China Huishan Dairy Holdings Company Ltd (6863.HK)

[specuvestor]

For missing cash, actually Parmalat and Satyam comes to mind

Actually "acclaimed" auditors do quite a thorough job if you know auditor friends. They are quite rigorous in the process and checking the paperwork. But the problem is they just go through the paperwork rather than "signs". Auditors will not report that they don't see delivery trucks moving as frequent as the sales figure indicates. They will say the trucks are there. They can't verify if the cash is really there if the china branch manager signs off that it is there, rather than say why the cash has been in the bank 3 years in a row but not "moving" at all even if the company is in debt?

VBs know however that I am critical of certain other auditors that probably has less incentive to do a proper robust audit because their reputation is not as important. So even in auditors, I do have preference and comfort level with different auditors.

[d.o.g.]

For missing cash, actually Parmalat and Satyam comes to mind

This article about the Satyam scandal:

http://www.thehindubusinessline.com/opin...225718.ece

notes that:

As to the external auditors who are supposed to look out for investors, they seem to have been quite a trusting lot. While verifying bank balances, they relied wholly on the (forged) fixed deposit receipts and bank statements provided by the ‘Chairman’s office’.

As I already stated:

"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."

So it seems that in this case the auditors (PWC) were complicit in the fraud for not verifying the cash in the bank themselves and instead relying on the forged bank statements.

[cyclone]

The Rise and 90-Minute Fall of a Chinese Tycoon

Bloomberg News
April 5, 2017, 5:01 AM GMT+8

It took more than a decade for Yang Kai to amass one of China’s most celebrated dairy fortunes.

He may have lost it in less than 90 minutes.

The chairman of China Huishan Dairy Holdings Co., who turned a former arm of the state into what he had described as an industry-leading innovator, is now battling for the company’s survival after a remarkable series of events over the past two weeks laid bare the extent of Huishan’s money troubles. The milk producer’s sudden tumble in Hong Kong trading on March 24 cut the value of Yang’s stake to $530 million from $3.6 billion.

Much of how his company got into this crisis is unclear. But the story of Yang’s rise -- pieced together from regulatory filings, Huishan’s promotional materials and disclosures from lenders -- shows a heavy reliance on debt that left both the chairman and his firm with little room for error. For investors in Chinese companies, it’s another reminder of the dangers of high leverage and low transparency after corporate defaults in Asia’s largest economy swelled to a record in the first quarter.

More details in https://www.bloomberg.com/news/articles/...shan-dairy

[cyclone]

Huishan Says HSBC Claims Loan Default as Court Freezes Assets

Bloomberg News
April 11, 2017, 9:18 AM GMT+8

HSBC Holdings Plc has told China Huishan Dairy Holdings Co. that it’s in default on a $200 million loan agreement, according to a statement from the embattled milk producer which suffered a mysterious share price plunge last month.

HSBC called “events of default” after informing Huishan Dairy that it had failed to comply with certain covenants in the loan agreement, the Chinese firm said in a statement to the Hong Kong stock exchange late Monday, without being more specific. The dual-tranche loan, dated Oct. 26, 2015, has an outstanding principal amount of $180 million in U.S. dollars and HK$156 million ($20 million) in Hong Kong dollars, Huishan said.

The Huishan Dairy statement also said that courts in Shanghai froze about 546 million yuan ($79 million) of assets held by Huishan, its subsidiaries and by Huishan Chairman Yang Kai and his wife, following an application from Chinese money manager Gopher Asset Management Co.

A Hong Kong court rejected a similar application by Gopher for an asset freeze, Huishan said earlier this month.

More details in https://www.bloomberg.com/news/articles/...zes-assets

[cyclone]

“I would question whether the directors should be resigning at a time like this,” said Paul Gillis, a professor at Peking University’s Guanghua School of Management in Beijing.

Huishan Loses All But Two Directors, One of Whom Is Missing

by Megan Durisin  and Lisa Pham
April 19, 2017, 1:45 AM GMT+8 Updated on April 19, 2017, 12:22 PM GMT+8

China Huishan Dairy Holdings Co. Chairman Yang Kai has lost his board of directors.

Yang, the embattled dairy tycoon who’s fighting for his company’s survival, is effectively now the only member of Huishan’s board after two executive directors resigned this week, adding to a flood of departures since the stock collapsed suddenly on March 24. Ge Kun, tasked with overseeing the company’s finances, is technically still a director but has been unreachable since at least March 21.

More details in https://www.bloomberg.com/news/articles/...y-j1nubm5p

[Duskerdawn]

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.

I personally work in an accounting firm and I agree completely with what you say d.o.g. Auditors are not paid much (or at least the actual ones doing the work). The associates of the company are often super overworked, working 12-14 hours days and burning weekends during the peak periods. They churn through hundreds to thousands of numbers on a daily basis. Do not expect them to find a needle in a haystack given that they are paid peanuts. Additionally, the staff turnover at audit firms are extremely high at 15-30% per year. Training is focused on how to perform the audit work and usually not much focus is given to spotting frauds cos that is as what d.o.g. has mentioned not what they are hired to do. Hence, the lack of skills, fatique, and lack of motivations are just some of the factors that make them the worst fraud detectors. 

In addition, the bulk of the fees paid to auditors go to the partners who's main incentive is (1) to get reappointed in the next year (2) ensure that they do not take on too much risk in their audit opinion. They do not claim to be experts in finding dead bodies, they only give opinions that say that they do not see any obvious signs of a dead body according to what they were provided(i.e. material misstatements). 

My word of advice is to take every financial report with a pinch of salt. The quality of the financial report is usually correlated to the quality of the management. (i.e. auditors can only work on what management provides and management often have a lot of power in leading the direction of the financial figures.) Please do not go on a witch hunt of the auditors, although I admit the industry as a whole needs to improve on its practice.

[Behappyalways]

Chinese firm: We're missing $350M after exec's disappearance
http://money.cnn.com/2017/06/06/investin...index.html

[Duskerdawn]

Chinese firm: We're missing $350M after exec's disappearance
http://money.cnn.com/2017/06/06/investin...index.html

Really interesting story to follow but the executive being missing could be due to two main reason:-
1) Murdered to keep the real story for surfacing.
2) Ge ran and hide with the money. 

I wouldn't want to be in either position. I'll briefly explain why not the latter, even with millions, your life would miserable as you constantly watch out for your own safety as the powerful and connected investors hunt you down. This company really panning out like a thriller novel, with mysteries and twists.

[weijian]

Embattled Huishan Dairy Proposes Restructuring Amid Financial Turmoil

China Huishan Dairy, the Hong Kong-listed company mired in billions of dollars of debt, proposed to pay creditors with stock in a debt restructuring plan amid unresolved controversies over its actual financial condition.

http://www.caixinglobal.com/2017-08-11/101128879.html