KPMG resigns as China Forestry auditor
KPMG has resigned as auditor of China Forestry Holdings, a portfolio company of The Carlyle Group and Partners Group, which became embroiled in an accounting scandal early last year. The accounting firm will not stand for reappointment.
According to a statement filed with the Hong Kong Securities and Futures Commission (SFC), KPMG cut ties with the company after failing to receive the results of an investigation into financial irregularities identified by an independent board committee.
The auditor flagged up financial irregularities in January and the stock was suspended from trading. A probe by the Hong Kong Securities and Futures Commission led to a judge freezing HK$398.2 million ($51.2 million) in assets held by Li Han Chun, China Forestry's CEO. He was later detained by the Chinese authorities for the alleged embezzlement of RMB30 million ($4.7 million).
The subsequent investigation found that Li and his team had faked records and bank documents in order to deceive KPMG. They wanted to cover up the use of sales proceeds from China Forestry's primary mainland subsidiary to purchase forest assets from farmers and to cover operating expenses associated to harvesting activities.
In addition to receiving $55 million from Carlyle Asia Growth Partners III in 2008 through two transactions, which left the fund with a 10.96% stake at the end of 2010, Switzerland-based Partners Group invested $30 million for a 5.4% holding.
KPMG's departure once again throws the spotlight on accounting irregularities at overseas-listed Chinese firms. The forestry industry, where opaque regulation and uncertainty about ownership, represent a challenge to strong investor oversight has been particularly problematic.
Sino-Forest, which listed in Toronto in 1995, was denounced as a fraud by short-seller research firm Muddy Waters, which accused the company of overstating its asset purchases by more than $800 million. Sino-Forest's chairman and CEO subsequently resigned and three employees were suspended after the crisis.
However, the company announced in November that, following an independent investigation, it stood by its initial denial of the accusations.
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