Deloitte’s Role as an Independent Auditor for CCME

February 7, 2011 | Comments (42)

I understand that shorts have to exist in the market to balance the equation, and let me first say that after having read “The Art of Short Selling” thoroughly a couple of times, I have the utmost respect for fundamental short sellers such as Kathryn Staley, Jim Chanos and David Einhorn.

China MediaExpress (CCME) is a Chinese company that I currently hold and is currently under heavy scrutiny as a fraud. Reports by boutiques specializing on shorts have been released, and while I must give credit to Muddy Waters for the work they have put in to their report, the main argument of the shorter’s report is that the numbers are “too good to be true”.

But I’m going to present a case for at least why the SEC filings are accurate.

Independent Auditor Required

The role of an independent auditor is crucial in protecting investors from dishonest management and has to be indifferent to the board. The auditor should not be a friend of the company and should work completely independently.

With so much buzz about CCME, there have been comments made about how Arthur Andersen failed in their auditing duties of Enron, and this is true.

However, if you take the entire story of Enron in context, Arthur Andersen had been Enron’s sole auditor for 16 years. Arthur Andersen not only performed the audits but also providing consulting services to Enron earning  $52m in 2000.

This is clearly not independent auditing. The relationship and the incentives were much too deep to be considered independent.

Which brings me to Deloitte.

Auditor for Bear Stearns

Deloitte was the auditor of Bear Stearns and it is true the auditor lacked judgement and overlooked red flags. But the red flags Deloitte overlooked when auditing Bear Stearns were not related to accounting gimmicks. All those red flags were related to risk and valuation for subprime. From an accounting standpoint and GAAP rules, Deloitte did nothing wrong.

But what about the point that the auditor of CCME is not Deloitte & Touche of the USA but in fact, Deloitte Touche Tohmatsu?

Deloitte Brought Down the “European Enron”

To to build on the case of Deloitte’s competence as an auditor, consider the case study of Parmalat.

Parmalat was once the largest Italian dairy company but is now classified as the “European Enron”. Parmalat is another case where the independent auditor missed the fraud in accounting.

Under Italian law, every company is required to switch auditors every 9 years. Parmalat changed their auditor from Grant Thornton to Deloitte & Touche and in the very first audit by Deloitte & Touche, offshore accounts were scrutinized and fraudulent offshore entities were exposed that were used to hide fake assets.

Deloitte Touche Tohmatsu Provided an Accurate Audit

What do these case studies have to do with CCME? The two main ideas are:

  • Deloitte was recently hired as the auditor.
  • Deloitte would have seen all documents and records from a fresh new perspective.

Deloitte Touche Tohmatsu, the auditor of CCME, is not 100% Deloitte & Touche, but Deloitte Touche Tohmatsu must operate under Deloitte & Touche rules and standards. To argue that just because Deloitte Touche Tohmatsu is auditing a Chinese company and thus open to manipulation and bribes is pure speculation and nothing but an opinion.

It would be equivalent to saying that Microsoft China is incompetent just because it operates in China and is subject to Chinese rule.

Conclusion: Accusations about the inability of Deloitte as an auditor debunked. SEC filings are correct.

Disclosure

Long CCME.

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

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  • Ted

    I just don’t think “Well Deloitte says so so it must be true” is that strong a defense here. I think Deloitte as an auditor is definitely a good thing, but the guys at Muddy Waters did a lot of work here and this goes a whole lot deeper than that.

    The evidence that they have way less buses than they claim to have is very strong. The comps make no sense, when you compare them to their competitors their numbers seem magical and made up when you look at utilization rates and how much money they are making per screen the numbers are way too good to be true, especially given that their target market here is lower middle-class on down. And how come none of these major ad buyers know who CCME even is? It seems likely that CCME is lying and exaggerating about a ton of things here.

