This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Auditors Play Defense on China Stocks

Frazer Frost has disintegrated. Formed a year ago as an independent firm representing a partnership between Frost, PLLC, and Moore Stephens Wurth Frazer & Torbet, LLP, Frazer Frost had counted more than 20 Chinese reverse merger companies as clients. The partnership has ceased operations. Requests for comment from the parent firms brought no response.

There is no question that auditors are key players in China deals. Properly audited financial statements are a key requirement for any new issuance of shares in the U.S. Audit firms in this country are normally given unrestricted access to a company's financial records. They are expected to check the veracity of statements in detail, verifying that customers and vendors exist, visiting facilities, cross-checking revenues and receivables, whatever it takes.

Audits of China-based companies are complicated by differences that relate to both standards and fees. Fees charged by Chinese audit firms tend to be a lot lower than those charged by U.S.-based firms, while standards at the Chinese firms are not so high, experts say.

Those factors work together to encourage RTO companies to retain Chinese audit companies for work in China. Jacob Frenkel, a former SEC attorney who specializes in small-cap fraud cases, says that U.S.-based audit firms frequently accept the China-based firms as affiliates and sign off on work done in China without investigating properly themselves.

"One of the problems," says Frenkel, now a partner at Maryland-based law firm Shulman Rogers, "is that even when it comes to Chinese accountants, there have been a good number of cases where they proved to be the facilitators of fraud, rather than fulfilling their roles as gatekeepers."

Only Monday, the SEC announced a settlement with Moore Stephens Wurth Frazer & Torbet, requiring the firm to pay $129,500 in connection with its work for a China Energy Savings Technology, a now defunct small cap that has been the focus of a series of SEC fraud cases dating back to 2006. The SEC asserted that MSWFT had good reason to exercise "heightened skepticism" with regard to China Energy, and failed to do so.

The fallout from allegations of fraud can be widespread. RINO International (RINO), a company that specializes in heavy environmental projects, was targeted in November by short-oriented research firm Muddy Waters. The allegation -- published on the internet -- was that Rino didn't have as many customer contracts as it had claimed. The company's CEO soon told auditors that the charge was partly true. The stock was delisted as a result.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player
2 of 6

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
CVVT $0.26 -13.33%
CGA $1.34 0.00%
AAPL $94.02 0.00%
FB $104.07 0.00%
GOOG $683.57 0.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs