Orient Paper: Ex-Auditor Forces 2008 Re-Audit

NEW YORK (TheStreet) -- Orient Paper (ONP), a small Chinese paper producer that ran through a gauntlet of fraud accusations last year, said late Wednesday that its 2008 financial results were audited by a firm that didn't have an accounting license.

In an 8-K regulatory filing and in a press release, Orient Paper said it was unaware of the problem until recently. Called the Davis Accounting Group, the Cedar City, Utah-based audit firm was supposed to be licensed by its home state, but its license lapsed in September 2008 and was formally revoked as of November last year. "During the time when Davis Accounting was retained by the Company, Davis Accounting represented that it was in good standing," Orient Paper said in its press release.

>>Orient Paper Pops After Results Gladden Bulls

Orient Paper's independent auditor for some time has been BDO Ltd. of Hong Kong, which will re-audit the company's 2008 results.

"We are not aware of any other information at this time which leads us to believe that our financial statements for 2008 are materially incorrect in any way," Orient Paper CEO Zhenyong Liu said in a prepared statement. "We have been in communication with the SEC and PCAOB" -- the U.S. regulator of auditing firms -- "to determine the best course of action." He said the re-audit should be done by the start of the third quarter, "if not earlier."

Davis Accounting has encountered problems before. In April 2008, it received an inspection report from the PCAOB that warned of audit deficiencies.

"The deficiencies identified ... were of such significance that it appeared to the inspection team that the Firm did not obtain sufficient competent evidential matter to support its opinion on the issuers' financial statements," the PCAOB said in its inspection report. At the time, Davis had three people on its professional staff.

The discovery of Davis' lack of a license has recently forced other public companies that were clients of Davis to re-audit past results, including the Chinese over-the-counter stock BioPharm Asia.

Orient Paper's use of Davis Accounting highlights one of the criticisms Chinese small-cap companies in general have faced in recent months: that, in many cases, companies hailing from the People's Republic have preferred to hire small, obscure audit firms in the U.S. to sign off on their numbers.

Auditing has been a key issue in the life of Orient Paper so far. Last year, after fraud allegations lodged by several short sellers roiled Orient Paper and its stock price, the company underwent a self-commissioned investigation aided by consultants at the Big Four firm Deloitte.

The result of the investigation appeared to clear Orient Paper.

Investigating Chinese Reverse Mergers

Spencer Bachus, the chairman of the House Financial Services Committee, sent a letter to the Securities and Exchange Commission last summer, asking the agency to heighten its scrutiny of the auditors used by Chinese small-cap companies. The SEC, in turn, has formed a task force to investigate allegations of fraud targeted at this group of companies, especially those that came public in the U.S. through reverse mergers.

-- Written by Scott Eden in New York

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