    Really, read this and tell me what you think:
    ***************************
    Similar to RINO, we verified that CCME’s largest relationship does not exist. We spoke with the largest operator in the CTR report, Shanghai Ba Shi about CCME. Ba Shi told us that it never had a business relationship with CCME. This comports with the advertiser kit,14 but
    wholly contradicts the CTR report. We spoke with Beijing A-er-sha Passenger Transportation Co. Ltd. (“Alsa”) and Beijing Xiang Long A-er-sha Passenger Transportation Co. Ltd. (“Xiang Long Alsa”). The CTR report claims Alsa and Xiang Long Alsa have 207 and 428 buses,
    respectively. Alsa told us that it has only approximately 20 buses. Xiang Long Alsa told us it has only approximately 60 buses. These numbers comport with the data in the advertiser kit.15 We provide screen shots of various operators’ websites below the table that also validate the advertiser kit data where available, and additionally contradict the CTR report with respect to two Fujian companies.
    ***************************

    When you look at this thing from the top down it seems like clear-cut fraud. I don’t short stocks and I’m not going to short this one but the evidence seems very strong.

  • Ted

    And I also have to question how much you actually know about this subject when you say things like this:

    “Deloitte Touche Tohmatsu, the auditor of CCME, is not 100% Deloitte & Touche, but Deloitte Touche Tohmatsu must operate under Deloitte & Touche rules and standards.”

    That’s just wrong. DTT IS Deloitte and Touche 100%. I really think you sound pretty emotionally invested into this thing.

    On top of that you’re going after an argument that Muddy Waters didn’t even make! In their 20 page report they never once mention Deloitte.

  • gokou3

    Ted, you may not have seen the notes regarding the multiple material errors that Muddy Water made in their so-called research. I refer you to the following links:

    http://ccme-info.xanga.com/

    http://www.facebook.com/#!/pages/Friends-of-China-MediaExpress-Holdings-Nasdaq-CCME/143661355689140

    Regarding the “Deloitte Touche Tohmatsu vs. Deloitte & Touche” discussion, there have been rampant attacks by the shorts that because CCME is audited by DTT in Hong Kong, it is somehow of lesser quality than the Deloitte & Touche in US. Glad that you think that’s not the case.

    It’s interesting to me that you said “I just don’t think “Well Deloitte says so so it must be true” is that strong a defense here.”, and then in the next sentence you go on to say “the guys at Muddy Waters did a lot of work here and this goes a whole lot deeper than that.” Apparently you haven’t attempted to verify MW’s “research” yourself and prematurely held MW’s work in a higher regard than Deloitte’s.

  • Edwin Wong

    Umm, the reason why CCME is not usually heard in China is because Fujian Fenzhong Media is the operating company. CCME is just the holding company. Why would Fujian Fenzhong then not just simply list itself on the U.S. market you may ask. Well, that’s because in China, there are rules against foreign ownership and one of the methods to get listed in the states is to use a reverse merger with contractual obligations. CCME was just a construction made in the states so that FF can get listed. And hence, people in China do not know what is CCME. Perhaps if you do a search of 福建分众, you might want to change your short position. ISO9001 etc… You know the whole gamut of things.

  • Nate

    I don’t hold a position, I used to but was worried about the quality of earnings along with the fraud factor, and would rather not lose money, there were too many red flags for me. I sold out about six months ago, but continue to follow the stock. I’m not short or long or anything, just interested.

    As to this article, I think this is a point a lot of people like to talk about how Deloitte is the auditor so the numbers must be good. I think what most people miss when they consider this is the corporate structure of CCME and what is Deloitte auditing.

    As I’m sure you’re aware the operating entity is Fujian Fenzhong which is a Chinese company, this company is not audited by Deloitte. Because CCME owns more than 50% and pass the test for control under GAAP rules they are allowed to consolidate their financial statements, so when you look at CCME’s statements you’re looking at Fujian Fenzhong’s statements. The burden of the auditor is at the top level, so they receive statements about the equity interest of the subsidiary at face value, then audit at the top level. I believe this leaves a gap. CCME does not have much at the top level, only at the operating level.

    Best of luck in your investing, I hope this position works out for you. I prefer to not lose money rather than hit it out of the ballpark.

  • Ted

    Edwin- do you really think that with all the trouble Muddy Waters went to, going to China and sitting on tons of their buses, calling ad buyers, calling bus companies, digging through financials that they would miss something simple that everyone knows like that?

