Update on Fraud Allegations at China MediaExpress Holdings


UPDATE: In March 2011, CFO Jacky Lam of China Media Express and the auditors (Deloitte) resigned. Deloitte said they could no longer rely on the representations of management, and they suggested an investigation was in order. Ping Luo, the analyst from Global Hunter who gave CCME rave reviews resigned. Maurice Greenberg’s Starr Investments sued CCME for fraudulently inducing it to invest $13.5 million. The stock was delisted from the NASDAQ in May 2011.

Deloitte raised the following issues: questionable authenticity of bank statements, supicioius bank confirmation procedures, existence of advertisers/customers, undisclosed bank accounts and bank loans, financial filings with the State Administration of Industry and Commerce differing from information provided to auditors, questionable authenticity of tax filing documents, cash payments to employees, and double counting of buses.

A couple of weeks ago I posted an article examining some of the allegations against China MediaExpress Holdings (NASDAQ:CCME) alleging that management was committing fraud on the investing public. I also discussed the company’s response, as well as the response of writers who are supporters of CCME.

The allegations that concerned me most were:

a. Despite claiming to be the largest television advertising operator on inter-city and airport express buses in China, there is little information to be found on the internet about CCME.

b. Profit growth from $2 million to $85 million doesn’t make sense.

c. The company does not exist on the large scale which it claims.

d. 2009 revenue was to the $95.9 million reported, rather it was $17 million.

e. Significant discrepancies exist between reported number of buses under contract per the disclosures to investors and per the materials the company supplies to advertisers.

f. The company is lying about an agreement between itself (via its website www.switow.com) and Apple or an Apple distributor.

g. Media buyers who represent the claimed customers of CCME have never heard of the company.

h. The claimed “exclusive license from the Chinese Ministry of Transport” is neither a license, nor with the Ministry of Transport.

i. CCME claimed it won an award for a patent, but no such award was ever given to the company.

j. Significant discrepancies exist in the revenue reported to the SEC (U.S.) versus the revenue reported to the Chinese government

Supporters of China Media Express have come up with defenses or arguments in favor of the company, which include:

k. The allegations are made by short sellers who stand to profit if the stock price goes down, so their allegations are immediately suspect.

l. Starr International conducted due diligence before investing $30 million in CCME.

m. Global Hunter Securities also conducted due diligence and channel checks.

n. The financial statements are audited by Deloitte Touche Tohmatsu.

o. A cash balance is difficult to falsify, especially when the financial statements are being audited.

China Media Express also published responses to some of the allegations, and the arguments that might have some substance to them include:

p. The critics are short sellers (same as k above).

q. The financial statements are audited (same as n above).

r. Numbers reported by critics are wrong.

s. The company has the contracts they say they have.

t. The number of buses under contracts looks lower than reality because some of the contracts are with subcontractors.

u. CCME has a contract with an authorized Apple distributor, Eading Group.

v. CCME has no competitors, which is why supposed competitors said they’d never heard of CCME.

w.  Revenue differences are related to differences in reporting rules between the U.S. and China.

x. CCME has a “tongzhi” issued by the Transportation Television Audio Visual Center, a department under the Ministry of Transport.

More recently Global Hunter Securities released another report about their due diligence on China Media Express. They reported:

  • Verifying about 50% of the company’s revenue with the top 16 advertising customers.
  • Confirmed 52% of bus contracts
  • Management was cooperative

While these three items may sound impressive, the truth is that this type of work provides me no greater comfort than the fact that the company has financial statement audits. Management is well aware that those doing due diligence will look at the largest contracts or customers, in an attempt to get “coverage” (i.e. be able to say we tested or verified X percent). Management is prepared for these inquires. Don’t you think that if the company was committing a massive fraud, they would be ready for the inquiries and have documentation and people in place to “verify”things?

Further, we don’t know what it really means when Global Hunter says they “confirmed” revenue. Who knows what they asked, or in what format. “Did you have a contract for X?” is a different question than “Did you receive services valued at X?”, and a different question than “Did you pay the company X?” or “How much have you been billed?”

