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Deloitte quits second Chinese firm as auditor fears grow

By Donny Kwok

HONG KONG (Reuters) - Deloitte said on Thursday it had quit as auditor for Chinese milk formula products maker Daqing Dairy Holdings Ltd <1007.HK> hours after its shares were suspended, the accounting firm's second resignation from a Hong Kong-listed Chinese company in days.

The news has sparked fears this could be the start of a much wider and deep-rooted problem at Chinese companies listed in Hong Kong, after a series of scandals at U.S.-listed mainland companies last year that has unnerved some of the big auditors.

"We see a trend there, and it may spread ahead of the earnings seasons as auditors are taking quite a cautious approach on reviewing those earnings, in particular under pressure from relevant regulators," said Linus Yip, chief strategist at First Shanghai Securities. "It alarms the market ... and alerts investors to the potential risk of investing in these small companies," he said.

Shares of Daqing, which produces milk formula products and whole milk powder products, plunged 45 percent in 2011 but had staged a partial recovery this year. The stock fell 17 percent in the three days trading prior to its suspension.

Officials at Heilonjiang-based Daqing, which has a market value of about HK$1.7 billion ($218.95 million), were not immediately available for comment.

DELOITTE IN SPOTLIGHT

The Daqing resignation came a week after Deloitte quit as auditor of Boshiwa International Holdings <1698.HK>, which holds the license to make Harry Potter- and Bob the Builder-branded clothes, attracting unwanted attention to one of the Big Four accounting firms.

"That's two in a row now for Deloitte. If that trend continues it will start to raise some eyebrows," said Paul Gillis, visiting professor of accounting at Peking University and author of the China Accounting Blog.

Deloitte said it was not satisfied with Boshiwa's response to questions about some of its transactions, knocking the company's share price down as much as 42 percent before trading was suspended.

"We may see more similar cases surface, especially as it was a tough year last year for many smaller companies," said Alex Wong, a director at Hong Kong's Ample Finance Group.

"These incidents suggest that authorities should pay more attention to the quality of listing candidates, and that has already hit investors' appetite for IPOs," he added.

A run of accounting scandals at U.S.-listed Chinese companies last year has highlighted the risk of financial irregularities, and led to some auditors facing class-action lawsuits from angry investors.

Deloitte was caught up in one of the most high-profile accounting scandals of last year when it resigned as auditor of U.S.-listed Longtop Financial Technologies Ltd, alleging the Chinese software maker had tried to falsify its financial statements and bank confirmations.

The U.S. Securities and Exchange Commission is investigating the case but has been thwarted by the refusal of Deloitte's Shanghai office to hand over its audit work papers.

The SEC has gone to the courts to try to force Deloitte's hand, but the auditor says it cannot comply as to do so could breach China's state secrecy rules.

In other high-profile cases in the past year, China Forestry's <0930.HK> shares were suspended in January 2011 after its auditors, KPMG, said they had found irregularities in its accounts.

In September, Anonymous Analytics, which said it was linked to hacking group Anonymous, published a report accusing Chaoda Modern Agricultural Ltd <0682.HK> of misleading investors about its cash holdings, capital expenditure, and falsifying its financial statements. Chaoda's shares have been suspended.

($1 = 7.7645 Hong Kong dollars) 7

(Reporting by Donny Kwok; Editing by Anne Marie Roantree and Robert Birsel)

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