Red Flag – Characteristics of Fraudulent U.S.-listed Chinese Companies

Author(s)

Thian Cheng Lim , Yun Liu , Lim Xiu Yun , Jessica , Haozhe Jiang ,

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Volume 1 - October 2012 (10)

Abstract

The American Institute of Certified Public Accountants (AICPA, 2002) No 99: Consideration of Fraud in a Financial Statement Audit (SAS 99). SAS 99 describes fraud as a purposeful act that results in a material misstatement in financial statements. We performed a literature review and discussed the attributes of 250 US listed Chinese firms such as political connections, reverse merger, location in China, auditor’s reputation and corporate governance in order to build a model to predict red flags. We find that red flag companies have these characteristics. (1) U.S listing via reverse merger. (2) earning management, (3) poor corporate governance. (4) hire small and obscure audit firms, investment banks and law firms to assist in their effort to gain listing. (5) lack accounting standards and (6) political connection. We conclude that US listed Chinese firms displayed these red flags that can identify their potential to commit fraud and misrepresent financial information. 

Keywords

U.S.-listed Chinese companies, fraud, IPO, reverse merger, red flag SAS 99

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