Well, I guess that PCAOB took that to mean the case was closed. No action was taken against Sherb. Sherb's five current Chinese clients include China Education Alliance ( CEU), which recently came under fire from a short-seller for having a nonfunctioning office and Web site.

The SEC oversees the PCAOB and the securities that get sold in this country. I believe the Commission needs to directly (or get the PCAOB to) audit these audit firms and shut them down if it finds they're operating in a "pay to play" manner. That's exactly what the SEC has done with Moore Stephens (although this fine and ban was for only one office of the company, not its entire network of offices).

If the SEC finds evidence of misrepresentations in these Chinese companies' financial statements (or disclosures around related-party transactions), it should seek to delist them. I believe the SEC also should force the exchanges to start asking more difficult questions before accepting these uplistings from the OTC.

If I worked at the SEC, I would begin by focusing on the following audit firms and their work in China:
  • Frazer Frost
  • Moore Stephens (not just the Orange County office but all of its offices)
  • Kabani & Co.
  • Sherb & Co.
  • Child Van Wagoner & Bradshaw
  • Marcum Josephson (formerly Stonefield Josephson)
  • Alliott AGCA Inc.
  • Jimmy CH Cheung & Co.

China will continue to receive enormous interest from American investors -- both institutional and retail -- in the coming decade. There are many ethical and well-managed Chinese companies. But there are bad apples -- not just over in China, but also right here in the U.S. among the service providers like these small auditors. The area deserves to be cleaned up, and I'm heartened to see the SEC move this week to do so.

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At the time of publication, Jackson had no positions in companies mentioned in this article.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson

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