So we have a real acid test under way here. Which of them, Deloitte or the shorts, will turn out to have egg on their faces? Is this company a dazzling profit-maker or a fraud that will deep-six Deloitte's reputation?
If the worst-case scenario comes to pass, it won't be for lack of waving red flags. Many of these Chinese small-cap companies came into being through reverse mergers, which also was the path to the public markets for many a penny stock shell-company frauds in bygone days. The Public Company Accounting Oversight Board issued an alert last summer, pointing out that "some U.S.-based firms issuing audit reports based on work performed by others outside the United States are not properly applying PCAOB standards." Instead, they rely on the work of overseas auditors. The PCAOB specifically mentioned Chinese companies in its alert.
Deloitte is far too reputable to do that. Or is it? Will this fine, upstanding company turn out to be as much of a sad sack as Frazer Frost, the auditor of the Chinese accounting fraud poster child RINO International (RINO)? Or it will be more on the order of Orient Paper (ONP), another Chinese reverse merger whose shares tanked on fraud allegations, but which was cleared in an internal probe aided by none other than Deloitte & Touche?
It doesn't help that these stocks are prone to extreme volatility abetted by online gabbing, as has been experienced by other small-cap Chinese stocks such as Universal Travel Group (UTA), Fuqi International (FUQI) and China North East Petroleum Holdings (NEP). So even if their financials are as rock solid as the Magna Carta, their share prices are still going to be subjected to spasms.In the final analysis, it doesn't matter what the auditors of these companies happen to be, whether they are high-priced companies in shiny office buildings in New York or no-name firms in Sheepshead Bay. They can be audited by all of the Big Four in tandem, or they can be audited by the hapless Frazer Frost, a list of whose clients was helpfully posted on Zero Hedge. The supposed prestige of the major firms isn't worth very much, not at a time when Big Four firms miss no opportunity to prove their uselessness, as I pointed out in this space in September.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV