US-listed backdoor firms under probe

  • Business
  • Wednesday, 06 Apr 2011

WASHINGTON: Securities regulators are probing Chinese and other foreign companies with questionable accounting practices that have used backdoor methods to access US capital markets, a top regulator said on Monday.

“In recent years we have seen a spike in private companies merging with a public shell company as a way of going public,” said Luis Aguilar, a commissioner at the US Securities and Exchange Commission (SEC).

“While it is Chinese companies that have grabbed recent headlines, the problems coming to the forefront would not necessarily be limited to companies based in China.”

He added that while the majority of these might be legitimate businesses, “a growing number of them are proving to have significant accounting deficiencies or being vessels of outright fraud.”

Aguilar was speaking to the Council of Institutional Investors spring gathering about a growing trend that has caused alarm at the SEC and led to trading suspensions and other enforcement actions.

At issue are moves by private foreign companies to merge with US shell public companies to raise capital. Many of these companies have been Chinese. In some cases they have used a procedure known as a reverse merger to bypass the due diligence of an initial public offering.

But many of these businesses often have problems with the quality of their accounting and the SEC has been on the prowl for deficiencies and for ensuring the accounting is in line with US standards after some companies hired unknown auditing firms.

Last week, the SEC suspended the trading of China Changjiang Mining & New Energy Co Ltd a Nevada company with headquarters in China amid questions about the accuracy of its public filings and the resignation of its auditor.

In another case, the SEC launched a formal investigation against Chinese printing equipment maker Duoyuan Printing on concerns it filed false documents, failed to maintain adequate financial records and deceived its external auditor, Deloitte Touche Tohmatsu.

Since January 2007, Aguilar said there had been 600 backdoor registrations of this nature, 150 of which were based in China.

He said there was concern that US accounting firms were signing off on the companies' statements without performing their own independent work and were relying instead on auditing firms in China.

“If this is true, it could appear that the US audit firms are simply selling their name,” Aguilar said.

He said the SEC had launched an internal task force to probe fraud by overseas companies listed on US exchanges.

“Our staff is committed to doing everything we can,” he said. “The SEC has already brought cases and will continue to do so.”

The watchdog over audits of public companies has had trouble gaining access to overseas auditors to conduct inspections in China and other countries.

On Monday, Public Company Accounting Oversight Board chairman James Doty said the board continued to “meet resistance” to inspections in China, leaving a “gaping hole” in investor protection.

“There are also significant risks associated with audits of operations of US companies in China,” Doty said in prepared remarks to the same investor event.

“We are finding through our oversight of US firms that even simple audit maxims, such as maintaining the auditor's control over bank confirmations, may not hold given the business culture in China.” Reuters

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