So where do we stand on the above allegations?

a. I haven’t seen this one disproven.

b. Still an issue.

c. Possibly still an issue, depending who you believe. Obviously, the company’s management has every incentive to exaggerate this.

d. Possibly still an issue, depending on what Global Hunter’s work included.

e. Possibly still an issue, depending on what Global Hunter’s work included.

f. Eading is an Apple reseller. They’re a retailer. Having a relationship with them means nothing and offers CCME no advantage. It appears that the company was exaggerating this relationship.

g. Possibly still an issue, depending who you believe.

h. Possibly still an issue, depending who you believe.

i. I have not seen this one refuted.

j. I have seen no hard evidence that refutes this one, only blanket statements from the company saying it’s not true. The company is in the position to put this one to rest with documentation, and they haven’t done that.

And what about the arguments made by supporters of China Media Express?

k. Management has a much bigger incentive to lie than the short sellers. If the short sellers are not to be believed, then management certainly cannot believed.

l. The value of this is questionable, as I don’t know what their due diligence consisted of.

m. I have serious questions about the procedures performed.

n. This is not terribly meaningful in the context of fraud. Audits are not designed to detect fraud, and they rarely detect fraud.

o. A cash balance is really meaningless, even if it is “verified.” Even when the auditors are auditing the balance sheet, all they do is verify the existence of that cash. They do not determine how that cash balance came to exist. See my article here about auditing cash and why it gives little to no comfort about the validity of a company’s financial statements or operations.

China Media Express also published responses to some of the allegations, and the arguments that might have some substance to them include:

p. Management has a much bigger incentive to lie than the short sellers. If the short sellers are not to be believed, then management certainly cannot believed.

q. This is not terribly meaningful in the context of fraud. Audits are not designed to detect fraud, and they rarely detect fraud.

r. This is not a convincing argument without hard data and documents to back it up. The company has the information that allegedly would vindicate them. Let’s see it.

s. I’m not convinced.

t. Sounds shady to me. I’m unconvinced.

u. Eading is an Apple reseller. They’re a retailer. Having a relationship with them means nothing and offers CCME no advantage. It appears that the company was exaggerating this relationship.

v. Absolute silliness. According to one writer: “The CEO claims that FMCN, VISN, and AMCN are not aware of CCME because these companies are each in a different “industry group” from the others. Of course, this is absurd for many reasons. One reason easily verified through filings, is that these companies all list each other as competitors, except that no one lists CCME, while CCME lists everyone else.”

w.  Prove it! The company could provide the numbers and reconcile them.

x. It appears the company has exaggerated this item, and sticks by their exaggerated story.

One writer who is short CCME said it well:

“I am short CCME. I see a very high probability that revenues are overstated. The reason for this is that there are simply too many red flags and inconsistencies in the company’s story. Any one or two of these red flags could be explained away. However, I cannot explain them all with a consistent story.”

But at the end of the day, when we put all the arguing about these items aside, we are left with the following statement from Citron Research:

What [Ping Luo or Global Hunter Securities] doesn’t mention is that if CCME’s numbers are to be believed, they would be the most operationally successful company in the world, on a percentage basis, on the whole stock exchange…..EVER.

Citron goes on to say:

China MediaExpress is not your average company:  it has leaped past Google, Apple, and Microsoft in most fundamental metrics for judging successful companies:  return on assets and profit ( if you are to believe the numbers).   Meanwhile, they have done all of this without ever attracting any material attention in mainstream business news in either the US or China .   We are supposed to believe they have built a company under the radar that will be studied in business schools for the next 100 years — all without  having a traditional underwriter for an IPO or top tier analyst coverage.   Maybe Goldman Sachs is just intimidated by their success?

How did this happen?    Did they start a search engine that took over the country?   Did they find a huge gold deposit?  A giant gusher of oil?   Maybe they started a social network that was so compelling they made a movie about it.   Nope.  They sell advertising on buses to lower income people in rural China … people whose average income is around $200 a month.

And who are their customers?  Well that is a company secret intentionally kept from Wall Street.   In a recent piece of research put out by Global Hunter, we are told that the company does not want to disclose its customers, …

And that, my friends is enough for me. I’m not a believer that this company could legitimately pull off such a feat. The supporters of CCME say that all the allegations of the “short sellers” have been debunked. That is simply not true. There are still many questions remaining. Too many, in my opinion.

