Deloitte quits as auditor to outdoor ad firm
China MediaExpress Holdings said its auditor Deloitte Touche Tohmatsu has resigned, a month after a short seller accused the advertising company of inflating its results.
Deloitte, whose Hong Kong office audited the company, said in its resignation letter dated March 11 that it was 'no longer able to rely on the representations of management'.
MediaExpress said chief financial officer Jacky Lam resigned two days after Deloitte ended its ties. The company is listed on the Nasdaq market in the United States.
Trading of shares in MediaExpress has been halted since March 11, after losing half of their value since late January when they hit a high of US$22.80. They last traded at US$11.83.
It claims to be the largest company that hosts display advertising on cross-country buses on the mainland.
Its stock fell 33 per cent on February 3 after Muddy Waters Research, an online research firm and short seller, said in a report that China MediaExpress overstated its revenue and only operated half the in-bus DVD machines it claimed to.
Muddy Waters founder Carson Block said: 'We had every reason to believe that Deloitte would take its obligation to the shareholders seriously and they, in fact, did do that.'
Fujian-based MediaExpress, whose head office is in Hong Kong, will delay filing its annual statements and fourth-quarter results with the Securities and Exchange Commission in the US.
MediaExpress is one of more than 350 Chinese companies that obtained US listings since 2004 through reverse mergers, meaning they bought the listed shells of inactive businesses that allowed a New York listing without the regulatory scrutiny involved in a full initial public offering.
Last December, the SEC announced an investigation into the reverse mergers following commentary from hedge fund short sellers of widespread suspect accounting.
Block said: 'China MediaExpress should respond to the regulators, but whether it actually does remains to be seen.'
Muddy Waters also exposed a false accounting issue in November last year at Rino International, a seller of pollution control equipment in Dalian traded on the Nasdaq. Rino was delisted after admitting its accounts were not accurate.
'In Rino's case, as far as I know, it never responded to the regulators so it was delisted from Nasdaq. China MediaExpress has a decision to make,' Block said.
Deloitte recommended an independent probe into issues it saw during its audit, MediaExpress said. The auditor also said these issues might adversely affect the company's historical results.
'Any time an auditor resigns, it's serious,' Drew Bernstein, co-managing partner at audit firm Marcum Bernstein and Pinchuk, told Reuters.
'They're basically telling you they have a lack of confidence in the financials and the information that was furnished to them,' he said.
MediaExpress declined yesterday to comment on the resignation of Deloitte and Lam.
The company's only reaction was made on February 7, after Muddy Water's question was followed by a criticism from other hedge fund short sellers and class action lawyers including Citron Research and Bronte Capital.
MediaExpress chief executive Zheng Cheng said in a letter on the company's website that the short sellers were hoping to make money by driving down the stock price.
In the backdoor
The approximate number of Chinese firms that have entered the US stock market through reverse mergers: 350