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Auditors Play Defense on China Stocks

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On July 26 -- two weeks after the PCAOB sent out its notice to auditors -- the SEC issued a final rule concerning the oversight of PCAOB inspections. The rule granted the right of audit firms to ask the SEC to review PCAOB findings. The SEC can now override PCAOB decisions, on occasion.

The PCAOB was taken by surprise by the SEC's move.

"The Board was not consulted concerning this rule and was not aware that it would be issued yesterday," PCAOB Acting Chairman Daniel Goelzer said in July. "We are studying the Commission's release in order to understand its impact on our work."

One impact seems fairly clear: Delays.

Auditors say they often get caught up in issues that have little to do with a company's financial statements, and can be blamed for the collapse of a stock even when their role is positive.

Kabani mentions the notorious case of Bodisen Biotech (BBCZ.PK), a reverse merger company that hit the skids in 2006 after short sellers and journalists raised key questions. The stock traded for about $20 a share in early 2006. It finally spiraled down to 12 cents last year, before recovering slightly, to about 50 cents a share recently.
Benjamin Wey
Benjamin Wey

Kabani says that, because his firm audited Bodisen, it has been unfairly blamed for the blow-up, lumped together with the chief promoter of the Bodisen deals, Benjamin Wey of New York Global Group.

While on retainer with Bodisen, Wey's firm used a pseudonym to publish glowing assessments of the company, documents filed in a shareholder lawsuit show. Investors claimed they were led to believe the assessments were independent. Days before Bodisen severed ties with Wey, New York Global earned commissions from handling the sale of more than $15 million in Bodisen stock, according to forms filed with the SEC.

At the time, Bodisen announced an intention to defend itself vigorously. Shareholder suits against Bodisen were dismissed.

In delisting Bodisen, the Amex expressed concerns both about Wey's role and about Bodisen's internal accounting. But Kabani maintains that no one has challenged the financial statements his firm prepared for the company, and that he and his company have been criticized unjustly.
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