Deloitte's Boshiwa exit a precursor to more China auditor resignations

Fri Mar 16, 2012 4:33am EDT

* Auditors tread carefully after U.S. scandals

* Boshiwa shares suspended after falling 42 pct

* Hard for firms' shares to recover after auditor censure-analyst

By Rachel Armstrong

March 16 (Reuters) - Deloitte's resignation as auditor of a Hong Kong-listed childrenswear company this week could be the first in a run of accountant departures from Chinese companies in the coming weeks as the audit season draws to an end.

Last year's spate of accounting scandals at U.S.-listed Chinese companies has made auditors more alert to the risk of financial irregularities and the consequences for them if they're found to be negligent. It's during the audit process, which usually finishes at the end of April, that problems come to the surface.

"Hold on to your seat. I expect a few more of these in the next few weeks," wrote Paul Gillis, visiting professor of Accounting at Peking University, in his latest entry on the China Accounting Blog following Deloitte's resignation.

Deloitte resigned from Boshiwa International Holdings , which holds the licence to make Harry Potter- and Bob the Builder-branded clothes, saying it was not satisfied at the company's response to questions about some of its transactions.

"We continue to have concerns about matters pervasive to the financial statements, including, for example, the existence and commercial substance of recorded prepayments amounting to 392,000,000 yuan ($61.93 million) with a supplier of the group," the auditor wrote in its letter.

Boshiwa shares fell as much as 42 percent on Thursday before they were suspended, pending the release of further information. The company said it was considering forming a special investigation committee to look at the issues raised by Deloitte and that it would have to delay the publication of its results.

Tom Fyfe, a partner at Hong Kong law firm Clyde & Co, said last year's run of scandals has likely made auditors working on Chinese companies doubly careful when signing off on their books.

"They are likely to be asking more difficult questions of their clients, and if they get to the stage where they don't get satisfactory answers, will issue a disclaimed opinion and eventually come off," said Fyfe, who specialises in auditor liability cases.

REPUTATIONAL DAMAGE

Most of last year's high-profile accounting problems were at Chinese companies listed in the United States, several of which resulted in auditors facing class-action lawsuits from angry investors.

Last year Starr International Co filed a lawsuit against Deloitte for its audit of China MediaExpress Holdings, which faced fraud allegations from short-seller Muddy Waters.

Steve Vickers, former head of Hong Kong police's Criminal Intelligence bureau, who now runs his own consultancy, said auditors are now focused on minimising any possible damage to their reputation.

"It's a self-preservation issue. Auditors are more conscious of the dangers of being sued and the reasons for the resignations are associated with protecting their own reputation," he said.

Fewer China-based companies listed on the Hong Kong Exchange have run into trouble than those in the United States. However, there have been a number of high-profile scandals in the past year which the companies involved in have failed to recover from.

China Forestry shares have been suspended since January 2011 after its auditors KPMG said they had found irregularities in its accounts.

In September, Anonymous Analytics, which said it is linked to hacking group Anonymous, published a report accusing Chaoda Modern Agricultural Ltd of misleading investors about its cash holdings, capital expenditure, and falsifying its financial statements. Chaoda's shares have been suspended ever since.

For Boshiwa, the company is now under pressure to redress Deloitte's queries or face a similar fate.

"Few recover once the auditor resigns," wrote Peking University's Paul Gillis. ($1 = 6.3300 Chinese yuan) (Editing by Muralikumar Anantharaman)