August 22, 2011 / 1:50 PM / 8 years ago

UPDATE 4-Zungui Haixi shares tumble after E&Y suspends audit

* Ernst & Young suspends its audit of Zungui Haixi

* Auditor identifies issues that need to be investigated

* Zungui shares fall more than 75 pct on the TSX-V (Adds director’s comments, background; updates share move)

By Euan Rocha

TORONTO, Aug 22 (Reuters) - Shares of Zungui Haixi ZUN.V fell more than 75 percent on Monday after Ernst & Young suspended its audit of the Canadian-listed Chinese clothing and footwear company pending an investigation into certain issues the accounting firm has identified.

Zungui, whose shares are listed on the TSX Venture Exchange, is the latest Chinese company to fall prey to accounting irregularities that have tainted the names of numerous North-American-listed Chinese entities.

China’s Sino-Forest TRE.TO, not long ago the largest forestry stock in Canada, is perhaps the most high-profile of these companies, which have been the objects of trading halts, de-listings, lawsuits and regulatory probes.

Sino-Forest’s shares have fallen more than 70 percent since early June, when the company was accused by short-seller Carson Block of fraudulently exaggerating the size of its forestry assets. [ID:nN1E76502A]

Zungui said auditor Ernst & Young LLP has advised its board that it has suspended its audit for the year ended June 30, 2011 until the company “clarifies and substantiates its position with respect to issues pertaining to the current and prior year”.

Ernst & Young recommended that the issues identified be addressed by an independent investigation, the company said in a brief statement that did not provide any details on the issues.

The string of accounting problems and stock plunges at publicly traded Chinese companies have sparked concerns across the world’s biggest audit firms that their reputations may sink as the list of stricken companies grows. [ID:nL3E7HM1RQ]

Zungui, which sells athletic footwear, apparel and other accessories in China, said its audit committee intends to address the matter by way of an independent investigation.

“It would be inappropriate to make any comment while that work is ongoing, and our professional obligations prevent us from speaking about client matters,” said a spokeswoman for Ernst & Young.

Zungui was founded in 1992 and opened its first store nearly a decade later in 2001. The company listed on the TSX Venture Exchange in 2009 and owns more than 2,000 retail stores in China, according to the latest company presentation on its website.

Patrick Ryan, the head of Zungui’s audit committee, has been asked by the board to chair an independent committee to investigate the issues identified by Ernst & Young.

Ryan, a former partner with accounting firm KPMG, told Reuters that the committee intends to retain the services of another major accounting firm, as well as independent counsel, to investigate the issues.

“At this stage of the game, we have taken a decision that we can’t disclose what the issues are,” Ryan said. “We feel it would just be speculation and people would draw some inappropriate conclusions from it, so our idea is to retain independent investigators and drill to the bottom of these issues. As soon as we can, we’ll report to the shareholders.”

Ryan said that it is too early to comment on how soon the investigation would begin and it is also too early to tell how long the investigation may take.

Shares of Zungui closed at a record low of 34 Canadian cents on Monday, down C$1.13 on the day.

INVESTORS BURNED

In a bid to benefit from China’s rapid growth, many North American investors have been drawn toward Chinese entities listed on North American exchanges. But a flurry of scandals this year has pummeled many of those stocks and led to an investor exodus.

Chinese and U.S. regulators have begun working together to investigate alleged accounting scandals. Last month, the Ontario Securities Commission (OSC) - Canada’s major securities regulator - also opened an investigation into some Canadian-listed companies that have significant business operations in emerging markets. [ID:nN1E7641Q1] [ID:nN1E7641WQ]

Zungui has so far not been in contact with the OSC, but Ryan said he expects the company will have to coordinate with the regulator on the issues identified by its auditor.

Shares of Zungui touched a record high of C$3.30 in early 2010. As of last week, the stock had fallen more than 40 percent this year, largely due to the allegations that have tainted many of its Chinese peers.

Shares of the company, which raised nearly C$40 million, via its initial public offering in 2009, plunged more than 75 percent on Monday, taking its market capitalization down to about C$21 million. ($1=$0.99 Canadian) (Reporting by Euan Rocha in Toronto and Ankur Banerjee in Bangalore; editing by Peter Galloway)

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