Chinese State Secrecy Laws Being Pulled Apart Under Audit Stresses

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Nov. 28 – In the past two years, a wave of accounting scandals, particularly allegations of securities fraud, have hit China-based companies listed on U.S. stock exchanges. Since 2010, more than 30 securities class actions have been filed against China-based, U.S.-listed companies. One of these cases is Munoz v. China Expert Technology, Inc., filed in 2007 by shareholders of Shenzhen-based China Expert against the company’s outside auditors, i.e. PKF Hong Kong, PKF New York and BDO McCabe Lo, for failing to detect an alleged US$132 billion fraud. The China Expert suit is at a slightly more advanced stage compared to the other proposed class-actions.

Rather than naming China Expert as the defendant, the shareholders pursued the accounting firms. Considering China Expert’s shaky finances and financial structures, and likely lack of adequate insurance coverage, it could be difficult for plaintiffs to collect judgments against it. On the other hand, accounting firms have deep pockets and would be a more lucrative option for the plaintiffs. The rulings of this case could therefore open the door for shareholders to pursue auditors of these China-based companies. Continue reading…

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