts which could have a material effect on the financial statements of the Company."

Pretty gangster, right? BDO is like an accounting Chuck Norris or Steven Seagal, raining down pain in bucketfuls on any dastardly evildoers that dare cross them!

Not so fast.

Where was BDO before? Fraudulent Chinese reverse-merger companies aren't exactly breaking news. And let's be real here -- a company that appears willing to mess with sales contracts and direct its auditor to a fake website for its bank was likely oozing red flags all along.

And I don't mean to just pick on BDO here. An impressive number of auditors -- including the foreign editions of the Big Four -- appear to have been caught with their pants down. If the auditors finally start getting tougher and taking these companies to task, perhaps they can help clean up Chinese businesses, (eventually) allowing U.S. investors to invest safely in China.

Of course, if you want to invest in China now, you may want to sign up (absolutely free!) to follow my fellow Fools Tim Hanson and Nate Parmelee as they trek through China in search of the best shenanigan-free opportunities.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 28, 2011, at 1:07 PM, jekoslosky wrote:

    Hilarious if you are not among the unfortunate souls invested in these companies.

    I know it's become much funnier to me since I sold off all my Chinese stocks at break even a few months back.

    More about that decision here:

  • Report this Comment On June 28, 2011, at 2:17 PM, Gonzhouse wrote:

    ..."Tim Hanson and Nate Parmelee as they trek through China looking for the best shenanigan-free opportunities" - now that will be an accomplishment. The "funny" part is how amateurish these attempts at coverup have become. The scary part is there are companies practicing deception at much higher professional levels.

    It will be years before I jump back in this pool.

  • Report this Comment On July 04, 2011, at 10:58 AM, BraveDwarf wrote:

    Can you folks please investigate the failure of Boards's supervision over Chinese companies and come up with an analysis? Without strengthening of Boards's supervision, the problems of Chinese companies listed in US will hardly be solved. In another word, strengthening of Boards's supervision will help a lot in solving the problems.

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