China MediaExpress is not your average company:  it has leaped past Google, Apple, and Microsoft in most fundamental metrics for judging successful companies:  return on assets and profit ( if you are to believe the numbers).   Meanwhile, they have done all of this without ever attracting any material attention in mainstream business news in either the US or China .   We are supposed to believe they have built a company under the radar that will be studied in business schools for the next 100 years — all without  having a traditional underwriter for an IPO or top tier analyst coverage.   Maybe Goldman Sachs is just intimidated by their success?

How did this happen?    Did they start a search engine that took over the country?   Did they find a huge gold deposit?  A giant gusher of oil?   Maybe they started a social network that was so compelling they made a movie about it.   Nope.  They sell advertising on buses to lower income people in rural China … people whose average income is around $200 a month.

And who are their customers?  Well that is a company secret intentionally kept from Wall Street.   In a recent piece of research put out by Global Hunter, we are told that the company does not want to disclose its customers,

36 thoughts on “Update on Fraud Allegations at China MediaExpress Holdings

  1. JLL

    It’s sad to see you chew over the same points again, offering no DD or “examinations” of your own. This is not an update, it’s a recap. And it’s a poor one.

    Is this how you published your 100+ articles?

    This is just sad.

  2. Richcat

    You conveniently fail to mention Starr and the important fact that they have a rep on the BOD.
    How about that dividend that will be coming?
    FACT: They are selling Apple I-PODS on the site.
    How about Forbes China naming them NUMBER 1?
    Your report is old news, find something new that is relevant!

  3. Rob

    This article is a joke. Nothing new has been mentioned that the investing public does not already know. As usual, just another article with a bunch of quotes that someone else has already stated. Real original (sarcasm).

  4. Tracy Coenen

    Thanks everyone for your comments and interest. You missed the point of this article. There doesn’t NEED to be anything new. The old allegations are still alive and well.

    I was asked by someone on another thread to discuss which allegations have been disproven and which still hold up. That’s exactly what I’ve done.

    I don’t need to do any new due diligence. The company is sketchy, and that’s all I need to know.

    Richcat – I indeed did mention Starr, not that their involvement matters a whole lot to me. Having someone from Starr on the board proves nothing. Selling iPods means nothing. The company exaggerated their claims about Apple. That’s what matters about that issue. As for Forbes, I never put any stock in the rankings that magazines or newspapers give companies because those rankings aren’t authoritative, are often based on some sort of sponsorship or opt-in process, and often are nothing more than a popularity contest. They’re just not reliable in any sense.

  5. Kevin

    You don’t think the auditors would check deposits/withdrawals with CCME’s bank accounts?! That’s really an absurd statement. Even when a regular person such as you or me purchases a house, the bank offering you the loan doesn’t take your bank account value at face value. Even they look at your transactions and verify where your deposits came from. You are telling me that Deloitte, who will be paid hundreds of thousands, if not millions of dollars, for their audit will simply take CCME’s bank account balance at face value and will not look at where their deposits came from?! Do you realize how incredibly irresponsible that would be for an auditor, especially for a top-4 auditor. For you to insinuate that Deloitte would not perform this most BASIC of actions really goes to show how poor this article is. Wow, the claims the anti-CCME people will make are really getting ridiculous.

  6. Tracy Coenen

    Kevin – Please read my article on auditing cash:


    I understand that you and others WANT Deloitte to look at the banking detail, but that’s simply not done in a financial statement audit.

    I suspect because of all of the allegations of fraud, that Deloitte may do more work during their audit than they would during a standard audit. But we likely will not ever know what the additional procedures are, if any. We cannot count on them looking at the deposit and withdrawal detail, and should NOT count on that being done, unless Deloitte comes forward and specifically describes their procedures. I don’t believe they will come forward with such information.

  7. Foggy

    these aren’t grounded allegations though, they are essentially are just lies, so how in good conscience can you continue to post (and re-post)?

  8. Kevin

    Tracy – I work as a bank examiner. When we review a bank, we rank the bank’s risk exposure in 7 different risk areas, one of which is TRANSACTION RISK. Our number one goal is NOT to detect fraud, but rather just determine the risks that a bank is exposed to. Even though we are not tasked with detecting fraud, and even though TRANSACTION risk is just one of the 7 risk areas that we examine, we still take BASIC STEPS to see if fraud is occurring, one of which is confirm stated bank balances AND the sources of deposits!

