with Howard Winn
China Forestry Holdings' results show an ultra big mess
The annual results announcement recently for Hong Kong-listed China Forestry Holdings, one of the country's largest logging companies, makes for dismal reading. The company's chief executive Li Hanchun (pictured), was arrested earlier this year on the mainland for allegedly embezzling more than 30 million yuan (HK$35.85 million).
Most of the senior management - including the chief financial officer, the head of sales and its head of resource management - abruptly stopped work in mid-February and cannot be contacted.
The company has announced a loss of 2.7 billion yuan for 2010 compared with a profit of 511.6 million yuan in 2009. But it has had to qualify the results, not only for last year, but also for previous years.
The loss mainly comprises a 2 billion yuan write-down on the value of the company's plantation assets and a 1 billion yuan suspense account for 'unreconciled items' and 'unknown transactions.'
The notes to the accounts contains the gloomy assessment that, since there were numerous payments that could not be properly explained, the board believes that this situation 'casts serious doubts over the reliability and accuracy of the accounting records presented in past years and of the financial statements of the company and of the group for the current and prior years.'
After Li's arrest, a special committee of the board was set up to investigate financial irregularities identified by its auditors, KPMG.
The report was released recently and said that former management provided bank statements and related documents that were falsified and that cash was overstated. The report found handwritten logging permits which were false and had overstated the company's assets.
The results announcement said that cash had gone missing from the groups' key operating subsidiary, the curiously named Kunming Ultra Big Forestry. Sales for 2010 were all cash transactions, and the board was unable to tell whether all the sales revenue went into the company's bank accounts.
The announcement notes that under Li's supervision, senior management maintained two sets of accounting records. Li apparently told the board where it could find the cash records, but it has been unable to find any supporting documents.
The board has concluded that 'it will be extremely difficult and time consuming to ascertain the true and correct financial position and profit or loss of December 31,2010, for Kunming Ultra Big' and adds that it will 'be almost impossible as it will be necessary to verify the information with external and independent sources and such sources may not be available or may be unreliable due to their connections with Mr Li ... or those responsible for the falsified accounts and financial information within and outside of the group'.
The auditors noted dryly, 'we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion'.
For the moment, the company remains suspended while the board attempts to assess the true nature of the company's financial position. They face a daunting task. Meanwhile shareholders, which include the Carlyle Group, are unable to do anything with their shares.
What can we learn from S&P?
We came across a flier yesterday urging us to participate in a three-day credit analysis course.
'Are you confident that your credit risk analysis skills are keeping up with today's market?' the headline proclaims. There is more, 'Join us for an educational event that will lead you through the must-have skills for developing a sound credit rationale. We consistently meet or exceed expectations for 93 per cent of our course attendees.'
Most impressive - except that it comes from Standard & Poor's the rating agency that gave AAA ratings to baskets of junk. The firm also excelled itself in the run up to the 1997 Asian financial crisis when its ratings turned out to be completely misleading. It's astonishing that anyone takes any notice of them, let alone pays them for their services.
There is a note in the flier, which says: 'This course is developed and offered by S&P Valuation and Risk Strategies group. This group is analytically and editorially independent from any other analytical group at Standard & Poor's.' This is a tacit admission, perhaps, that there is some odour surrounding the company's name and a feeble attempt to distance itself from Standard & Poor's Rating Services.