Financial Fraud Was Questioned In The US, &Nbsp, Accounting Standards Differ As Excuses.

In early April, Muddy Waters, known as the "anti-counterfeiting specialist", issued a new report, which alleges that the Chinese listed company, NYSE:DGW, is listed in the NYSE. financial fraud Problem.

The reporter's report, entitled "how far is the difference?" shows that the amount of the company's entry to the land assets is too high. In the two reports, the data on the construction projects are not consistent, CFO has no Chinese background, and its distribution network is virtual.

Accordingly, Muddy Waters believes that the annual income of multi year global water will not exceed $800 thousand, which is far from its declared $154 million 400 thousand when it first launched in the US.

This is the usual methodology of Muddy Waters: to find out the difference between the two financial statements between China and the United States, so as to explore the clues. The original Chinese audit report was issued by a local Langfang Zhongtian accounting firm.

"How can we know that distance is so far away from us?" Ni Zhongsen told our reporter. One of the main businesses of Hengrun international Vantage Capitals Ltd, chairman of the board, is to provide financial advice when small and medium enterprises are listed overseas.

For those Chinese enterprises wishing to make a big difference in the capital market on the other side of the ocean, "distance beauty" is mainly reflected in the difference of accounting system as an excuse.

However, in recent years, the accounting standards of the two countries are increasingly convergent. Richard Cant, President of Dezan Shira & Aoociates, a former Ernst partner and current financial consultancy, told the newspaper: "there are indeed differences between Chinese and American accounting standards and auditing systems, but these differences can not explain tens of millions of annual revenue errors."

The mystery of two sets of financial statements

A number of Chinese enterprises are questioned by financial questions. Richard Cant said, "as far as I know, the common practice is to counterfeit bank statements, fabricate nonexistent loans, fictitious assets, dummy sales contracts, forge inventory lists, so as to achieve the purpose of VAT fraud."

Ni Zhongsen said that all of these fraudulent practices are ultimately aimed at increasing revenues and profits and earning high liquidity in the US capital market with higher profitability.

At the same time, the investigation agency produced two sets of accounts against the "killer" and provided intermediaries for the audit services in the United States. It was also quickly drawn from the list of PCAOB.

"Small and medium-sized firms have not been trusted by PCAOB, and big firms are becoming more and more strict and prudent. This is the reality." Ni Zhongsen said.

He pointed out that even if this is the case, accounting firms will still be unable to achieve the two set of financial reports completely because of the differences in audit systems between China and the United States. The Chinese accounting standards (PRC GAAP) are formulated according to the international accounting standards (IFRS), while the US GAAP has certain differences with the former in some details.

After comparing the two sets of criteria between China and the United States, it is found that the difference between them is mainly reflected in the differences between the details of borrowing cost, such as capitalization or cost, intangible assets amortization, identification of related parties and income recognition.

"For example, it is a little different if we confirm the income at the time of the invoice or when the goods are confirmed offshore." A tax manager told this newspaper.

A Chinese certified public accountant who did not want to be named told us that the US accounting standards were more international accounting The guidelines are more prudent and adopt a more cautious attitude towards fair value. There is no possibility of "loopholes" at the standard level.

However, the industry has stressed to reporters that in recent years, US GAAP has gradually moved closer to IFRS, which means that the gap between PRC and GAAP is getting smaller and smaller and has been gradually integrated.

Ni Zhongsen provided another possibility for the difference between the two sets of earnings reports: "China's accounting and tax laws are inconsistent, and some permanent differences can not be solved. It is not always possible to sit on the false data of some companies through tax department data.

Financial fraud can not be easily detected.

"There is no need for improvement in accounting standards," Richard Cant said. "The key is whether it can be implemented well."

The usual auditing practice is that the four big accounting firms in the United States or other PCAOB appointed firms receive a IPO audit project of a company, and then appoint a partner or senior manager to come to the country to cooperate with the brothers office under the same name in the country and provide the latter with the main audit team.

The above tax managers said that if they met a relatively small audit fee, they would simply use the domestic team, so long as they could check the offices of the United States before issuing the earnings report. If there is no domestic team in the office, it may also cooperate with a domestic firm.

Ni Zhongsen disclosed that domestic accountants are well versed in certain manipulations, especially in terms of conservatism and US GAAP.

"In China, the operation of specific problems is relatively flexible. For example, how long is the age of accounts, we must make allowance for bad debts. In China, if the company can produce some evidence to prove that the money can be collected, the firm will not force it to prepare for bad debts. He said.

The reporter learned from many accountants who participated in the PO field audit that fraud was obvious in the revenue recognition link. In theory, the consultation link that can break a lie lies in many ways. Richard Cant said he had met with a diligent investigation of Chinese companies and banks colluding, dumming the bank's bills, "the accountants can not easily notice."

And Ni Zhongsen said frankly, if it involves the need to third parties (such as the custody of the warehouse, Accounts receivable The domestic atmosphere is "irrelevant, high hanging up", it is difficult to complete the consultation process. At the same time, the audit time is very intense. Finally, firms will adopt alternative procedures with lower efficiency.

"It's really not easy to be a certified public accountant in China," Richard Cant joked. "They have to learn how to ask the right questions. Otherwise, it is impossible to judge whether the tables and chairs in front of them belong to the boss or to the company name.

China and us strengthen audit docking after S&ED

Last July, PCAOB and SEC jointly issued an official warning statement, saying that financial audit reports issued by companies in China must be treated with caution.

The problem is, because SEC has no right to summon the companies in China, the investigation of these fraud cases seems to be stretched. Richard Cant pointed out in his report that SEC can only exert pressure on the Chinese authorities to carry out the next investigation.

However, after the third round of strategic and economic dialogue between China and the United States (S&ED), the two sides said they would first strengthen their audit docking in areas such as combating counterfeiting and counterfeiting. SEC also has similar statements, hoping to narrow the grey area through cross-border cooperation.

"At present, Chinese companies need to learn how to truly survive in the US capital market. The usual practice of Chinese companies is that disclosure is not timely and incomplete, and the response is slow or even unresponsive. These are serious problems. Zhu Shenling, a lawyer from Shanghai Office of Beijing Heng lawyers group, told this newspaper.

However, Ni Zhongsen believes that the increasingly stringent regulatory environment in the United States may lead enterprises to divert to other markets. "If the situation in the United States is not good, it is not necessary to go to the United States."

While Richard Cant has observed a new situation, he believes that at present, IT enterprises will still take the US as the first choice for listing, while traditional manufacturing is not necessarily.

"More investors willing to profit from China's development, those who originally wanted to invest in stocks or mutual funds, might be willing to turn their attention to direct investment."