    We review SEVERAL months of bank statements, not just the latest month. Again, we are NOT even an auditor. Banks ALSO are required to have an independent auditor (who really doesn’t care about the risks that we care about such as reputation risk, interest rate risk, liquidity risk, etc)…they are more or less ONLY concerned about transaction risk, to determine if the financials are fairly stated. As part of our examination, we actually review the workpapers that the auditors perform, and guess what, the auditors DO verify more than just the banks’ balances, and they also review more than just the most recent month. They also review incoming deposits. Do you REALLY think that Deloitte would risk their entire reputation by simply not taking a look at several months of statements to see where deposits are coming in from…especially with a company whose operations are as basic as CCME’s? You are really grasping at straws to think that they wouldn’t review several months of statements and not see tens, if not a hundred+, million in deposits coming in to artificially boost the bank balance so it looks good at year-end.

  9. Tracy Coenen

    As I wrote above, most of these have not been disproven. Your statement that they’re lies simply hasn’t been proven by anyone. I’d love for the company to come forward with information to disprove any and all of them.

  10. THT

    Its hard to take you seriously, Tracy. You purport to be a forensic accountant, yet you haven’t made the slightest effort to do any due diligence and form your own opinion. If you don’t care enough about CCME to do your own due diligence, why are you writing about them? These articles smack of laziness and intellectual dishonesty, quickly thrown up on your website to cynically capitalize on controversy without contributing anything original to the debate.

    In the future you may want to focus your efforts on blogging about things you have at least made an attempt to understand, so that you can contribute original thoughts instead of simply regurgitating worn-out talking points.

  11. Marty Chilberg

    I appreciate your writing your article on cash fraud and following up on the CCME story. I must say however that your article appears to be written without much attempt to do any original research to form an opinion on the specific claims and facts in this story. I don’t disagree that fraud exists in some companies and that auditors rarely find it during a normal engagement. If this management team was truly committed to a massive fraud scheme they clearly could have manufactured enough evidence and manipulated enough transactions to get to this point without being caught. However if the standard of proof to claim fraud is what could have happened, then quite a lot of public companies trading on US exchanges are very overvalued.

    First a comment on audit guidelines. The audit standard for fraud awareness and risk assessment is something that wasn’t mentioned in your articles. Anyone interested can find an article in the Journal of Accountancy that describes SAS 99 in some detail (http://www.journalofaccountancy.com/Issues/2003/Jan/AuditorsResponsibilityForFraudDetection.htm). It’s also worth noting that the 2009 audit and the 2010 audit will likely be dramatically different. In 2009 there was no hint of fraud and if the auditors didn’t find anything suspicious they would have followed normal audit testing procedures. The 2010 audit would have been constructed to more aggressively pursue the issue of fraud do in no small part to the media attention, the “Deloittewatch” website and the Research Reports you refer to. Suggesting otherwise is just not based upon the realties of how the Big 4 audit firms conduct business with their Liason offices likley interacting with SEC regulators who are already looking at the claims.

    Some specific reaction to comments you made above:
    – Why would you report that profit grew from $2m to $85m in one year? The reported net income from the company’s 10K are as follows: CY07 $6,967, CY08 $26,367, CY09 $41,711

    – Did you read the company press release that disclosed the Apple product relationship? Doesn’t appear to be the case so here it is (http://www.ccme.tv/eng/ir/press/p101228.pdf). The relevant disclosure was: “CME has already signed contracts with many prestigious global and Chinese domestic companies or their distributors such as Apple…” The Muddy Waters report says: “AAPL only has two online distributors in China, one of which is Amazon.com subsidiary Joyo(www.amazon.cn). AAPL does not have any agreement with SWITOW (or CCME). Further it does not permit its China licensees to sub-license. Therefore, CCME is abjectly lying about this agreement.” So look at these two statements and decide. Did CCME claim they had an agreement with Apple or were a distributor or subdistributor? I read that they claimed to have a signed agreement with a distributor. If you do the research you’ll find that this retail endeavor is not anything close to a distributor relationship but rather more akin to a commissioned sales agency. I don’t see any statement that Apple has approval rights over commissioned sales people or agents so why is this problematic in your view?

