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Will Handke is an investor and entrepreneur who currently resides in his home state of Minnesota. He is a recent graduate of Georgetown University, where he majored in American Studies and minored in Theology. Will’s introduction to the world of investing was largely incidental. When he was in... More
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  • A Positive Development for Chinese Reverse-Merger Companies that are Audited by BDO Limited 1 comment
    Oct 18, 2010 11:39 AM | about stocks: SPU, GURE, CMFO, CHBT, ONP

    As the followers of the Chinese reverse-merger sector are well aware, issues regarding accounting and corporate governance have played significant roles in triggering and sustaining the recent – though now turning – malaise in the stock prices of many small Chinese companies.

    One of the foremost issues that has been discussed is the credibility of accounting firm BDO Limited’s audits. BDO Limited is the Hong Kong member firm of the international BDO accounting network and is a leading auditor of Chinese reverse-merger companies. BDO Limited’s clients include SkyPeople Fruit Juice (NASDAQ:SPU), Gulf Resources (GFRE), China Marine Food (OTCPK:CMFO), China Biotics (OTCQB:CHBT), and Orient Paper (NYSEMKT:ONP). Author Note: CMFO, CHBT and ONP have all been accused of fraud by several vociferous members of the investing community, over the past few months – as of yet, no fraud allegations have been proven. Critics of BDO Limited’s credibility primarily base their assertions on the fact that the firm’s predecessor, BDO McCabe Lo was the auditor of the proven Chinese reverse-merger fraud China Expert Technology (OTC:CXTI) (A more complete description of the detractors’ claims can be found HERE). While I agree that such a disturbing link should merit further due diligence and more caution, I disagree with the notion that this troubling vignette from BDO Limited’s past should mean that all of the firm’s auditing work is now suspect.

    Apparently Grant Thorton, another large and well-regarded network of accounting firms, agrees with me. On October 7th, Grant Thorton’s Hong Kong member firm merged with BDO Limited, forming an enlarged firm that now has a staff of more than 1000 individuals, including over 50 partners, and a client-base of over 200 companies. Patrick Rozario, the CEO of Grant Thorton’s Hong Kong member firm had the following to say about BDO Limited:

    "Our partners believe that in line with the fast expanding business of the Firm, the business opportunities in China and around the region, we are joining a successful firm which has a solid reputation in the profession and great strength in Hong Kong. BDO provides a well established structure and support, in particular with its capabilities in China, for us to further develop our business. And, going forward, the enlarged practice would be well placed to provide a stronger service platform in both Hong Kong and China and further enhance our position in the market. We are very excited about this opportunity and the potentials and benefits that this strategic move will bring to our clients, staff and the accounting profession as a whole." Source

    This merger augurs well for all individuals who have an interest in Chinese reverse-merger companies that are audited by BDO Limited. This vote of confidence by Grant Thorton and the new resources available to the firm will likely translate into more thorough auditing processes. As a result, better information and greater confidence will be provided to long-investors and short-sellers, alike.

     

    Disclosure: Author holds long positions in SPU, GFRE, CMFO, CHBT and ONP.
    Stocks: SPU, GURE, CMFO, CHBT, ONP
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  • Business Economics Analyst
    , contributor
    Comments (2565) | Send Message
     
    I admit I am somewhat confused by people evaluating whether a company is a fraud or not by its accounting firm, as many frauds have been audited by large accounting firms.
    However, with regards to Grant Thornton, you point is not well supported or researched as Grant Thornton recently, on September 20, gave its Hong Kong member firm notice to leave the organization by March 2011. Thus, any perceived assurance by the Grant Thornton name is contradicated by this development. See www.big4.com/news/hong....
    Additionally, any perceived advantage of having a large auditing firms name attached for a China company or some other foreign country companies because you are not actually getting the large auditor. The large firms like Deloitte, KPMG, etc. are creating a loose affiliation of independent member firms who operate on their own without support of the large firm and the large firm claims no liability, but the large firms are allowing them to use their names.
    For example, KPMG is used to refer to KPM Huazhen, which is described at KPMG's website as:
    "KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such."
    KPMG expressly denies responsibility for any of the actions of these independent firms and expressly denies any liability for their actions.
    Virtually all of these large accounting firms have their operations set up this way. Thus, in my opinion, you are not really getting Deloitte, KPMG, or any of these firms, but some independent member firm who operates separately and pays to use the name.

     

    18 Oct 2010, 01:17 PM Reply Like
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