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Another One of Deloitte’s Former Chinese Clients Has Been Charged with Fraud

Posted on by Caleb Newquist

When fraud allegations first arose in 2011 against China MediaExpress, CEO Zheng Cheng countered with confidence, telling shareholders that everything was tip-top and the company had a 'reputable and well-known' audit firm behind them. Of course, later that firm — Deloitte — resigned, along with the CFO. 

I suppose when you're in a situation like that, you sorta roll with the punches and hope that things don't get any worse. Today, things kinda got worse. 

The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People's Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger. In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not. The company's chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy. 

In a little bit of added fun, according to the SEC's complaint, after Deloitte had brought up some concerns and an investigation had started, Zheng then tried to bribe a forensic accountant with $1.5 million "to assist in the investigation."  

There's nothing like brazen fraud. But a brazen attempt to cover-up that fraud is an especially nice touch.  

SEC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case [SEC]
Complaint [SEC]

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Muddy Waters CEO: There Are Some Big 4 Partners in China Conspiring to Defraud Investors

As you probably heard, the PCAOB officially put out a proposal earlier this week for audit partners to be named in the annual reports of public companies. It would also require “registered firms to disclose the name of the engagement partner for each audit report already requirethe form” and “disclosure in the audit report of other accounting firms and certain other participants that took part in the audit.”

While most Big 4 audit partners are probably feeling a little chapped by this whole proposal, there is at least one person going on record (by way of PCAOB comment letter) that feels that it doesn’t go far enough. That would be Carson Block, the CEO and founder of research firm Muddy Waters. In Block’s letter (in full on page 2) to the Board he writes that not only should the engagement partner be identified but that he or she should be putting their name on the audit opinion because “[it] will decrease investors’ future losses to fraud and gimmicky accounting by billions of dollars.”

That on it’s own is enough to get more than a few people riled up. But as we indicated, there are some conspiracy and fraud accusations as well:

Even the most reputable auditors in China seem to be in a race to the bottom. We believe that there are particularly egregious situations in which some Big Four partners in China offices have actually conspired with their clients to defraud investors. Further, it is a reasonable proposition that the conflict of interest inherent in the Chinese auditors’ business model also affects the quality of US company audits.

Now before your knickers in a twist, don’t forget that this is the guy who called Sino-Forest a “Ponzi Scheme for the 23rd Century” which more or less looks to be accurate. Further, if you consider all the trouble Big 4 firms have had with Chinese companies listed in the U.S. and elsewhere, it doesn’t seem to be that much of a stretch that some partners would just say fuck it and work with their clients to keep a lid on the shenanigans than go through the pain of actually doing their jobs.

Regardless, with these accusations the PCAOB may try to make another run at getting the Chinese to play ball.


Carson Block 102011

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