    Here is the text of what Global Hunter’s due diligence was: “We called or met 16 top advertisers, who verified a total of approximately $105MM of revenue or ~50% of our estimated 2010 revenue. We called China Telecom, and the exclusive advertising agents for Coca Cola and L’Oreal, who confirmed they have placed ads on CCME’s platform. We also spoke to 17 bus operators, who confirmed that they have signed in aggregate 14,191 buses with CCME, or 52% of the total number of buses CCME reported. The amount of revenues and buses these advertising customers and bus operators confirmed with us matched the numbers in the contracts we reviewed at CCME.”
    -You state that this doesn’t give you comfort because the company would have “had people in place to verify things” and you don’t know what questions were asked. So let the reader draw their own conclusion. What is the likelihood this company had the ability to plant moles in significant companies like China Telecom to respond to Ping Luo’s inquiries? Note that this company has the exclusive advertising contract with among others Coca Cola so it’s pretty unlikely they were conplicit in the arrangement. Yes it’s possible that CCME was able to plant someone there in 2007 or 2008 to start assisting in this so call conspiracy without China Telecom’s awareness so they could be there to respond to this type inquiry. However improbable that seems it’s far more improbable to assume it was done in 15 other companies big enough to do $100m of business with a small upcoming company like CCME.

    Your comments on cash audit procedures are pretty minimalist to say the least. I’ll paint a very different picture of what is likely happening for the 2010 audit.
    – Many engagements start with auditing the November balances and do a roll forward of December activities. It would be logical that this happened here given the timing of the Chinese New Year as it gets some of the work done earlier. While I don’t know if this is the case, In 15 years I worked with outside auditors it was always the approach. That would mean they are reviewing more transactions and activity during the last month of the year.
    – Audit engagements undergo a subsequent transaction test of transactions from the date of the audit until the date of the audit opinion. That means that there is a review of subseqent receipts and disbursements from 12/31 until around 3/15. Large transactions are being given a little more carefully so if there is anything close to the type of unusual infusion and subsequent withdrawal of cash it would have to be quite cleverly documented or broken down into lots of smaller transactions that are supported by balances at 12/31 in either receivables or liabilities. As you know the reason this is done is to search for unrecorded liabilities or to document the validity of receivables through subsequent C/R.
    – An interesting article written by a Chinese professor of accounting can be found here (http://www.chinaaccountingblog.com/schooling-the-auditors.html). In summary he agrees that the confirmation process used in Chinese audits of cash can be forged effectively fooling auditors. However he goes on to say: “I think we can expect that there will be few stones unturned in this audit. I am confident that Deloitte will not sign unless they are comfortable with all of the issues raised by investors.”

    I’d recommend anyone interested in this story to read Professor Gillis’ article for themselves. He appears to be actively following the story and while he is open to the possibility of fraud, is balanced in his review. Unlike this article where it appears the author is already convinced by the articles written by MW and Citron and made no real effort to research or confirm the allegations.

    In closing everyone should remember that this company wasn’t suspect of fraud until the two reports came out. Muddy Waters in particular claimed that the 2009 revenue of $95m couldn’t have been more than $17m. Their rationale? “We estimate that CCME generated 2009 revenue no greater than $17 million. We base this estimate on the metric of revenue per employee in sales and marketing” and “CCME’s 10-K suggests that it has only seven sales people.”
    I suggest readers look at the 2009 10K since Tracy didn’t appear to. The company makes two disclosures on Page 15: ” For the year ended December 31, 2009, CME derived 78.6% of its revenue from selling advertising time slots to advertising agencies” and “As of December 31, 2009, CME employed an advertising sales force of 65 employees.” Hard to use a metric of revenue per employee to justify fraud when almost 80% of the sales effort is outsourced and your starting point of employees is off by a factor of 10x. So this is what started the discussions about fraud. Now everyone appears to be backing off the original outrageous claims while trying to argue that a less significant degree of fraud could exist. Sure that’s possible but again remember that the conversation only started because of outrageous claims that most are now distancing themselves from.

