Failing to Find Fraud When Auditing Cash


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.

Earlier this week, I posted an article about China MediaExpress Holdings (CCME) and the allegations of fraud that were leveled recently against the company. I took a look at some of the commentary out there, asked questions and made comments, and ultimately decided that I am concerned about the potential that the company is a fraud.

Supporters of CCME have questioned the reliability and authenticity of the fraud allegations, and have provided evidence of their own about why the critics of CCME should not be trusted. I haven’t looked at all of those counter arguments, but I have looked at some of them, and some appear credible. I do not discount the due diligence that has been done by a number of investors. I am sure that they found plenty of evidence to suggest that the company is completely legitimate and their numbers are reported accurately.

However, I still believe that something is wrong at the company.

Here’s why: Even if most of the fraud allegations are either improper or incorrect, I believe that at least some of them are likely to be true. Even if one or two or three of the fraud allegations are true, the company has a serious problem. In my experience, lying and fraud do not occur in a vacuum. When small lies or frauds are found, very often they are the tip of the iceberg and more dishonesty exists. Continue reading