Is New Oriental Education's Management Telling the Truth?

NEW YORK (TheStreet) --

New Oriental Education's (EDU) shares fell through the floor for the second day in a row.

Falling in sympathy were Apollo Group (APOL), Bridgepoint Education (BPI),  Corinthian Colleges (COCO) and Devry (DV).

EDU data by YCharts

Shareholders were already reeling from the pain of watching their shares lose half their value in a month. The situation took a turn for the worse when allegations of management fraud circled through the Internet.

Muddy Waters Research claims New Oriental presented fraudulent financial statements. New Oriental shares, which earlier in the day were trading higher, dropped another 30% Wednesday.

Support fell from under the shares of New Oriental comparable to a trap door on a gallows, leaving investors twisting in the wind. The Muddy Waters Research report concerning New Oriental is profoundly disparaging. MWR claims encompass the reported quantity of schools owned, manipulation of financial reports, value of assets, and a host of other impropriety by management.

This is my second article about New Oriental. In the first, I advised readers to avoid Chinese stocks due to the added risk of fraud. Well-known international auditor Deloitte Touche Tohmatsu Shanghai (Deloitte) is the current New Oriental auditor. I have also written about the perils of Chinese stocks for about a year.

Deloitte already has issues with the Securities and Exchange Commission. The SEC is asking for documents on another company, and Deloitte is refusing to turn them over. Deloitte claims Chinese law forbids the auditor from fully cooperating with the SEC demands.

Deloitte has resigned from at least one other Chinese company after company fraud allegations surfaced. ChinaMedia Express (CCME) is a company I wrote about several times last year.

China MediaExpress was one of several Chinese firms to hail down in a rain of controversy over several Chinese companies. China MediaExpress went from trading over $10 per share to the current price of 3 cents a share. You don't need to break out a calculator to know how injurious of a return that is.

In fairness to Deloitte, if MWR's allegations are correct, there is no way to know for the average investor if Deloitte is a conspirator or a victim. For the average investor, knowing who to trust can make all the difference in the world.

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