Another Auditor Blow-Up - Digging through the Chinese RTO Jungle
posted by The Traveller on Sunday, January 23, 2011
Davis Accounting Group
As of November 4, 2010, the independent registered public accounting firm of two OTC-quoted Chinese microcaps has ceased to exist. Davis Accounting Group P.C., the current auditor on file for both Jade Art Group (JADA) and BioPharm Asia (BFAR), has to be licensed with the state of Utah to work as a certified public accountant. But a recent filing with the Utah Department of Commerce's Division of Occupational and Professional Licensing reveals that the principal of the firm, Edwin "Ted" Reese Davis Jr., "has engaged in unlawful conduct by continuing to practice as a certified public accountant and otherwise hold himself out to be a CPA after his license had expired on September 30, 2008."
Ted Davis's license has been revoked, and with that the license for his Davis Accounting Group is gone as well. "Respondent's expired license to practice as a CPA FIRM was revoked effective the date of the Order (November 4, 2010). Respondent was also ordered to cease and desist from engaging in any acts or practice which constitute the practice of public accountancy unless Respondent is duly licensed in that regard." (Source: State of Utah Newsletter, December 1, 2010)
Digging deeper into this story reveals that Ted Davis has been arrested in December on suspicion of issuing bad checks and a Montana-issued warrant. We don't have a statement from either JADA or BFAR on this matter, and both companies are still registered with Davis Accounting Group as their auditor. Attempts by Trading China to contact the companies have been unsuccessful so far, but we will keep trying.
In 2009, the Public Company Accounting Oversight Board (PCAOB) issued a report on Davis Accounting Group. According to this report, the firm had a total of one partner (Ted Davis?) and 3 employees, but 13 clients. And the report reads like this: "pervasive failure to plan, perform, and document performance of the audit and inappropriately taking responsibility for the work of another auditor when the other auditor performed substantially all of the audit procedures that served as the basis for the Firm's opinion." So, additionally to Davis signing off audits without a license for more than two years, the PCAOB report suggests that no actual audit work had been done by the firm.
BioPharm and Global Pharm
BioPharm Asia (BFAR) engaged Davis Accounting Group on February 21, 2010, after their previous auditor, Sherb & Co., resigned on February 11, 2010. Sherb had been engaged for just a couple of months (since June 30, 2009), following the dismissal of BFAR's previous auditor, Moore & Associates Chartered. A reason for Sherb's resignation was not given in the filing, but the firm declined to re-issue its report on BFAR's 2008 Financial Statements, and Davis was engaged to perform a re-audit. On May 10, 2010, Davis Accounting Group signed off on both the 2008 and 2009 financial statements (10-K Filing).
There is an interesting connection between Davis, BioPharm Asia, and another recent Chinese reverse merger, Global Pharm Holdings Group (GPHG). Global Pharm, known until September 2010 as Top Flight Gamebirds, Inc., is a Shenzen-based wholesaler and distributor of pharmaceutical-related products. Two of the company's three executives come directly from BioPharm Asia: Chairman, CEO, and sole director Yunlu Yin served as BFAR's CEO until April 2010, while Secretary Dan Li was assistant to President in BioPharm Asia until late 2009. Li was also director of China US Capital Holding Group. The third executive, Chief Financial Officer An Fu, was employed as an auditor at Davis Accounting Group until May 2010.
China US Capital Holding and Subsidiaries
Now this China US Capital Holding Group has several wholly-owned subsidiaries: China US Venture Capital Group Limited, China US Bridge Capital Limited, China Finance Inc., and Giant Fortune Investment Management Limited.
China US Venture seems to have changed its name to "China US Strategy Capital Group", advertising its services as "paving a way to US capital market for excellent Chinese enterprises, enabling them to become international excellent enterprises as soon as possible." Among the clients presented on their website are Home System Group (HSYT), Jade Art Group (JADA), Gulf Resources (GFRE), China Organic Agriculture (CNOA), Universal Travel Group (UTA), and China 3C Group (CHCG). The company is partnering with several U.S. accounting firms, among them two small firms with a strong presence in the Chinese RTO space: Kabani & Co. and Weinberg & Company. Davis Accounting Group is not mentioned as a partner.
