China Huishan Dairy Holdings Company Ltd (6863.HK)

(Bloomberg) -- 

Ge Kun, the executive director who managed Huishan’s treasury operations, has been unreachable for a week, the company said. Huishan’s last contact with her was a March 21 letter to Chairman Yang Kai explaining that work stress -- heightened by a critical report from short seller Carson Block in December -- had taken a toll on Ge’s health and that she didn’t want to be contacted. That same day, Yang said he realized the company had been late on some bank payments. By March 23, Huishan had arranged an emergency meeting with creditors and government officials in Liaoning province, where the company is based.

-snip-

Adding to the risk for Huishan shareholders is the leveraged ownership stake of Yang, who’s also the company’s chief executive officer. Champ Harvest Ltd., an entity controlled by Yang, owns almost 71 percent of Huishan, with most of those 9.5 billion shares used as collateral for loans.

-snip-

I'm sure the company's cashflow issue and Champ Harvest leverage are coincidence

Authorities Join Forces in Bid to Save Huishan Dairy
http://www.caixinglobal.com/2017-03-29/101071934.html

The impact is not only contained within few banks, but also retail creditors from P2P platforms.

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Huishan Turmoil Highlights China's $8 Trillion Shadow Loan Risk
https://www.bloomberg.com/news/articles/...-loan-risk

Huishan Investors Try to Dump Debt at Loss on Local Exchange
https://www.bloomberg.com/news/articles/...l-exchange

Four Huishan Directors Resign in Wake of Mystery 85% Stock Plunge

by Lisa Pham
April 3, 2017, 10:18 AM GMT+8

China Huishan Dairy Holdings Co. said its four remaining non-executive directors resigned and the company still can’t locate its treasury head, adding to concern about the indebted farm operator’s corporate governance and finances.

The directors tendered their resignations effective March 31, with all four citing other commitments, according to a stock exchange filing late Friday. The Shenyang, China-based company said Ge Kun, who manages the company’s treasury and cash operations, was last known to be in Hong Kong and a missing person’s report has been filed with the city’s police.

More details in https://www.bloomberg.com/news/articles/...ll-missing

The 06863.HK shares were trading at around $2.80 level before the dramatic fall to $0.42 and suspension of trading.

The aastocks website shows the NAV at $1.11 and 1.25 cents dividend paid in Sept 2016 and these factors would not really justify the price level at $2.80 .

KMPG are the auditors and they really have to explain why the asset value in the company has vanished.

(03-04-2017, 05:48 PM)soros Wrote: The 06863.HK  shares were trading at around $2.80 level before the dramatic fall  to $0.42 and suspension of trading.

The aastocks website shows the NAV at $1.11 and 1.25 cents dividend paid in Sept 2016 and these factors would  not really justify  the price level at $2.80 .

KMPG are the auditors and they really have to explain why the asset value in the company has vanished.

Muddy Waters published a report on Huishan on 16 December 2016 that laid out why Huishan's shares were worth "close to zero". So there was plenty of warning for shareholders and would-be investors that something was wrong.

KPMG doesn't have to explain anything. They were the auditors and their job was only to express an opinion about the accounts. They did not certify that the accounts were correct. Auditor opinions should not be relied upon as an indicator that everything is fine. The most that can be said about auditor opinions is that if the accounts are qualified in any way, something is wrong. But unqualified accounts are not necessarily correct. It's like dead bodies - if the police find a dead body, you know someone died. But if the police didn't find anything, that doesn't mean nobody died.

(03-04-2017, 08:53 PM)d.o.g. Wrote:

(03-04-2017, 05:48 PM)soros Wrote: The 06863.HK  shares were trading at around $2.80 level before the dramatic fall  to $0.42 and suspension of trading.

The aastocks website shows the NAV at $1.11 and 1.25 cents dividend paid in Sept 2016 and these factors would  not really justify  the price level at $2.80 .

KMPG are the auditors and they really have to explain why the asset value in the company has vanished.

Muddy Waters published a report on Huishan on 16 December 2016 that laid out why Huishan's shares were worth "close to zero". So there was plenty of warning for shareholders and would-be investors that something was wrong.

KPMG doesn't have to explain anything. They were the auditors and their job was only to express an opinion about the accounts. They did not certify that the accounts were correct. Auditor opinions should not be relied upon as an indicator that everything is fine. The most that can be said about auditor opinions is that if the accounts are qualified in any way, something is wrong. But unqualified accounts are not necessarily correct. It's like dead bodies - if the police find a dead body, you know someone died. But if the police didn't find anything, that doesn't mean nobody died.

Yes, auditor opinions should clearly not be relied upon as an indicator. Everyone knows that.

BUT KPMG sure has to explain this. This certainly would be a smear on their reputation, if they even bother.
Auditors are paid audit fees to do exactly that - AUDIT.
If something as simple as the asset value can show such a big discrepancy, and if they can explain it away as just "expressing an opinion" and not an audit, well, why pay for auditors? Huishan can pay TTI or any man on the street. There are lots of "opinions" around, they're mostly free!
The auditors are supposed to go find out if there are dead bodies that are hidden, not take a cursory look at the ground and say there's no dead body, and if one turns up later, simply say well there wasn't one when I looked at it, so that's my opinion.

Unfortunately, the reality is the latter. They turn up in the corporation, sit in a room for a few days, and look through statements that are ironically, prepared by the accounts department of the very company they are auditing. As long as everything tallies up, that's your audit opinion right there. If you can hide the dead body, and I can't see it, you're in the clear.

