(Trina Solar story updated for Mizuho analyst comments)

NEW YORK ( TheStreet) -- Shares of Trina Solar ( TSL) sank on Tuesday after the company announced the resignation of the head of its audit committee, Peter Mak, who until recently was chief financial officer of A-Power Energy ( APWR), a company facing serious accounting issues that have halted trading in its stock.

"I can't think of a worse headline for today's environment than 'China-based head of audit committee resigns,'" said Soleil Securities/PrincetonTech analyst Paul Leming. In this case, the news also thrust Trina's link to the scandal engulfing A-Power into the spotlight, and raised questions about the company's own books, given Mak's central connection to Trina's own auditing process.

Two weeks ago, A-Power's outside auditors resigned, setting off the latest in a string of Chinese stock scandals. Mak resigned from A-Power shortly thereafter and the company has delayed its annual report. A-Power shares have been halted since June 27.

There is no indication that Trina Solar has accounting issues but its shares fell sharply on the news of Mak's resignation. Trina shares recovered somewhat on Tuesday afternoon, after analysts including Raymond James and Jefferies came to the company's defense. Trina finished trading with a decline of 8.5%, at $18.09, on more than four times the issue's trailing three-month daily average. Earlier in the session, Trina shares scraped a fresh 52-week low of $16.90.

The Chinese stock sector has been rife with accounting scandals, predominantly among companies that went public through reverse mergers, and the Securities and Exchange Commission and Chinese regulators have launched an investigation of the issue. Chinese solar stocks have largely been insulated from the scandals however. The Trina link to A-Power is the first taint on big Chinese solar stocks to stem from the halted or de-listed parade of Chinese stocks.

Paul Leming, analyst at Soleil Securities/Princeton Tech, said while the Chinese solar companies have been largely insulated from the stock scandals, they have faced broad criticism about corporate governance.

Several Chinese solar companies, including Suntech Power ( STP), Yingli Green Energy ( YGE) and LDK Solar ( LDK) have completed financial transactions involving operations owned separately by the company chairman, a type of internal dealing that was evident recently when JA Solar ( JASO) acquired a wafer company 70% owned by its chairman .

Aaron Chew, solar analyst at Maxim Group, said the A-Power connection called into question both Trina's management and its books, even if he has never had specific reason to doubt Trina. He believes Trina is one of the better-run companies in the Chinese solar sector but is reluctant to say the stock is a buy here because of the overhang from this news.

"If it turns out to be nothing then Trina is a buy, but it's better to be on the sidelines right now," Chew said on Tuesday morning. After a conversation with Trina on Tuesday afternoon, the Maxim analyst said he was more confident that this was a hiccup for Trina and the stock could bounce. Though even if he came away for a conversation with Trina less concerned, he said it's impossible to know whether investors will remain concerned that the issue could return at a later date. "It's not like this is a bank stress test," the analyst said.

The fact that A-Power's former CFO was head of the Trina audit committee has to be a red flag for Trina investors, and it would in the least make sense for Trina management to remove an audit committee chairman who has been implicated as CFO of a now-halted Chinese renewable energy stock. Yet it raises as many questions about Trina's corporate governance and due diligence when it hires as head of its audit committee a CFO now at the heart of a Chinese stock scandal.

"Lots of portfolio managers can't even own these stocks when stuff like this happens. It's 'shoot first and ask questions later'," Chew says.

Paul Clegg, Mizuho Securities analyst, who was at the Intersolar conference on Tuesday in San Francisco and had spoken with Trina officials by phone, said he doesn't believe Trina Solar is any more risky than any other stock in the sector simply based on the fact that Mak was on their audit committee. For one, an audit committee chair role is often limited to advising on decisions put in place by an accounting team, as opposed to directing policy of the internal accounting team or the financial reporting process.

Soleil's Leming was at the Intersolar conference on Thursday in San Francisco and hadn't reviewed the Trina news specifically, but said it's clear that U.S. investors will shy away from China-based companies by and large with the mounting issues related to accounting. "Why have a ticking timebomb in your portfolio? That's a question any portfolio manager has to wrestle with here."

The question posed by the Soleil analyst was also a good reason for Trina to remove any link to A-Power. "They are severing ties with anyone who could be a liability from a public relations perspective. Across the sector everyone will start to scrutinize who is on their board and we may see more of these," the Mizuho Securities analyst said.

The solar analysts said that Trina Solar has been among the Chinese solar companies considered the best at complying with Western accounting standards. "I think there's little question that Trina has been among the Chinese solar companies considered a cut above the rest when it comes to financial reporting and quality of numbers," Leming said.

Mak also resigned from Trina's board, effective last Monday, and the company has named Jerome Corcoran to serve as chairman of the audit committee. Corcoran is a former managing director at Merrill Lynch's China Private Equity Group, and he served on Trina's audit committee from December 2006 through April 2010.

The fallout from the A-Power scandal runs all the way to Capitol Hill, with Senate Majority Leader Harry Reid (D-Nev.) having negotiated a deal with the Chinese company to build a wind turbine manufacturing plant in Nevada last year.

For solar investors more generally it would be a wise idea to consult the publicly available information related to the composition of audit committees as a first step to analyzing risks that had not been previously considered. The Trina announcement about Mak's resignation comes more than two weeks after A-Power shares were halted and a week after Mak's resignation from A-Power.

In the Mak biography included in Trina's annual filing with the SEC, the solar company did not list A-Power Energy CFO as one of the positions held by Mak throughout his career, though it lists more than a dozen corporate positions Mak has held.

Mizuho's Clegg said that the official message from Trina Solar in his conversation with them was not just that Mak decided to resign his position, but in fact, Trina hadn't even been aware that Mak had joined A-Power as CFO after already being a member of the Trina audit committee.

From one perspective, Trina's ignorance about Mak's A-Power role suggests Mak may not have been very involved in Trina's operations. Yet it's also fair to ask if there are holes in Trina's due diligence process based on its lack of knowledge, and in the least, Trina was "caught with egg on its face."

For complete coverage of the Chinese stock scandals from TheStreet click here.

-- Written by Eric Rosenbaum from New York.

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