Longtop Financial Technologies Ltd, suspended its Nasdaq trade on May 17 due to accusations of fraud. (Source: CFP)
The Chinese stock fraud contagion continues to spread as the US-listed financial software maker Longtop has come under investigation by the SEC less than one week after trading was suspended over potential accounting fraud.
Longtop Financial Technologies Ltd. (LFT), a Hong Kong-based maker of financial software, said auditor Deloitte Touche Tohmatsu Ltd. resigned and a U.S. regulator started a probe of the company’s financial reports.
Longtop, whose 2007 U.S. initial public offering was underwritten by Goldman Sachs Group Inc. and Deutsche Bank AG, said Deloitte and Chief Financial Officer Derek Palaschuk resigned because of “falsity of the company’s financial records in relation to cash at bank and loan balances (and possibly in sales revenue)” among other issues, according to a press release today. The U.S. Securities and Exchange Commission informed Longtop that it is investigating matters related to Deloitte’s claims, the company said.
The $1.08 billion company is the largest yet to be caught in the maelstrom of US-listed Chinese scams:
“We learned that there’s no such thing as pedigree anymore in the Chinese market,” said Andrew Left, Los Angeles-based founder and owner of Citron Research, who wrote reports questioning Longtop’s financials. “This company had Goldman at their IPO, Deloitte as their auditor, and major firms as their investors. You couldn’t ask for a better structure.”
Deloitte said in its resignation letter from May 22 that it found falsehoods in the company’s financial statements and experienced “deliberate interference by certain members of Longtop management” in the audit process, including “unlawful detention” of audit files, according to the statement from Longtop...
The SEC has revoked the registrations of eight China-based companies since December, and more than 24 firms have disclosed auditor resignations or accounting problems to the agency since March, SEC Chairman Mary Schapiro wrote in an April 27 letter.
Here is an excerpt from the letter:
As part of the process for auditing the Company’s financial statements for the year ended 31 March 2011, we determined that, in regard to bank confirmations, it was appropriate to perform follow up visits to certain banks.
These audit steps were recently performed and identified a number of very serious defects including: statements by bank staff that their bank had no record of certain transactions; confirmation replies previously received were said to be false; significant differences in deposit balances reported by the bank staff compared with the amounts identified in previously received confirmations (and in the books and records of the Group); and significant bank borrowings reported by bank staff not identified in previously received confirmations (and not recorded in the books and records of the Group).
In the light of this, a formal second round of bank confirmation was initiated on 17 May. Within hours however, as a result of intervention by the Company’s officials including the Chief Operating Officer, the confirmation process was stopped amid serious and troubling new developments including: calls to banks by the Company asserting that Deloitte was not their auditor; seizure by the Company’s staff of second round bank confirmation documentation onbank premises; threats to stop our staff leaving the Company premises unless they allowed the Company to retain our audit files then on the premises; and then seizure by the Company of certain of our working papers.