Pretty damning that Muddy Waters, which were not given support in their investigations by the company, could dig something out when auditors can't.

Maybe KPMG should just call themselves "opiniators" instead then, since clearly, it's not auditing that they're doing here.

(04-04-2017, 12:47 PM)TTTI Wrote: The auditors are supposed to go find out if there are dead bodies that are hidden, not take a cursory look at the ground and say there's no dead body, and if one turns up later, simply say well there wasn't one when I looked at it, so that's my opinion.

Unfortunately, the reality is the latter. They turn up in the corporation, sit in a room for a few days, and look through statements that are ironically, prepared by the accounts department of the very company they are auditing. As long as everything tallies up, that's your audit opinion right there. If you can hide the dead body, and I can't see it, you're in the clear.

Pretty damning that Muddy Waters, which were not given support in their investigations by the company, could dig something out when auditors can't.

Maybe KPMG should just call themselves "opiniators" instead then, since clearly, it's not auditing that they're doing here.

The opinion of the average man is that auditors are supposed to check and make sure that everything in the company is OK.

But opinions are not the same as facts. And the facts are that auditors have always stated very clearly that they are NOT being paid to detect fraud i.e. their job is not to find the dead bodies. Their job is only to say "We didn't see any dead bodies, so we think there are no dead bodies". If they do see a dead body they have to say something, but otherwise it is "see no evil, hear no evil".

If you want auditors to detect fraud, audits would take much longer and cost several times as much, perhaps 3x the time and 10x the cost. Since nobody wants to wait that long nor pay that kind of money, the "communism" status quo persists i.e. the companies pretend to pay, and the auditors pretend to work.

Of course, if a dead body is found, then the companies appoint a forensic investigator, which is often another audit firm, whose job is really then to find out if there are more dead bodies and figure out how/why they got there. Such a job takes many months and costs a lot of money. You get what you pay for, or in Chinese, as we say, 一分钱，一分货.

Muddy Waters is a short seller. Their income depends on them being correct. So they have every incentive to do their work thoroughly. Ditto Glaucus, Citron etc.

KPMG is an auditor. Their income depends on them being reappointed. So they have every incentive to look the other way. Ditto PWC, EY, Deloitte etc.

d.o.g,

Thanks for pointing out the different types of Audit (1) based on opinion and (2) based on certification . As a public investor , I would want to be sure the assets figure and cash figure in the bank on year end date 31st March 2016 are verified true by inspection of bank statement and not verified by opinion.

When I made a google search on KMPG , I found another company asking if KMPG are Auditors or Fraudsters ? I am wondering if KMPG has a track record of auditing by defective opinions ?

http://www.sarawakreport.org/2015/03/kpm...raudsters/

(04-04-2017, 02:40 PM)soros Wrote: As a public investor , I would want to be sure the assets figure and cash figure in the bank on year end date 31st March 2016 are verified true by inspection of bank statement and not verified by opinion.

Cash in the bank is easy to verify, so it's rare that the cash is simply not there. Of course, if the auditors are so lazy or stupid that they accept the bank statements given to them by the company, then I have nothing to say. At a minimum, the auditor should contact the bank on their own and obtain the statements themselves, if for no other reason than that anyone with a scanner and colour printer can easily forge bank statements.

It is the non-cash items that present a challenge:

Receivables and Payables. How can the auditor verify that all of the hundreds or thousands of invoices are real? Even if the suppliers and customers are real, were the goods or services actually delivered, and were the amounts charged reasonable?

Inventory. Is the auditor going to count tens of thousands of items, and weigh millions of pounds of goods? Are the items genuine? Are they of the correct quality? Do they in fact belong to the company?

Equipment. Does the auditor have enough knowledge to assess the market value of the equipment against the purchase price?

Property. Will the auditor check all the local land registries to confirm that the company owns the land it claims? What if, like in Greece, there is no registry?

Sometimes people think that because a company pays $100k or even $1m to the auditors, the auditors should do a thorough job. But maybe we can put ourselves in the shoes of the auditors.

Try sitting in the warehouse and accounting for 25,000 items of different names, shapes, sizes and types, all bought from different suppliers at different costs and going to different customers at different prices.

Try to weigh 50 million pounds of soybeans, barley, wheat, and corn, of different grades coming from different farms and going to different customers.

Try going to 8,000 stores and counting all the shoes, T-shirts, running shorts, socks, tennis balls, swimming goggles and other whatnots. Figure out if those are current-season and saleable at the cost price or better, or if they are old stock that needs to be written down to some discounted price.

Try to figure out the market value of 200 different types of equipment of various brands, models and ages, and compare that against the purchase prices.

Sounds impossible for $1m? Then how can the auditor verify that the accounts are true? They can't, so they don't. They just "express an opinion" and call it a day. Now if the fee was $10m, things might well be different. But if the fee is 10 times larger because the company is also 10 times larger, we come back to square one.

Auditors are generally competent people. But you have to be clear what you are paying them for. If it is for a normal audit, you only get an opinion, because that's all that your money buys. If it is a forensic investigation, you get a forensic report because that's what your money buys. The cost of a forensic investigation is considerably more than that of a normal audit, so generally companies just pay for a normal audit and hope for the best.

Paying for audit fees is like going to a restaurant - you can order steak, or you can order a salad. Salad is cheaper, but then you can't complain that you didn't get steak. If you want steak, you have to pay for it!

As always, YMMV.