Bloomberg News

China Forestry Auditor KPMG Resigns Citing Valuation Concern

January 06, 2012

(Adds KPMG’s Silvercorp review in ninth paragraph.)

Jan. 6 (Bloomberg) -- China Forestry Holdings Co., the Chinese timber company whose shares have been suspended since January last year because of accounting irregularities, said its auditor KPMG LLC resigned citing valuation concerns.

China Forestry needs to verify the ownership and valuation of its plantations and log inventories, a statement yesterday from the Beijing-based company cited KPMG as saying. The former auditor also said it was still awaiting results from a broader probe into the irregularities it identified last year.

The resignation comes as investors increase scrutiny of accounting standards of Chinese companies, which intensified last June when short-seller Carson Block alleged Sino-Forest Ltd. overstated its assets and cash balances. Vegetable producer Chaoda Modern Agriculture Holdings Ltd. and software maker Longtop Financial Technologies are among companies halted from trading after fraud allegations were made against them.

“We’re very sensitive to any statement an auditor makes, or resignation in this case,” said Ben Kwong, chief operating officer at KGI Asia Ltd. in Hong Kong. “Chinese private companies tend to not be very transparent and we’ve had bad experience in the past where accounts are not reliable and the companies’ conduct not very ethical after they go public.”

KPMG won’t stand for reappointment and the board will find a new auditor “as soon as practicable,” the timber company partly owned by the Carlyle Group said in the statement. KPMG declined to comment when reached by phone today.

Independent Investigation

“We don’t have a clear idea about when the independent investigations will be complete,” Raymond Tong, China Forestry’s chief financial officer, said by phone from Hong Kong. “The investigations are completely independent so management doesn’t have access to them.”

That broader investigation should “identify all irregularities that may have occurred and all management and officers involved in the irregularities, trace where the group spent the proceeds from the initial public offering and reconcile the details of recorded plantation assets,” KPMG told the company along with its resignation in letters dated Dec. 30 last year and Jan. 5, China Forestry said in the statement. Last year, KPMG said there was “serious doubt over the authenticity and reliability of records and documents of the group.”

The forest operator reported last August a first-half net loss of 130 million yuan ($21 million) as it didn’t conduct harvesting in the first six months due to the irregularities and a change in management, the company said in a filing.

Silvercorp, Real Gold

KPMG was hired to carry out a forensic investigation by Silvercorp Metals Inc., a Chinese miner listed in Toronto and New York, after websites, including Alfredlittle.com, wrote reports alleging fraud. KPMG’s findings didn’t support the claims, Silvercorp said last October.

Deloitte Touche Tohmatsu, the former auditor for Hong Kong- listed Real Gold Mining Ltd., also resigned last October, saying the company failed to disclose material information.

China Forestry formed a committee of independent directors in January to carry out an initial investigation. Its former chief executive officer, Li Han Chun, was detained by police in Guizhou province in February for alleged embezzlement of 30 million yuan. Li was replaced by Li Jian as CEO.

The committee found its former management team faked bank documents and logging permits, China Forestry said last April.

The company owns forestry rights to about 231,000 hectares in Sichuan province, Yunnan province, and Guizhou province as of June 30 last year, it said in its interim report. It had a cash balance of about 1.2 million yuan as of Aug. 26, it said.

Forest Assets

“For forestry companies, it’s hard to confirm the existence of their asset ownership,” said KGI’s Kwong. “You can’t go and count every single tree. We can only rely on professional audit and accounting firms to do this work.”

Sino-Forest, which counts Richard Chandler Corp. as its largest shareholder, dropped 74 percent on the Toronto stock exchange after Block’s research firm Muddy Waters LLC issued a report against the company. Sino-Forest denies the allegations.

Its shares remain suspended as it delayed its earnings and defaulted on two sets of bond payments last month. Richard Chandler, a billionaire investor whose investment company owns 19 percent of Sino-Forest according to data compiled by Bloomberg, said the timber company needs to change its CEO and appoint new directors.

--Editors: Andrew Hobbs, Indranil Ghosh

To contact the reporter responsible for this story: Michelle Yun at myun11@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net


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