The resignation of KPMG as auditor of China Forestry Holdings is a worrying sign for the Hong Kong-listed firm, analysts say.
'Clearly, there are issues that are troubling the auditor. It suggests the auditor is not receiving all the information it needs, and this is a bad sign for everybody,' said Christopher Howe, managing director of Anglo-Chinese Corporate Finance, a Hong Kong corporate advisory firm.
The Big Four accounting firm resigned as auditor of the mainland forestry company on Thursday, according to China Forestry's announcement. KPMG cast doubt on China Forestry's 2010 financial report, citing irregularities it found.
'In response to the irregularities identified, we requested the company extend the investigation to identify all irregularities that may have occurred and all management involved in the irregularities, trace where the company spent proceeds from the initial public offering and reconcile details of plantation assets. We are still awaiting the results,' said KPMG's letter to China Forestry.
Immediately after KPMG found irregularities in January last year, China Forestry's board of directors set up an independent committee to investigate the matter, according to a China Forestry spokeswoman.
'The company will make a public announcement on the findings of the independent committee when the investigation report is completed. China Forestry also implemented various measures to reinforce internal control in bank accounts, logging permits, forest ownership certificates, cash transactions and purchase of wood logs,' she said.
KPMG's inability to obtain information on the investigations is very disturbing, said a lawyer who declined to be named. 'It suggests there is no co-operation between the auditor and the company. If they are not getting the information, they believe there is obstruction.'
'For auditors to resign, they don't take these things lightly.'
It is unusual for an auditor to issue such a strongly worded letter to a company, said Raymond So Wai-man, dean of the business school of Hang Seng Management College. 'If the auditor states things so bluntly, it is trying to protect itself by saying the company will not provide information, so [it] can escape legal liability.'
In February last year, China Forestry's former chief executive Li Han Chun was detained on the mainland by Chinese police for allegedly embezzling 30 million yuan. In April last year, the company admitted some of its accounts were falsified.
China Forestry's shares have been suspended since January 26 last year.