    What do you think about the proof that CCME actively lied about how many buses each of these companies owned? Even if that was the only thing in the whole report that was true it would be a major red flag. It’s worth noting though that in the pics of the CCME equipment on buses that are in the report the logo says “Media Express”…

    And if what Nate says is true then that’s a major blow to the thesis in the article here. Jae, true or no? I really don’t know, I didn’t dig into the financials here I just read some reports and blog posts and the evidence seems strong enough to me that I don’t need to follow up.

    I’m not short. I don’t short Chinese fraud stocks, it’s too dangerous.

  • TimothyConway

    Hey guys, here’s the essential thing:
    Far MORE THAN ENOUGH d.d. has been done on CCME by veteran analysts like Darren Aftahi of Northland Cap. (who covered CCME’s older peer FMCN when at ThinkEquity) and Ping Luo of Global Hunter (who is fluent in Mandarin), both of whom can actually access the cashflow and cashbalances at the Chinese banks that CCME/Fujian Fenzhong uses and also extensively examine CCME/FujianF’s books and records. Ping Luo has performed over 7 months of d.d. on CCME, mostly done on the ground in China, and she and Aftahi have conducted close channel checks with CCME’s many bus operators and advertising clients and brokers.

    Both of these independent analysts leapt to CCME’s defense last Monday morning when the deceitful Citron “Research” piece came out by convicted felon Andrew Left.

    Both Global Hunter and Northland Cap. reiterated their strongest “Must Buy” rating, and Northland also clearly reiterated that CCME is their “top pick” for 2011 among 97 stocks in their coverage, and CCME is only one of 2 or 3 China cos., so that is a remarkably confident pick.

    The Andy Left / Citron hit job, like the one by fellow manipulative shortseller Carson Block of “Muddy Waters” (yeah, he really knows how to “muddy up” the waters), have both within 15-20 hours of their publication been proven to display unconscionable and extensive ERRORS OF FACT.

    You can read CCME’s Founder/Chairman/CEO Zheng Cheng’s Letter to Shareholders this a.m. that specifically rebuts all the major allegations by Left & Block.

    These “financial assassins” Block and Left have drawn erroneous conclusions about #s of buses in bus operators’ fleets because they can’t properly read or are misrepresenting the actual Chinese websites of the bus operators with whom CCME does business. Moreover, Block and Left can’t see that CCME doesn’t have direct “competitors” because it occupies its own advertising niche and so therefore doesn’t have “competitors” but peers, and that CCME is in fact listed by the Chinese Advertising Agency as a strong-performing peer, gaining higher ranks over recent years. Indeed, it is quickly gaining on the top-ranked China out-of-home advertiser, FMCN. As Michael Anderson pointed out for S.A. the other day:

    “The China Advertising Association [cnadtop.com] is the official government agency that all advertising platforms in China must register with. You can find CAA’s description in Baidu’s version of Wikipedia, it’s in Chinese (you can use Google translate) and very comprehensive. In 2007, CAA ranked CCME number 15th by revenue. In 2009, CCME was ranked number 6. This latest ranking was released in August 2nd, 2010.”

    Given the trend, it is most likely that CCME’s 2010 ranking will have moved from 6th place to even higher.

    It should also be known here that Starr Int’l, before it invested what is now nearly $50M in CCME (starting with a $30M PIPE in Jan 2010, added warrants, and then a $13.5M buy of common shares in Oct.), had its own internal investigators and fully three outside hired teams of investigators to do extensive d.d. on CCME’s business model, its finances, and its legal status. The Starr group has one of its financial investigators, Dorothy Dong, holding a Director’s seat on the board, with ongoing complete access to all the books and records.

    So, gee, who am i going to trust here about what’s really going on in China with CCME? The Chinese Advertising Association, top-ranked auditor Deloitte, big name investor Starr Int’l, independent analysts Global Hunter and Northland Cap. (with their objective analysis and ongoing access to CCME’s books & records), and big retail investors i personally know who’ve done their own extensive and unusual forms of d.d. in China (e.g., see impressive work at ccme-info.xanga.com )?

    or

    …two pathetically self-serving, admitted shortsellers who have already been exposed this week for a multitude of whopping blunders, malicious omission of facts and manipulative rhetoric?

