Posted by Amy CHAN Wen Yi, Year 4 undergrad at the School of Accountancy, Singapore Management University
Boshiwa International Holding Ltd., a Hong Kong listed Chinese chain of children’s apparel and a licensee of global brands like NBA and Harry Potter, declared that Deloitte Touche Tohmatsu has resigned as its auditor due to doubts about corporate governance.
Shares in the Shanghai company, which FORBES ASIA profiled in December, were suspended from trading at noon on March 15 after its second announcement that day. Its share price fell 35%, with its value shrinking to $449 million. Its market capitalization hit $2.4 billion on the IPO organized by UBS, Credit Suisse, and Bocom International, but dropped about 70% over last year.
Deloitte said its resignation was because of “concerns about pervasive matters in its financial statements,” including the existence and commercial substance of various transactions with its distributors and suppliers, and of a recorded prepayment of $62 million to a supplier. The firm said the information Boshiwa provided was insufficient, and their explanation was unsatisfactory.
Boshiwa stated that the company will need extra time to collect data for its new auditor, and the release of its 2011 annual results will be delayed to after the end of March, which will be a breach of stock exchange rules. It is also considering establishing an ad hoc investigation committee for this matter.
“It’s an unfortunate event at an unfortunate time, but we respect their decision,” says Lv Yihao, Chief Administrative Officer of the company. “We are grateful to our shareholders and we must be responsible for them. I believe our new auditor will make a fair appraisal.”
During the first half of 2011 Boshiwa made $21 million profit but prepaid $26 million to its suppliers. In the half-year report, the company said prepayments would reduce purchase costs. Many public Chinese companies have been suspended from trading because of accounting irregularities, including software maker Longtop, China Forestry Holdings and Sino-Forest. Other Hong Kong listed mainland companies in children’s apparel have also suffered from Boshiwa’s plight. On Mar. 15 Prince Frog’s stock price went down 3.4%.
“Those companies haven’t been public for long, and investors are not familiar with this industry,” says Zhang Yuanmeng, director of China Research Center for Children’s Industry. “Boshiwa may have set a bad example, but it’s possible [the mess will] soon go away.”