Last Updated: 04/04/2011

The recent SEC investigation into China Century Dragon Media, Inc. is a perfect example as to why audit confirmations play an important part of the financial audit process. It also supports recent decisions by the Auditing Standards Board (ASB), the Public Company Accounting Oversight Board (PCAOB) and the International Auditing and Assurance Standards Board (IAASB) to update and strengthen their standards related to external audit confirmations.

NASHVILLE, TN - April 4, 2011 - Just six weeks after CDM launched its initial public offering (IPO) on February 8 of this year, the New York Stock Exchange notified the company that its common stock was being delisted due to non-compliance with the exchange's listing standards.  According to StreetInsider.com, China Century's independent accounting firm, MaloneBailey LLP (MB) formally resigned its engagement with the company because of discrepancies noted on customer confirmations and the auditor's inability to directly verify China Century's bank records.  

As a result, MB stated that it can no longer support its opinions related to the financial statements as of December 31, 2009 and 2008. The U.S. Securities and Exchange Commission (SEC) has also initiated a formal investigation concerning material misstatements on China Century's financial statements, including cash accounts and accounts receivable.  

This falls right on the heels of another bank confirmation fraud that was announced on February 19 of last year.  According to the company's 8-K filed with the SEC, the auditors for Electronic Game Card, Inc., Mendoza Berger and Company, LLP, withdrew their audits from 2007, 2008 and 2009 for EGMI after the auditors discovered irregularities during the bank confirmation process.  The SEC immediately suspended trading on shares of EGMI and this past September, seven months after the auditors detected the bank confirmation issues, EGMI filed for bankruptcy.

These are not isolated confirmation frauds.  The first reported audit confirmation fraud dates as far back as the 1920's with the McKesson and Robbins Drug Company.  More recently, the $4.9 billion Parmalat bank confirmation fraud, the largest such fraud ever reported, was also Europe's biggest bankruptcy according to the BBC.  Satyam inflated the company's balance sheet by $1 billion in cash resulting in India's largest financial fraud according to The New York Times. Based on SEC filings, Kmart, which later became the largest retail bankruptcy in U.S. history according to ABC News, also involves falsified accounts receivable confirmations.  Audit confirmation fraud was also purported to have been involved in the financial frauds at Refco and Ahold according to CFO.com. These frauds and others lead to investors and lenders losing billions of dollars due in large part to frauds involving falsified audit confirmations.

In the last two years the ASB and the IAASB have issued new standards that now allow for secure electronic audit confirmations to help auditors more easily detect financial frauds involving audit confirmation irregularities.  The PCAOB is currently seeking final SEC approval of its revised AU 330 standard, The Confirmation Process, which, if approved by the SEC, will also allow for the more secure electronic audit confirmations.

Secure electronic audit confirmations have already been adopted by more than 8,000 accounting firms and all of the Top 10 banks in the U.S. which now use Confirmation.com to help reduce the occurrence of bank confirmation fraud.  In total, more than $3 trillion has been confirmed by auditors through Confirmation.com.

"Investors, government agencies and the general public rely heavily on an auditor's independent opinion from a financial audit on whether a company's financial statements are accurately presented," said Brian Fox, CPA and Founder of Confirmation.com.  "The auditor's role is vital in the investment decision process and our solution helps restore investor confidence back into the audited financial statements."