Questionable accounting

A new storm is brewing in the accounting world, this time centred around mainland firms listed on the Hong Kong stock market.

During the busy corporate earnings season that has just ended, several Hong Kong-listed firms surprised investors with the news that they are delaying their results announcements or that their auditors had resigned. Some of the firms are household brands on the mainland and were widely believed to have been adhering to good business practices.

Last year, the spotlight fell on a number of mainland high-technology and internet companies listed in the United States, including Jiayuan. com, an online match-making website, and Longtop Financial Technologies, a software provider. Scrutiny of mainland firms' accounting standards intensified last June when short-seller Carson Block alleged forestry company Sino-Forest had overstated its assets and cash balances. Now the attention has shifted to retail and consumer goods companies, including popular fashion brand Ports Design, listed in Hong Kong. Many of them are small and medium-sized businesses (SMEs).

'The number of auditor resignations from mainland SMEs in the first quarter of this year has already reached the total of last year,' says Arthur Kwong, the head of Asia-Pacific equities at BNP Paribas. 'More could come as auditors are likely to be less and less tolerant of grey areas given the negative market perception' of such companies.

A credit crunch on the mainland that is particularly affecting SMEs, coupled with a slowing domestic economy, is making it more difficult for some companies to make ends meet. Among the hardest hit are purveyors of goods such as household appliances, hit by a weakening housing market, and clothing, with sales damped by rising prices. Moreover, industry analysts say, for companies that have been cooking the books, economic and industry downturns make it harder to hide malfeasance.

'The retail industry on the mainland started to slow down in the second half of last year,' says Forrest Chan, an analyst at CCB International Securities. 'A large number of the listed companies in the retail industry are small and medium-sized private enterprises, which are more likely to be tight on cash. This may explain the reason why they are running into accounting problems.'