China’s Sihuan Pharm (460 HK) reports long delayed earnings and accounting overhaul; Sihuan’s auditor PwC issued a disclaimer of opinion as it was unable to obtain sufficient evidence to form an audit opinion.

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China’s Sihuan Pharm reports long delayed earnings and accounting overhaul

PUBLISHED : Monday, 03 August, 2015, 10:11am

Sihuan Pharmaceutical released its long-delayed 2014 annual earnings on Monday morning, and major restatements of its financials involving its sales and marketing activities.

Sihuan, one of mainland China’s largest prescription drugmaker, reported net profits up 30 per cent to 1.7 billion yuan (HK$2 billion). The earnings were released four months later than required, as the company, backed by a Morgan Stanley private equity fund, had to rectify some of its accounting practices.

An investigation led by an audit committee consisting of some non-executive directors of Sihuan concluded that the company should have consolidated some of the marketing research agents into its own books, as Sihuan was deemed to influence the agents’ earnings. The probe also revealed that some of the marketing and promotion expenses that Sihuan paid to the agents were eventually reimbursed to its distributors, therefore a reduction in revenue should be adjusted for.

Sihuan also conducted some off-book transactions through bank accounts opened in the names of employees, including sales and payments of distribution rights, deposits from distributors and payment of salaries.

The restatements, though only marginally affecting its previous bottom-lines, saw Sihuan moved some gains from revenue to other income and gains accounts, and an increase in its cash account.

Sihuan’s auditor PricewaterhouseCoopers issued a disclaimer of opinion as it was unable to obtain sufficient evidence to form an audit opinion.

Morgan Stanley Private Equity Asia III, or MSPEA III, holds 7.5 per cent stake in Sihuan.


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