Last Updated: 03/15/2012
NASHVILLE, TN – March 15, 2012 – The SEC’s revocation of Longtop Financial Technologies Limited’s registration highlights the large risk that confirmation fraud poses to investors and corporate finance officers doing business with Chinese companies, says Chris Schellhorn, CEO of Confirmation.com, the creator and world’s leading provider of secure audit confirmation services.
The SEC acted against Longtop Financial Technologies Limited because among other things, the company failed to file its annual report for fiscal year that ended on March 31, 2011. Longtop was unable to file its annual report because their former independent auditor resigned in May 2011 citing serious discrepancies with bank confirmations and that Longtop officials including the chief operating officer deliberately interfered with the audit confirmation process.
Bank confirmation discrepancies are also purported to have led NASDAQ to recently de-list several Chinese-based companies including Advanced Battery Technologies, Inc., China MediaExpress Holdings, Inc., and ShengdaTech, Inc. Advanced Battery was delisted because the company failed to provide NASDAQ with audit confirmations of its cash accounts that were to be prepared by bank personnel in the presence of the company's independent auditor. In his letter to shareholders, Zhiguo Fu, Chairman of Advanced Battery Technologies, Inc. acknowledged that suspected collusion was the reason for NASDAQ's special request, but failed to comply because he considers bank confirmations a "degrading procedure" and was successful in getting the highest level at each of their banks to refuse a special audit of their cash accounts.
"Investors aren't typically harmed as much by fraud committed against a company's management," noted Schellhorn. "What costs investors billions are frauds committed by management."
"With frauds on the rise among U.S.-traded Chinese companies, there is growing speculation that collusion is taking place between some Chinese companies and their bankers," said Schellhorn. "Collusion happens when the company being audited will ask their relationship manager at the bank to provide false information on the confirmation response."
In March 2011, the independent auditors for China MediaExpress Holdings, Inc. resigned because they suspected the company's bank statements were not authentic and believed that the bank confirmation procedures were carried out under suspicious circumstances. Discrepancies with ShengdaTech's bank balances and confirmation responses are some of the issues that led their independent auditor to resign in April 2011. According to Bloomberg, investors in Chinese public companies lost more than $10 billion in market value in 2011 after companies like China MediaExpress Holdings, Inc. and Longtop Financial Technologies Limited disclosed auditor resignations or financial statement irregularities.
"Typically if a company interferes with audit confirmation procedures like the executives did at Longtop and Advanced Battery Technologies, it's often an indicator of greater fraud taking place. Our service Confirmation.com prevents upper-level management from interfering with the confirmation process because we identify the validity of every participant in the confirmation process."
Today, auditors and financial institutions in over 100 countries use Confirmation.com because the propensity for fraud and the magnitude of those frauds on a global scale are both increasing. By verifying the authenticity of each user, this cloud-based solution not only improves the quality of audits, it brings greater investor confidence into the financial statements.