  12. Tracy Coenen

    Kevin – The work of a bank examiner is very different from a financial statement auditor. Yes, the sources of some deposits will be examined in an audit, as part of the procedures applied to test other financial statement accounts. But in a normal financial statement audit, there is not a wholesale effort to confirm sources and uses of cash.

    The difference here, Kevin, is that you are stating what you HOPE the auditors would do. You HOPE that they wouldn’t “risk their entire reputation” on not doing certain procedures that you WANT them to do. I am stating what is actually done in financial statement audits. And obviously these are two different things.

    You should also note that I only addressed the issue of the cash balance because supporters of CCME asked about it. Personally, I don’t think the fact that the company has money in the bank proves much of anything.

  13. Tracy Coenen

    THT – Thank you for your comments. I haven’t been retained to do any due diligence, and the point of this article is clear… to examine the allegations that have been made and the responses to those allegations. I am waiting for the company to hard evidence that disproves the allegations. We’re all still waiting.

  14. Tracy Coenen

    Marty – Thank you for your comments. Again, the point of this article was not original research. It was to examine the allegations that were made, and see whether they’ve been proven or disproven.

    Your comments about audits are made with the HOPE that Deloitte does more audit work than usual, and the HOPE that they do more work related to the fraud allegations. We don’t know if they will do more work, or what that work will be. To suggest that the 2010 audit will be dramatically different is just wishful thinking. You have no evidence that it will be.

    Regarding the profit growing from $2m to $85m – I misstated what Citron reported, and have now corrected it.

    Apple press release – CCME wanted the item to look more important than it was. Was that misleading? Maybe, maybe not.
    – Did you read the company press release that disclosed the Apple product relationship?

    Global Hunter – We still don’t know exactly what was done, and yes, it is possible for the company to fool people doing this type of work.

    Auditing cash – You are merely speculating on what you HOPE the auditors will do. This “roll forward of December activities” is a procedure that you have fabricated. I do agree that the last month of the year will be scrutinized more than other months. Do you know the purpose of the test of subsequent transactions? It is not to verify the source of bank deposits. Yes, it is related to liabilities and receivables, but not in the way that you describe. (i.e. They may look at subsequent receipts from certain customers to help verify the A/R balances for those customers at year-end. They do not, however, go through all the cash receipts to see if they are related to a customer or an A/R balance. This is an important distinction.)

    No one can say with any certainty what Deloitte will do, or how much consideration they will give the fraud allegations.

    I’m not backing away from anything. I simply reviewed what was alleged and what has come out against or in favor of those allegations. I have the same opinion that I had a couple of weeks ago: There are too many serious questions that remain unanswered.

  15. Foggy

    wow – so you believe anybody with a computer and an internet connection has an authoritative opinion? Do you really expect CME to respond every time someone posts on the internet?

    And who was this ‘friend’ that asks you to continue this thread?

  16. Salty dawg

    This says it all…..
    “I don’t need to do any new due diligence. The company is sketchy, and that’s all I need to know.”
    Where excatly is YOUR old DD?
    You are using findings from MW/citron and GHS.

    Completely illustrates your level of forensic accounting.
    Again, non-existant.

  17. HPS

    nothing like getting schooled on your own blog site.

    that’s what happens when your DD is nothing more than:

    “yeah, what they said”

  18. Marty Chilberg

    Tracy- I’ll not respond again after this comment. I learned last time that this is your platform and you appear to be using it to promote your services rather than objectively trying to look at things and educate readers.

    You state that I fabricated the concept of auditing november balances and rolling them forward and HOPE the procedures I outlined are what auditors would do. Strong statements both so I’ll respond to each before moving on.

    I did not fabricate anything. I reported what procedures were used by Big 4 auditors during my 15+ years at Atari, Daisy Systems, Symantec and Visio. I properly reported that to be the case and stated it would be logical to assume that could be the case here. How that would result in your claim of fabrication is beyond me.