    That’s a no-brainer. CCME is heavily “on sale.” Therefore, as the market itself was indicating yesterday, CCME is a very strong “Must Buy,” as both Global Hunter and Northland Capital have recommended earlier this week.

  • Timothy

    Look here…

    Far MORE THAN ENOUGH d.d. has been done on CCME by veteran analysts like Darren Aftahi of Northland Cap. (who covered CCME’s older peer FMCN when at ThinkEquity) and Ping Luo of Global Hunter (who is fluent in Mandarin), both of whom can actually access the cashflow and cashbalances at the Chinese banks that CCME/Fujian Fenzhong uses and also extensively examine CCME/FujianF’s books and records. Ping Luo has performed over 7 months of d.d. on CCME, mostly done on the ground in China, and she and Aftahi have conducted close channel checks with CCME’s many bus operators and advertising clients and brokers.

    Both of these independent analysts leapt to CCME’s defense last Monday morning when the deceitful Citron “Research” piece came out by convicted felon Andrew Left.

    Both Global Hunter and Northland Cap. reiterated their strongest “Must Buy” rating, and Northland also clearly reiterated that CCME is their “top pick” for 2011 among 97 stocks in their coverage, and CCME is only one of 2 or 3 China cos., so that is a remarkably confident pick.

    The Andy Left / Citron hit job, like the one by fellow manipulative shortseller Carson Block of “Muddy Waters” (yeah, he really knows how to “muddy up” the waters), have both within 15-20 hours of their publication been proven to display unconscionable and extensive ERRORS OF FACT.

    You can read CCME’s Founder/Chairman/CEO Zheng Cheng’s Letter to Shareholders this a.m. that specifically rebuts all the major allegations by Left & Block.

    These “financial assassins” Block and Left have drawn erroneous conclusions about #s of buses in bus operators’ fleets because they can’t properly read or are misrepresenting the actual Chinese websites of the bus operators with whom CCME does business. Moreover, Block and Left can’t see that CCME doesn’t have direct “competitors” because it occupies its own advertising niche and so therefore doesn’t have “competitors” but peers, and that CCME is in fact listed by the Chinese Advertising Agency as a strong-performing peer, gaining higher ranks over recent years. Indeed, it is quickly gaining on the top-ranked China out-of-home advertiser, FMCN. As Michael Anderson pointed out for S.A. the other day:

    “The China Advertising Association [cnadtop.com] is the official government agency that all advertising platforms in China must register with. You can find CAA’s description in Baidu’s version of Wikipedia, it’s in Chinese (you can use Google translate) and very comprehensive. In 2007, CAA ranked CCME number 15th by revenue. In 2009, CCME was ranked number 6. This latest ranking was released in August 2nd, 2010.”

    Given the trend, it is most likely that CCME’s 2010 ranking will have moved from 6th place to even higher.

    It should also be known here that Starr Int’l, before it invested what is now nearly $50M in CCME (starting with a $30M PIPE in Jan 2010, added warrants, and then a $13.5M buy of common shares in Oct.), had its own internal investigators and fully three outside hired teams of investigators to do extensive d.d. on CCME’s business model, its finances, and its legal status. The Starr group has one of its financial investigators, Dorothy Dong, holding a Director’s seat on the board, with ongoing complete access to all the books and records.

    So, gee, who am i going to trust here about what’s really going on in China with CCME? The Chinese Advertising Association, top-ranked auditor Deloitte, big name investor Starr Int’l, independent analysts Global Hunter and Northland Cap. (with their objective analysis and ongoing access to CCME’s books & records), and big retail investors i personally know who’ve done their own extensive and unusual forms of d.d. in China (e.g., see impressive work at ccme-info.xanga.com )?

    or

    …two pathetically self-serving, admitted shortsellers who have already been exposed this week for a multitude of whopping blunders, malicious omission of facts and manipulative rhetoric?

    That’s a no-brainer. CCME is heavily “on sale.” Therefore, as the market itself was indicating yesterday, CCME is a very strong “Must Buy,” as both Global Hunter and Northland Capital have recommended earlier this week.

