Accounting-Driven Class Actions Rising, Study Finds
Twenty of the accounting-related class actions included allegations of improper revenue recognition, PwC finds
April 10, 2015 | CFO.com | US
Now that securities litigation related to the 2008 financial crisis has largely petered out, accounting-driven class-action suits based on regulatory enforcement actions are on the rise, according to PwC’s 2014 Securities Litigation Study released Friday. There were 53 accounting-driven cases filed last year, representing 31% of all federal securities class-action cases filed during the year, according to the report. In 2013, 46 cases were filed, representing 29% of all cases that year. PwC tracks U.S. federal securities class-actions filed since the passage of the Private Securities Litigation Reform Act in 1995.
By Roy KIM Jia Liang and KB Kee
China Environment (SES: 50U, Bloomberg: CENV SP) FY2014:
- Receivables past due more than 90 days exploded from RMB90m in FY13 (17% of sales, 12% of current assets) to RMB306m (52.4% of sales, 34% of current assets) in FY14, with no provision for impairment. Cash and Cash Equivalents down from RMB90.3m in FY13 to RMB8.8m in FY14.
- Notice how the “trade receivables not past due” (“deposits with bank”?) amounting to RMB297m eerily approximates the sum of Amount due to related parties RMB86.6m, Short-term borrowings RMB173.4m and Bank balances pledged RMB39.5m. Are these circular money-go-round transactions in money pledged to give loan guarantees and loans to related-parties?
- Overall: Further doubts are cast on the propriety and reliability of receivables and revenue figures with the potential risk of undisclosed related-party transactions severely misrepresenting the financial status of the company.
- Chronology of events:
- Feb 10, 2015: Part 1 of article series on China Environment highlighting accounting and governance issues. Part 2 on Feb 17, Part 3 on Feb 23.
- Feb 16, 2015: CFO CT Chiar replied using the moniker “Sadme” and a personal email (firstname.lastname@example.org).
- Feb 27, 2015: Unaudited FY14 financial results announcement with 4Q14 sales and profit witnessing a sudden plunge, corresponding with a sharp decrease in cash and a sudden increase in “Other Receivables (Unsecured, Interest-Free Advances to Unidentified Mysterious Subcontractor With No Provision for Impairment to Mitigate Default or Non-Repayment Risk)”.
- Mar 9, 2015: Open Letter to SGX/MAS: Reply to CFO of SGX-Listed China Environment (CENV SP) on report “Potential Accounting Tunneling Fraud at China Environment?” – Address the accounting and governance concerns in an SGX/MAS announcement.
- Apr 2, 2015: Auditor Emphasis of Matter and the partial repayment (disgorging?) of cash taken out from the listco. Read: (1) China Environment: Auditor Emphasis of Matter raises more questions on potential accounting tunneling risk, (2) Does Auditor Explanatory Language in Unqualified Audit Reports Indicate Increased Financial Misstatement Risk? “Emphasis of matter” language predicts restatements,
- Apr 13, 2015: Receivables past due more than 90 days exploded.
PCAOB Preparing New Rule for Audits of Accounting Estimates; The PCAOB staff plans to discuss auditors’ responsibilities for accounting estimates with the Standing Advisory Group in June.
April 9, 2015 | CFO.com | US
The Public Company Accounting Oversight Board is moving closer to proposing a comprehensive new standard for audits of accounting estimates in financial statements. Thomson Reuters reports that according to the standard-setting agenda the board updated on March 31, PCAOB staff is planning to discuss auditors’ responsibilities for accounting estimates with the Standing Advisory Group in June.
Vietnam Police Arrest Executives of Truong Son Securities
23 March 2015
Vietnam News Brief Service
Vietnamese investigative police on March 21 detained two former high-profile executives of Truong Son Securities Incorporation (TSS) for ‘fraud, appropriation of assets’, lengthening the list of crimes in the country’s financial system. Continue reading
‘Audit firms need to be put under lens’
10 April 2015
As a special court sentenced B Ramalinga Raju, chairman of erstwhile Satyam Computers, to 7 years in jail along with a Rs 5 crore penalty and holding two former partners of its auditing firm Price Waterhouse accountable in the fraud case, regulatory officials, who were involved with the case, said that accounting firms should also be held accountable.
“Nothing has happened to the audit firm because, in India, while institutions have disciplinary powers over individuals, they can do nothing to the firm and this needs to be looked into. In developed nations accounting firms have been held accountable,” said a former Sebi official. He added: how can the firm justify the fact that the auditor did not raise issues even as accounts were manipulated for 28 quarters? Continue reading
Predicting Large Negative Stock Returns: The Trouble Score
- Korcan AkUniversity of California, Berkeley – Haas School of Business
April 6, 2015
The purpose of this study is to predict large negative stock returns. I create an indicator variable, which takes the value of one when a company experiences a stock price decline of 50 percent or more over the subsequent year. Then, using both accounting-based and market-based variables, I predict this large change by using a logit model; the outcome of this prediction is the “Trouble Score”. The top three deciles of the T-Score correctly classify 63.00 percent of observations for the in-sample tests and 60.52 percent of observations for the out-of-sample period. Further, I document a significant and negative association between the out-of-sample T-Score and future stock returns even after controlling for well-known risk factors and control variables that are correlated with future stock returns.