Short-seller Carson Block believes as much as 99 percent of revenues reported by Chinese enterprises are fraudulent, the Hong Kong Economic Journal reported Tuesday.
Block, founder of equity research firm Muddy Waters LLC, says such accounting malpractices are due to the fact that Chinese units of the big four auditing firms — PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young — are not supervised by US authorities but by their mainland counterparts.
In 2010, Muddy Waters exposed questionable accounts by Canada-listed Sino-Forest Corp. (TSX.TRE), which eventually led to the Chinese operator of commercial forest plantations filing for bankruptcy.
Block also blasted mainland companies for their low disclosure levels in spite of their high valuations, citing Alibaba Group, which is set to launch an initial public offering in the US, as an example.
Mainland authorities tend to protect the interests of their official funding vehicles, causing harm to capital markets, he said.
Investors should be suspicious about firms that have colossal capital and acquisition expenses but relatively low tangible assets, Block warned.
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