China US Bridge says it were dedicated "to strengthening the integration between fast-growing China enterprises and US capital market." As partners they have listed the same accounting firms as China US Venture, and the same reverse merger "cases" are advertised with additionally New Energy Systems (NEWN). US Bridge is also partnering with several investor relations firms, among them well-connected Hawk Associates. AMI Research, a division of Hawk Associates, initiated paid coverage of Jade Art Group (JADA) in June of 2008, and recommended the stock with a $7.49 price target. JADA is currently trading at $0.08. Among AMI Research's 2011 Top Microcap Picks are two Chinese companies: Tri-Tech Holding (TRIT) and China Kangtai Cactus (CKGT). Both are current clients of Hawk Associates.
Giant Fortune again presents the same auditing and investor relations partners as the previous two entities. Three U.S.-listed Chinese companies are presented as "successful cases" on their website: BioPharm Asia (BFAR), Universal Travel Group (UTA), and China 3C Group (CHCG). Giant Fortune's Zuhong Xu still is the largest independent shareholder of BioPharm Asia as of its latest annual report, holding 8.50% of outstanding shares.
Mr. Xu served as Chairman and CEO of the fourth company on our "subsidiary list": China Finance Inc., which was quoted on the Bulletin Boards under CHFI, before it went dark in 2009, became delinquent and subsequently demoted to the pink sheets. As of March 31, 2009, China Finance still held sizable positions in Jade Art Group (JADA, 8.87%) and Gulf Resources (GFRE, 5.46%), additionally small leftover shares in Home Systems Group (HSYT) and China Organic Agriculture (CNOA, 1.30%). Previous holdings of CHFI include Universal Travel Group (UTA, 2008), Orient Paper (ONP, 2008), and the failed RTO stocks China 9D Construction Group (CNAG.PK), Beijing Logistic (BJGL.PK), Guilin Paper (GUPR.PK), and China Ivy School (CIVS.OB).
Doubts about Jade Art Group
Jade Art Group (JADA) engaged Davis Accounting Group on July 13, 2009 after dismissing Chisholm Bierwolf, Nilson & Morrill. Davis has been engaged "for all audit and permissible non-audit services," and the firm signed off on JADA's 2009 financial statements on April 12, 2010. JADA is currently not delinquent with its filings, and the most recent balance sheet shows cash and cash equivalents of $16.27 million or 250% of their current market capitalization. The company went dark again, all attempts to contact anyone there have been unsuccessful for weeks, and the stock price keeps collapsing on extremely high volume. With the recent developments regarding their auditor the market does apparently not believe JADA's financial statements, questions that all that cash even exists. We will see if (and what) they file their 2010 annual report - due by March 31, and who will sign off on the numbers (can't be Davis anymore).
Both BFAR and JADA have not yet shown any reaction on the developments at Davis Accounting. They will both have to engage a new accounting firm for the 2010 report, and I have my doubts that this can be a quality name. I am also not sure about further legal implications. Will a re-audit be required by the SEC for the fiscal years of 2008 and 2009 when Davis illegally practiced as a CPA firm? If so, then another Chinese firm that had connections with China US Capital Holding and China Finance might be affected:
Orient Paper (ONP) engaged Davis Accounting Group on November 27, 2007, replacing Moore & Associates Chartered (similar to BFAR). Davis signed off on Orient Paper's 2007 results on March 28, 2008, and on the 2008 numbers on March 19, 2009. Davis resigned as ONP's auditor on December 1, 2009 and was replaced by BDO Limited. On November 29, 2010, Orient Paper presented the findings of an independent investigation, assisted by two law firms and Deloitte & Touche Financial Advisory, into several issues which also covered the period when Davis was engaged. ONP said this investigation found no evidence for falsely reported revenue, inventory turnover, and gross profit in previous financial statements.