    I did speculate which I think was pretty apparent in my comment. However it is far more than the HOPE that you claim. I can only surmise that you must be unaware of the escalation procedures that occur with respect to listed securities on US exchanges when claims of fraud come to the attention of the SEC. I suggest you look into it and if you need contacts in these firms please let me know. It basically goes something like this:
    – SEC hears rumors or claims of fraud.
    – Regulators contact the Liason officer of the National office of the Big 4 audit firm involved (usually Wash DC).
    – Liason officer agrees to look into it.
    – National office contacts engagement partner to understand the scope of the audit underway, the potential validity of the claims being made and the liklihood that fraud exists.
    – The national office takes a lead position from this point forward reviewing scope, testing, findings and continues to communicate with SEC regulator as to progress. The engagement partner at this point is accountable and reporting to the National office in US.
    I don’t know for certain that this has happened in this case. I do know that this is the typical escalation process used by Big 4 firms. I also know that the SEC is aware of this and actively looking at it. To suggest that they are not in communication with Deloitte is pretty improbable but certainly anything is possible.

    I also did not fabricate the professor who has been tracking this case nor his comments about what his conclusions were about the degree of testing occuring at Deloitte as part of this audit. I can’t say for certain that he isn’t fabricating it so I guess it leaves the door open that he is also involved in some way.

  19. Tracy Coenen

    CCME supporters need better reading comprehension skills. The purpose of this post was to examine the allegations made, and whether they have been proven or disproven. I have not been retained to do any due diligence, and that is not my purpose here. I am simply exploring whether these allegations have any merit.

  20. Tracy Coenen

    Marty – You’re being dishonest by implying that this rollfoward constitues additional or enhanced audit procedures. You wrote: “Many engagements start with auditing the November balances and do a roll forward of December activities.” Yes, the auditors will look at changes in balances from the last period to the current, and may calculate how those changes occurred in total. But that doesn’t mean that they are doing a detailed examination of the transactions in that roll forward period.

    And my comment stills stands: You hope that Deloitte will do more work. You have no idea what the scope of that work will be or what procedures will be done.

    And I made no comments about the professor you mentioned.

  21. Marty Chilberg

    Sadly I have to post yet again because I’ve been accused of being dishonest and can’t let that accusation stand unchallenged. Rather that try to debate the issue further I’ll let readers make their own conclusions about my honesty versus the author’s motives.

    Roll forward of interim Substantive Testing (Public Company Accounting Oversight Board)
    Auditors usually perform some of their audit work as of an interim date. Interim
    audit procedures may include confirmation of accounts receivable and observation of
    physical inventories. PCAOB auditing standards allow auditors to apply substantive
    tests to the details of asset or liability accounts as of an interim date if additional
    substantive tests can be designed to cover the remaining period to provide a reasonable basis for extending the audit conclusions at the interim date to the balance sheet date.

    Auditor’s Approach (published by the AICPA)
    The auditor’s approach is based on an assessment of the risk of material misstatement of the financial statements. This approach includes (1) an identification of the risks associated with relevant financial statement assertions, (2) an assessment of those risks,(3) a determination of the significant risk of material misstatement, and (4) the design of procedures responsive to those significant risks so as to reduce such risks to the acceptable level to enable the auditor to express an opinion on the financial statements taken as a whole.
    The auditor should consider the sufficiency and appropriateness of audit evidence to be
    obtained when assessing risks and designing further audit procedures. Sufficiency is the
    measure of quantity of audit evidence. Appropriateness is the measure of the quality of audit evidence, that is, its relevance and reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions. The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality of audit evidence, the less the audit evidence that may be required). Accordingly, the sufficiency and appropriateness of audit evidence are interrelated. However, merely obtaining more audit evidence may not compensate if it is of lower quality.

  22. Tracy Coenen

    Marty, I’m not disputing that a roll forward occurs. What I’m disputing is your suggestion that somehow this constitutes extra work being done on the part of auditors. That is not true. The audit is still an audit, whether procedures were done early and balances were rolled forward, or whether all work was done at year end. The basic premise still stands: Audits are limited in scope and we cannot just assume Deloitte is going to do extra work, nor can we assume what that work might entail. The roll forward process is not any sort of additional verification above and beyond standard audit procedures. Until I know more directly from Deloitte, I’m not convinced that they’re doing anything other than a standard audit. You pretending to know what happens during an audit gives no additional credibility to the Deloitte audit.

  23. HPS

    apparently YOU are the one that doesn’t get it.

