China Scandal Halts Company Fundraisings

Chinese companies under fire from regulators over questionable bookkeeping.

Irregularities involving one of China’s biggest accounting firms have forced more than 50 Chinese companies to suspend fundraising plans, including 28 initial public offerings.

The China Securities Regulatory Commission (CSRC) in July opened an investigation into Ruihua Certified Public Accountants, which has more than 300 listed companies as clients. Regulators suspended approvals for IPOs of companies that have Ruihua as their accountant.

In May, one of Ruihua’s audit clients, Kangde Xin Composite Material, reported missing bank deposits of more than $1.7 billion. A CSRC probe found that Kangde Xin executives inflated profits and didn’t fully disclose dealings by related parties.

Kangmei Pharmaceutical, which makes traditional Chinese medicines, admitted to inflating its reported cash holdings by more than $4 billion.

A series of auditing scandals this year, many involving inflated profits, has eroded confidence in the financial records of Chinese companies.

The scandals broke at a time when global investors are allocating more money to the Chinese market through the MSCI emerging markets index.

Meanwhile, Chinese corporate defaults quadrupled last year, and continue to rise to record highs. Most of the irregularities came to light after Chinese companies with a lot of cash on their books defaulted on relatively small payments.