* Auditors tread carefully after U.S. scandals
* Boshiwa shares suspended after falling 42 pct
* Hard for firms' shares to recover after auditor
By Rachel Armstrong
March 16 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
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
"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
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
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
"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
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
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)