    You quote Citron, thats nice Andrew left has been found guilty of false and misleading statements. he was banned for 3 years as well. Oh and another beauty, he was recently arrested for PETTY THEFT in Florida.

    Carlson Block and his father live in China for a reason, look it up. Have you been to MW’s office in China? An investor in China went to their offices… guess what… they weren’t there.

    So Citron says CCME doesnt exist, MW says it does.

    Which side are you? Does it exist or doesnt it? Do you even know?

  24. Tracy Coenen

    I don’t believe Citron ever said CCME doesn’t exist. I believe they said they believe the company doesn’t exist on the LARGE SCALE that the financial statements purport to show.

  25. HPS

    please, saying no one has ever heard of them is the same thing.

    left’s criminal history doesn’t bother you?

    Block’s past seems straight to you?

    does that even bother you in the least bit?

    or are you just ready to write another hacked piece of 5th grade journalism?

  26. Tracy Coenen

    No, it’s not the same thing. Certainly someone’s past should be factored into an assessment of their credibility. I think it’s wise to be skeptical about the allegations, but it’s equally wise to be concerned with the fact that there are so many questions left unanswered and allegations not disproven.

    As I stated in my first piece on this company, I’d have a different opinion if there were only a couple of allegations. In this case there, are many, and most of them are still open with many question marks.

    Things like the work done by Global Hunter do something to help the company, but I don’t know enough about their work to definitively say that the company gets a clean bill of health.

    This blog features opinion pieces, not traditional journalism. Hopefully you understand the difference.

  27. HPS

    you dont know if Citron or MW is telling the truth, but you use them as the backbone of your opinion?

    dont you have a responsibility to your reader that you know what you are talking/writing about?

    or is that too much work for you?

  28. FG

    Let’s consider the sources? On one side we have a Nasdaq traded company, institutional investors, audited SEC filings, a top 4 auditor and facts checked by “on the ground” research from Ping Luo of Global Hunter Securities (an actual person you can contact).

    On the other side we have 2 nameless bloggers with shady reputations, no actual credentials, no listed address or phone number and who admittedly stand to profit from destroying the company’s market value. Something they know they can do with little/no chance of repercussions.

  29. Tracy Coenen

    Being traded on the NASDAQ means nothing, and audits rarely find fraud, so the audit report gives me no comfort.

    The fact remains that there are numerous allegations which have not been fully refuted. Look at the totality of the situation. Why isn’t the company providing the documentation and information that could refute these claims?

    The critics could be wrong. But again, there are so many allegations that are still big question marks, and that’s what makes me uncomfortable about the company.

  30. Alan

    Thanks for following up on my question. You are at least consistent in your statements: a) you offer only your opinions and b) you do not plan to do actual due diligence until being retained. It is clear that no CCME supporter would retain you at this point (for a variety of reasons).

    This seems fair enough. Unfortunately, my general feeling is that the most competent people offer their services free of charge (at least initially), but that’s ok, that’s a matter of my personal philosophy, and it’s not worth having a conversation about it.

    I think at this point we just have to wait and see, to see who’s right. It should be very interesting come middle/end of March. Of course, at that point, I think you will make the argument that the new audited financials (if they ever appear) are not supported by a forensic audit. That is what you have been consistently saying for the last few weeks.

    However, if Deloitte signs off, that detail won’t matter; if Deloitte signs off and earnings are good, I’ll be able to further insure my downside at that point in time at minimal cost. Makes sense to do that on these stocks that can be easily manipulated, I have learned (the hard way).

    Time will tell.

  31. Tracy Coenen

    Alan – Competent professionals do not provide services for free. Anyone who is any good deserves to be paid for their work. Further, competent people typically have more work than hours in the day, making it a bad deal for them to do work for you for free. Like I always say – you get exactly what you pay for.

  32. Alan

    Tracy, as I said, the “free service” topic is not worth discussing here….but, I didn’t say that people shouldn’t get paid…there was more nuance than that.
    You get what you pay for…hmmm…like I said, this is a discussion for some other forum.

  33. Tracy Coenen

    Free samples are for grocery stores. I don’t care if there was “nuance” or not. Any self-respecting professional who is good does not give away services for free. Period.

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