Monday, May 30, 2011

An Instance of Accounting Fraud

The New York Times analyzes an instance of possible accounting fraud at a Chinese company, Longtop Financial Technologies that has close similarities with India’s own Satyam scandal (i.e. improper confirmation of bank balances). While the Satyam scandal came into the public domain through a confession letter of the Chairman, in this case the auditor blew the whistle. Here is an extract:
Deloitte, which had given clean audit opinions to Longtop for six consecutive years, apparently was well on its way to providing a seventh, for the fiscal year that ended March 31. But for some reason — Deloitte did not say why —the auditor went back to Longtop’s banks last week to again seek confirmation of cash balances.
It appears Deloitte sought confirmations from bank headquarters, rather than the local branches that had previously verified that Longtop’s cash really was on deposit. And that set off panic at the software firm.
It is reported that SEC has begun an investigation, which will also throw the spotlight generally on non-US companies listed on US stock exchanges.

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