SEC passed an audit of California to sign the fraudulent statements made by an energy company in China

Investigation of the Securities and Exchange Commission of auditors in China based companies listed on U.S. exchanges share is a signal for investors to approach these people with caution, said International Strategy & Investment Group.

The SEC on Dec. 21 passed an audit of California to sign the fraudulent statements made by an energy company in China. Auditors have been scrutinized for signs of the financial statements of companies based in China access to U.S. markets through reverse mergers, in which a closely held company acquires a publicly traded company and may sell shares after an IPO.

"This is the ultimate 'buyer beware' investment sector," said Donald Straszheim, China research director at the ISI, which was ranked first in the macro and Economy category in 2009 survey by Institutional Investor magazine . Individual investors, it might be a good service to stay just a few. Even the most sophisticated institutional investors tend to avoid the opacity world and risks, "he said.

Straszheim, which is headquartered in Los Angeles, estimates that "hundreds of small companies in China that have sold shares in the U.S. through reverse mergers, in order to exploit the growing demand for U.S. investors who want access to China's economy.

Xia Lihua, a spokesman for the Securities Regulatory Commission China, refused to comment on the SEC investigation.

SEC Claims

Moore Stephens Wurth Frazer and Torbet LLP Orange County, one of several companies that have fallen under the scrutiny of the SEC, "did not exercise professional skepticism and due professional care" in the audit of China Energy Savings Technology Inc ., which was ordered to pay about $ 35 million in March 2009 for overstating revenue, the SEC said in a statement on 21 December.

China Energy Savings has been withdrawn from the list. Calls to Hong Kong office of the company were not returned.

Dean Yamagata, the partner in charge of the audit, was banned from working as an accountant for at least two years. Frazer and Yamagata not admit or deny the allegations. To resolve the claims of the SEC, Yamagata Frazer and agreed to pay $ 129,500 and hire an independent consultant for training in fraud detection, auditor independence and other duties related to audit functions.

The SEC has identified "hundreds" of companies so small ", where nearly 100 percent no, 95 percent, 100 percent of the shares are in the People's Republic of China" and the financial statements are signed by a small U.S. auditor, Wayne Carnall, chief accountant of the SEC Division of Corporation Finance, told a public meeting of the Company Accounting Oversight Board in April.

Legal Requirements

"It matters more than accounting firms own problems," said Hubert Tse, a partner at the law firm of Boss & Young in Shanghai. "It's their job and responsibility to work on that and ensure that the IPO applicants meet all legal requirements and the U.S. listing."

The PCAOB, created by the Sarbanes-Oxley Act in 2002 to oversee auditors of public companies, is looking for ways to celebrate the U.S. auditors for the work they outsource to audit firms based in China.

"The news about the SEC investigation is not surprising," said Michael Yoshikami, who oversees about $ 1 billion in Walnut Creek, YCMNet Advisers based in California. "Standards for transparency have a ways to go to reach a level where one can expect accuracy. However, this does not change our view that Chinese companies represent a growing percentage of IPOs."

"Frothy levels'

At a time when China's government is trying to keep the economy from overheating, a record number of companies are selling shares in the U.S. Forty-one Chinese companies have sold shares through initial offerings in the U.S. this year, capping a record year surpassing the 37 operations in 2007.

investor demand for emerging market stocks, including China, will remain in "levels of foam," Yoshikami said, who was named by Barron's as one of the Top 100 Independent Financial Advisors in 2009. "The business opportunity is simply too great to ignore."

The gross domestic product of China will expand by 9.2 percent this year, about to overtake Japan as second largest economy in the world. The People's Bank of China has raised the amount of reserves banks must set aside, including the request for an increase of 10 December, the third time in five weeks to control inflation and prevent asset bubbles.

"The feeling of hostility '

While the SEC investigation "may damage the sentiment in the short term for Chinese listed companies, the demand for these small business growth remains strong," said Jeff Papp, senior analyst at Oberweis Asset Management. These small Chinese companies are attractive by improving the governance and valuations are still "cheap," he said. That trade on average less than 10 times reported earnings, compared with more than 50 for large populations such as Baidu Inc., Papp said.

The Bank of New York Mellon China ADR Index, which has American depositary receipts of Chinese companies and Hong Kong, gained 0.4 percent yesterday, taking its rise this year to more than 12 percent. Shanghai, China Composite Index fell 0.8 percent to 2,855.22 as of today around 3 pm. The indicator has fallen 13 percent in 2010.

"Research such as this, inevitably, a shadow that is broader and wider than the facts of the case itself," said Straszheim. "I doubt that will cause permanent damage to the broad interest of investors in the global economy of China."