  • Lee

    Ted- I am somewhat bemused by your confidence in MW’s bus numbers. The evidence seems quite clear that this section of the report was fabricated by MW.

    These bus numbers clearly didn’t come from the CCME media kit as was stated. The look and format are different and the numbers are inconsistent with the true media kit.

    Of course the fact that the pdf in the report originated from an Excel spreadsheet produced on Kathy Blocks copy of Excel or computer is somewhat suspicious. Or are we to believe Carson’s wife is a CCME employee?

    As to the other complaints I am satisfied by the debunking on the ground as documented at ccme-info.xanga.com and continue to have confidence in Deloitte audited financials.

  • gokou3

    “Because CCME owns more than 50% and pass the test for control under GAAP rules they are allowed to consolidate their financial statements, so when you look at CCME’s statements you’re looking at Fujian Fenzhong’s statements. The burden of the auditor is at the top level, so they receive statements about the equity interest of the subsidiary at face value, then audit at the top level.”

    Nate, I may not know auditing as much as you do, but what you stated above doesn’t make much sense to me. I give you an example. If I have a holding company called “LegitHold” which has nothing but a subsidiary called “FraudSub”, and ask Deloitte to audit LegitHold, would Deloitte certify whatever statements put forth by LegitHold?

    Btw, I think you are contradicting yourself here. Either a subsidiary’ assets and liabilities are consolidated into the various lines of the balance sheet of the parent or it is included in the parent’s asset as equity interest (e.g. “long-term investments”).

  • http://www.selectedfinancials.com Ankit Gupta

    Good job – we need more people who are willing to express an opinion like what Jae has done. Correct or not, it’s tough to go against the norm, good job on putting yourself out there.

    Ankit

  • Jonsjon

    I like your analysis, but you made a mistake in the end.

    Deloitte Tohmatsu is the mother company, but what we mean when we refer to Deloitte is a subsidiary of Deloitte, namely Deloitte USA.

    The auditor of CCME however, is Deloitte China, another subsidiary of Deloitte Tohmatsu.

    So you’re analysis is wrong if you say it doesn’t matter if Deloitte China is the auditor. It does matter.

  • Zehua Zhou

    No one seems to mention that CCME’s CFO bought 100K shares at $15. Do you think he knows better about the business of CCME than Muddy Water?
    Also they had such a huge share buyback program. If they are not making money, they will not have money to buy back shares. In addition, after they publish the 10-K, they will start the semi-annual dividends. Isn’t that another indication that the company is indeed making big money?
    We have seen so many errors in Muddy Water’s report that we can safely conclude MW is a crime. After this matter is fully resolved, we should let its people go to jail.
    It is great to see everyday’s volume exceeding the float. I would assume each day adds 20-50% of naked short interest. The more naked short sellers in, the faster they die after the 10-K comes out.

  • Zehua Zhou

    Does anyone know when the 10-K will come out?

  • http://yahoo.com mant

    Delloitte is a big 4 accounting firm and muddy waters is a \research\ website operated by someone with a crooked past, and is actually short the stock. I hope you are shorting CCME based on some other knolwedge than muddy waters’ say so.

    People lets not get carried away and lose sight of the position ,a big 4 accounting firm is involved.

  • http://valueinvestortoday.com Jim

    I’ll only comment in regards to Ted’s “emotional” reference in regards to Jae. I’ve known Jae for 3 years now and he has never been known as an “emotional” investor. Matter of fact, coming from the same school of thought as PlanMaestro and myself, the entire premise to our investing process is to completely disregard the use of emotions and only be aware of their existence. As far as Muddy Waters, they have no special inside knowledge that they’ve been made aware of that any other investor doesn’t have access to. I have not seen a shred of evidence to support the idea of this company being a fraud and I don’t recal reading a Muddy Waters report concerning Enron and that was a case that could be spotted more than 2 years in advance of their demise. Who is Muddy Waters and what is their history? In my opinion they are nothing of importance.

