China Forestry (930 HK)

Timber company, China Forestry, listed in December 2009. Barely a year later, in January 2011, its shares were suspended following the discovery of accounting “irregularities” by the company’s auditor, KPMG, during the audit of the 2010 results. The company’s chief executive, Li Han Chun, brother of the Chairman and controlling shareholder, was arrested shortly afterwards in mainland China accused of embezzling funds. Just prior to the suspension, he had sold over half his shareholding in the company raising around US$50m.

It appears the company kept two sets of books for the main operating subsidiary, which had operated mainly on a cash basis in 2010; using sales proceeds to buy logs from third parties[1]. This seems to have been an attempt to hide the fact that many of the forests it claimed to own did not actually exist. The IPO proceeds of RMB1.7bn largely disappeared, including a prepayment of RMB0.4bn paid to a former employee for the acquisition of forests that never materialised. Incomplete documentation meant KPMG was unable to produce a cashflow statement for 2010 or confirm that the 2010 accounts gave a true and fair view.

The company was subsequently put into liquidation and delisted in early 2017. Hong Kong’s SFC recently sued KPMG and the arrangers of the IPO, Standard Chartered and UBS.

[1] China Forestry: 2010 Annual Report; 2011 Annual Report

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