Shares of Subaye, a Nasdaq-listed mainland cloud-computing company, plunged 6 per cent after it announced that PricewaterhouseCoopers Hong Kong had resigned as its independent registered public accounting firm.
PwC Hong Kong's departure followed that of James Crane, Subaye's chief financial officer, who cut ties with the company last month after serving as CFO since October 2007.
Subaye's shares closed down 6.14 per cent at US$2.14 on Thursday.
The company said yesterday that trading had been halted.
The shares have lost 78 per cent so far this year.
In a statement to the US Securities and Exchange Commission (SEC), Subaye said PwC informed it on April 1 that it was resigning because it was unable to verify the cash going into Subaye's business. It said the auditor had also said it could not obtain documents to prove Subaye's subscribers were real.
Guangdong-based Subaye offers so-called cloud-computing services, in which customers can use Subaye's web servers instead of their own local hard drives. Subaye, which also offers video marketing, business-to-business and business-to-customer services, said a new accountant would be 'in place' next week.
A person who only identified himself as 'Mr Liu' at Subaye's investor relations department in Guangzhou, said the company would release the information to the public, in line with SEC regulations. He declined to elaborate.
Subaye said Crane had resigned to pursue other professional interests and it had named company president Alan Lun as its new CFO.
PwC said it could not obtain information to verify cash settlements from sales agents to the company, nor could it verify the end customer subscriptions for Subaye's services. The auditor also said the company's explanations regarding 'commonalities' between certain customers and vendors were insufficient.
Violet Ho, managing director of global risk at consulting firm Kroll, said problems were widespread within the e-commerce industry on the mainland.
'E-business is an industry that is particularly vulnerable to fraud,' she said.
'It involves a huge number of vendors, whose identity keeps changing every day, so it is very hard to monitor.
'According to our Global Fraud Report, China's fraud level, has, for the last few years, been much higher than the international average.'
Subaye is not the only mainland media stock whose credibility is being questioned. Recently, China Century Dragon Media, a television advertising company, was delisted from the New York Stock Exchange less than two months after its listing.
In March, the Hong Kong office of Deloitte resigned as the auditor for advertising company China MediaExpress, saying it was 'no longer able to rely on the representations of management'. Trading in its shares has been suspended since March 11.
The SEC has launched a fraud inquiry into Chinese companies whose shares are traded in the US, following a surge of accounting scandals.
SEC commissioner Luis Aguilar said the regulator was looking into fraud at small firms that have gained back-door listings via so called 'reverse mergers' - injecting their assets into dormant, publicly traded companies so they do not need to go through the scrutiny of a full initial public offering.
Since January 2007 there have been 600 back-door registrations on American exchanges, with more than 150 from 'in and around China'. Subaye made its trading debut on the Nasdaq in July after such a listing.