  • gokou3

    Jonsjon,

    What makes you think foreign Deloitte is of lesser quality than Deloitte US? Besides, it’s “Deloitte Touche Tohmatsu in Hong Kong” that’s engaged in the audit per 2009 10-k:

    http://sec.gov/Archives/edgar/data/1399067/000114420410017463/v179137_10k.htm

    In case you didn’t know, little Hong Kong is a financial center where more money is raised in IPO last year than New York. DTT HK has audited companies many times the size of CCME.

  • Will

    Hey guys, GuruFocus just posted a couple of articles relating to this very issue.

    http://www.gurufocus.com/news.php?id=121572

    http://www.gurufocus.com/news.php?id=121435

    http://www.gurufocus.com/news.php?id=121472

    This seems to be very hot topic indeed!
    Obviously, there is a lot of doubt surrounding Chinese companies due to the fraud cases that come out. Unfortunately, this has lumped many companies into the “seen one, seen them all” category.

  • Jonsjon

    ZHOU, about the insider buys, some were warrants executed, which are basically option transactions. It could be likely those shares were immediately sold, not very bullish. Other transactions were already agreed to, for example with Starr.

    Now the announced buyback, we all know how buybacks work, you don’t know if it happened until after the fact, so you would have to wait until annual or quarterly reports to find out if buybacks happened. That’s why companies rather announce buybacks, than announce dividends.

    GOKOU, when people refer to the name Deloitte, they without a doubt mean the subsidiary Deloitte USA. That is the subsidiary with all the reputation. So DTT HK is indeed less reputable than general Deloitte.

  • avinv2010

    I have found this post which I found interesting. It gives an opinion about how cash might be faked if a company wanted to go to that lenght to fake its numbers. I also agree with the poster that CCME’s CEO letter to shareholders failed to address one very important point raised by MW and Citron’s researches: that their main advertisers (Coca Cola, Lenovo) said they do not know CCME.

    http://investorshub.advfn.com/…..d=59622540

    What is your opinion?

  • somrh

    gokou3 asked:
    “Nate, I may not know auditing as much as you do, but what you stated above doesn’t make much sense to me. I give you an example. If I have a holding company called “LegitHold” which has nothing but a subsidiary called “FraudSub”, and ask Deloitte to audit LegitHold, would Deloitte certify whatever statements put forth by LegitHold?”

    I’m curious about this as well. To add some fuel to the discussion, the David Einhorn/Allied Capital affair had something, perhaps, similar going on.

    Allied Capital (ALD) was a BDC and one of its investments was more or less a subsidiary since, I believe, they owned all of the equity. Business Loan Express (BLX) was the sub. but very little information about BLX was included on ALD’s financial reports. As such, did Arthur Andersen have legal/accounting convention obligations to audit BLX’s reports when it audited ALD’s?

    Einhorn ended up hiring a private investigator to even come up with some relevant information on the company since ALD provided limited disclosure into the business. It’s unlikely that Arthur Andersen really audited the firm.

    So is there an obligation for the auditor to investigate a subsidiary of a holding company?

    I’m personally in agreement with your good sense, but frankly the law doesn’t always match one’s good sense.

  • Nate

    To gokou3 and somrh, I understand what you’re both saying in that it seems the auditor should audit both the holding company and subsidiary, common sense would dictate that.

    gokou3 your scenario is actually accurate, I could form a holding company and buy enough equity in another company that I am deemed to have control and list them on my financial statements as if they were me (they would be consolidated). At this point the sub could have a different auditor, that’s a plausable scenario.

    I don’t know what CCME is doing, this could be some of the discrepancy with some of their numbers, I saw posted somewhere that CCME only had 300k in net income according to the SAIC filings, which would make sense if it’s just the top level corp.

    What’s confusing with these US listed Chinese companies is their corporate structure. In CCME’s case there is the US listed company, a company in China that has some sort of contract to pay CCME, a sub of that, and a VIE. I’m not sure if it’s a true sub in China or another contract basis type of thing, all I know is between all of these moving parts there is no assurance of anything. For accounting CCME is stated to have control over the Chinese entities which is good enough to consolidate their financial statements, but it doesn’t mean anything about what’s actually being audited.

