BEIJING—A series of alleged frauds at Chinese companies listed in the West has spotlighted the role of some of the world's biggest auditors in a fast-growing market where they have expanded quickly and competed aggressively in recent years.
Since February, the so-called Big Four accounting firms have resigned or been dismissed from at least seven Chinese companies listed in the U.S., according to SEC filings.
In most of those cases, the auditors said they had concerns about the accuracy of information provided by their clients, and in three instances, auditors quit the accounts before completing the auditing of any financial reports.
Dozens of mostly smaller Chinese companies listed outside that country have come under fire in recent months from regulators and investors, as a wave of fraud alleged by short sellers has erased billions of dollars in the Chinese firms' market value and triggered lawsuits and U.S. regulatory probes.
The companies in question represent just a handful of the hundreds of Chinese companies listed on U.S. exchanges. Still, some of the issues have caught the attention of regulators.
This week, officials from the Securities and Exchange Commission and the Public Company Accounting Oversight Board, which oversees audit firms, are meeting with China's Finance Ministry and the China Securities Regulatory Commission to restart talks aimed at allowing U.S. examiners to inspect auditing firms based in China. U.S regulators have been calling for access to China-based accounting firms that audit U.S.-listed companies, arguing that, at present, they don't have oversight of these firms.
Most of the companies in trouble were audited by small accounting firms. But the role of big accounting firms in auditing some of the companies has become a black eye for the firms in the view of some analysts and investors—particularly in cases where they disavowed previous earnings filings they had audited only after "short sellers," who bet on a fall in share prices, questioned the accounts.
In May, Glenn Greene, an analyst with Oppenheimer & Co., lowered his investment rating on two Chinese stocks audited by Deloitte Touche Tohmatsu after the accounting firm resigned as auditor for Chinese software company
Longtop Financial Technologies Ltd.
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"Given our limited conviction in Deloitte audited financial statements for Chinese IT services companies, at present, we are stepping to the sidelines and reducing our ratings and removing our price targets" for two firms, Mr. Green said in a May 25 report. The two firms—
VanceInfo Technologies Inc. and
Camelot Information Systems Inc.—weren't accused of any wrongdoing. Neither was Deloitte.
Gordon Lau, Camelot's chief financial officer, said the team of Deloitte accountants that audit his company's books is "totally independent" from the team that audited Longtop. "With the respect to Oppenheimer, we do not agree with the analyst's action, but we respect their research independence," he said.
A representative for VanceInfo didn't immediately respond to a request for comment. Deloitte declined to comment.
Deloitte parted ways with New York Stock Exchange-listed Longtop in Mayfollowing six years as its auditor after Longtop was accused by short sellers of inflating its business revenue. Longtop has denied the allegations.
In its resignation letter, Deloitte said, "we decline to be associated" with any of Longtop's financial communications in 2010 and 2011.
Longtop has said an independent investigation is reviewing Deloitte's concerns and the short sellers' allegations. Longtop declined to comment further.
Along with Deloitte, KPMG, Ernst & Young and PricewaterhouseCoopers—often referred to as the Big Four—declined to comment about their operations in China or the issue of alleged fraud among a few Western-listed Chinese companies.
Accountants say fraud can be difficult for auditors to detect. But in some instances, auditors have alleged fraud by their clients before anyone else has and before any regulatory filings were endorsed.
The Big Four have expanded rapidly in China, a market that has become the biggest source of new international stock listings and mergers.
The auditors are "guilty of taking bad clients," not of doing bad audits, said Paul Gillis, a visiting professor of accounting at Peking University's Guanghua School of Management. But, he said, "given the Big Four's pace of expansion, it's no surprise that they have a shortage of what you can call gray-hair or no-hair partners."
In China, the Big Four operate through joint ventures with local affiliates to comply with domestic rules. All of the Big Four accounting firms have international umbrella organizations and member firms in each country in which they do business. The member firms are separate entities that legally have no relationship to one another.
In 2004, Deloitte announced an aggressive bid to expand its China business, declaring the country "an area of virtually unlimited potential" and earmarking $150 million for investment here over the next five years. In 2006, a senior Ernst & Young executive told the state-run China Daily newspaper his firm planned to invest $200 million in China.
KPMG took on a "reverse takeover" company, fuel retailer and distributer China Integrated Energy Inc., as a client in December and signed off on its 2010 earnings filing dated March 16. A reverse takeover is a quicker and cheaper way of going public, but one that avoids the scrutiny of a traditional initial offering. Shortly after KPMG took the account, a short seller published a report saying long-term surveillance of the company's factories had revealed "no meaningful production activity." In late April, KPMG resigned, citing lack of cooperation in an independent investigation of China Integrated's accounting that was initiated in response to the short seller's report. KPMG said its audit report should no longer be relied on.
A representative for China Integrated declined to comment.
—Sue Feng
and Kersten Zhang in Beijing
contributed to this article.
