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Auditors Play Defense on China Stocks

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And there, Wey says, "is the one major mystery and why you have this fuss over the China reverse mergers and IPOs."

Those kinds of bookkeeping discrepencies prompted recent short-seller attacks against China Green Agriculture (CGA - Get Report), another client of Kabani's firm.

Shorts have focused on a stark discrepancy between the 2008 revenue numbers that the firm reported to the SEC and much lower revenue numbers reported on tax filings in China. In response, China Green Agriculture issued a press release on Sept. 13 saying "a number of bloggers believed to be short sellers or affiliated with short sellers have posted incorrect and defamatory reports."

"It is well documented that reports filed with the PRC State Administration for Industry and Commerce (SAIC) often do not reflect the comprehensive income and financial condition of a company," China Green said in its Sept. 13 release. "Oftentimes, Chinese companies access SAIC filings to learn more about their competitors to gain a commercial advantage. As a result, many companies have understated their financial results in such filings."

Kabani suggests that the world needs uniform guidelines for auditors -- a solution not likely to happen, anytime soon, other experienced professionals say.

"Look, there are bad people everywhere. It's not that China is bad or here is bad. We can't characterize it that way," Kabani says. "But if you have a uniform system of reporting and a uniform system of auditing, then you can at least have some form of assurance."


- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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