    I would also note it’s worth taking a look at their previous 10-K and read the auditor’s letter. It appears what they audited was the reverse merger itself and the share counts associated with it.

    As I said in my previous post, I have no position in this stock outside of a general interest. One thing I would ask myself though if I was an investor is how am I protected against this crazy structure. What if the Chinese company just breaks the contract and stops paying the top level of CCME, what recourse do I have? All a US investor owns is equity in a company that has a foreign contract with a Chinese company.

  • Nate

    I also want to point this out, remember back in 2009 the Satyam fraud? The CEO claimed there was $1 billion dollars in the bank that didn’t exist, the accounts were a big 4 PWC. The complexity of the fraud? The CEO just stated it and it was never checked.

    If anyone is curious about auditing they do sampling, like random sampling. So if the auditors think there’s no reason a bank account could be faked they won’t check it. They might check a sample of receivables and inventory, it would take way too much time and money to actually check every single invoice. This is why when a company folds such as Enron it takes the Feds years to put their case together, they actually comb through everything, and it takes a long time.

    Here is an article on Satyam, just something to consider:
    http://www.nytimes.com/2009/01/09/business/worldbusiness/09iht-09outsource.19206831.html

  • http://www.oldschoolvalue.com Jae Jun

    @ All,
    After I wrote this, I started reading more on auditing and how companies can manipulate the books to book non existing revenue and cash. So when I wrote this article, I was confident the numbers could be correct, the book I’m reading at the moment (financial shenanigans) is casting a doubt on whether an audit can detect everything.

  • Jock

    Jae – I am SO impressed at your post: that you are questioning your conclusions about CCME. This doesn’t happen on most investment sites. I’m long CCME too. And I’m glad to have in the foxhole next to me
    a truth seeker rather than a big ego determined to prove he’s right!

  • Zehua Zhou

    I have not seen other fraud companies buying back shares and announce dividend, at least not at this scale. Some of them borrow money from the bank to buy back shares to hide the fact that they have no real cash flow, but CCME doesn’t have much loan from the banks, so the only way to have money to buy back shares is from their own operation.

  • Nate

    Zehua Zhou I would re-read the previous 10-Q the company announced a buyback then purchased no shares. So they didn’t spend any cash, more of a PR move. A dividend has been announced as well but nothing has actually been paid out. The only dividend was 12m paid to the CEO at the time of the reverse split.

    Jae – Financial Shenanigans is an excellent book, you will learn a lot in there. Another great book is Creative Cash Flow Reporting by Mulford and Cominski, they discuss how cash flow can be manipulated just like earnings and how to detect sustainable cash flow in businesses.

    I’d also recommend another book Wall Street vs America which is about stock scams, boiler room operations and all sorts of murky business that happens in the markets. It’s not about detecting it, just stories of it happening, but general themes weave through the book.

    Lastly this is a site I’ve been reading recently http://www.sequenceinc.com/fraudfiles/ The author is a forensic accountant and she digs through all sorts of stuff. It seems that MLM businesses are a favorite of hers but she does cover a lot of good stuff on auditing.

    As someone who knows a number of auditors I believe there is a large disconnect between what they do and what investors perceive what they do. The difference between perception and reality is where an investor can lose money. Think like a creditor if you want to come out ahead.

  • avinv2010

    http://www.sequenceinc.com/fraudfiles/2011/02/10/failing-to-find-fraud-when-auditing-cash/

    Very interesting, thank you Nate.

    I am long on CCME but I am also considering whether I should at least trim my position. During this CCME rollercoaster I am discovering my psychological limits, that is, I wake up at night thinking about it !!

  • Zehua Zhou

    Nate:CCME’s auditor did verify the cash account and the cash flow.

  • Zehua Zhou

    Nate, you are just questioning this company with no solid evidence. As an investor we all need to learn how to act under uncertainty. You are only given 1 or 2 clues and you need to make a judgment that is approximately right.

  • Anony Moose

    There has been a bunch of discussion RE: Deloitte here, and I think most of it is not 100% correct. Here is an explanation of the nature of the company.

    Deloitte is a partnership. Each country has its own partnership. Deloitte USA is completely separate from Deloitte Hong Kong, is completely separate from Deloitte UK. Each country partnership is a member of Deloitte Touche Tohmatsu (DTT).

    The point of DTT is to leverage knowledge, skills and best practices among firms. For example, some employees with unique skill sets needed in one country can call upon DTT skills from other member firms.

    This is how ALL of the big audit firms work (generally speaking). They are partnerships, and each country is legally independent from each other. They leverage skills off of each other. This was also the operating structure of Arthur Andersen.

    Enron: When Enron fell, Anthur Andersen fell. It was also a partnership. The company was in nearly every country in the world. With that said, the errors related to Enron were limited to the USA. Theoretically, Arthur Andersen could have continued in every other country they operated in, as liability was limited to USA partners. Why then did they dissolve? Simple: The reputation was destroyed. No reputable company anywhere in the world wanted to deal with them any more.

    How does this knowledge help you, the investor? The stakes are higher for auditors of publicly traded companies. They know that if they release an unqualified audit report in error, they hold a liability which could possibly destroy the entire firm. They therefore have stricter standards than required to minimize audit risk.

    This doesn’t mean that a big 4 auditor means there isn’t fraud. Remember that fraud is intentional, and management will actively try to hide that fraud. Investors will always hold SOME risks.

  • assman

    “So when I wrote this article, I was confident the numbers could be correct, the book I’m reading at the moment (financial shenanigans) is casting a doubt on whether an audit can detect everything.”

    Quality of Earnings, a book you have already read, says you shouldn’t trust auditors. That is why I am surprised you wrote this post. I found out about Quality of Earnings from your website!

  • http://www.oldschoolvalue.com Jae Jun

    @assman,

    True. You definitely should not take the opinion of the auditor for granted. But with everything else, it’s not as simple to define like that. Important thing is to look at everything with an investigative eye.

  • Anonymous

    I don’t think there is too much worry. We all know how fishy the Muddy Water report is, and those short sellers know even better. They are smart bad ass folks. I guess they were quietly reversing their positions from short to long now so they could ride it up after the 10-K comes out.
    I am also predicting that the folks hired by them to keep posting negative comments will suddenly disappear, replaced with folks saying how good CCME it after 10-K is out, so these bad ass guys could squeeze a few more bucks from their longs.
    Anyone who got hit hard should contact this law firm to sue Muddy Water and Citron:
    http://www.shulaw.com/About-Us/Investigations/China-MediaExpress-CCME/

  • m

    Your distinctions regarding Arthur Anderson and Enron, and Deloitte and Bear Stearns, are without merit.
    Furthermore, Deloitte in no way brougth Ddown Parmalat. Instead, they were complicit, when they saw fraud and expressed internal concerns, they back off and signed the audit; when a partner quesionted a fictitious transfer of funds, Deloitte took him off the account. Deloitte was sued for its complicity. An investigation into criminal actitivy on Deloitte’s part was made. Of course, Deloitte claims it was tricked, as it will do for CCME. For the story, see http://www.time.com/time/magazine/article/0,9171,785318-3,00.html
    You provide no evidence that Deloitte did a competent audit. Deloitte in the U.S. in not a competent auditor in my opinion, see the last PCAOB audit of Deloitte, where they made numerous bonehead errors. Deloitte China is worse in my opinion.

  • m

    Deloitte routinely defends cases against member firms claiming they didn’t know what the member firms were doing and could not reasonably have known or find out that the member firm was acting neglgiently or incompetently. Anyone who thinks the member firms are being properly overseen by the parent is simply making it up in their mind and contradicting what hte parent company itself claims.

  • Ted

    CCME halted. Looks like all you kool-aid drinkers are about to learn a very expensive lesson.

  • http://www.oldschoolvalue.com Jae Jun

    cmon Ted. What’s the point of name calling? Doesn’t achieve anything.

  • Ted

    A lot of the longs here have such a nasty tone- either talking about “hit jobs” and “financial assassins” and con men or being extremely condescending. They clearly had a lot of bias and some very strong feelings and it blew up in their faces and no one should cry for any of them. Such a certain tone when applied to investing can get you hurt badly.

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