The HKICPA sanctions the audit firm and its director, but fails to disclose the listed company involved. We'll tell you who it was.

Cheng & Cheng's EPS snafu
1 September 2015

The Hong Kong Institute of Certified Public Accountants (HKICPA) today announced that it has "resolved" (or settled) a complaint against auditor Cheng & Cheng Limited (C&C) and its director Alice Li Yuen Yu (Ms Li), for failure to spot a material error in the earnings per share calculation of a listed company for the year ended 31-Dec-2012. The listed company also had convertible notes outstanding which had not been properly considered in the diluted EPS calculation.

The "administrative penalty"? A measly HK$25,000 for each of the firm and its director, plus joint costs of $10,000.

The self-regulatory body does not say which listed company was involved. Webb-site Who's Who covers all auditors of HK-listed companies since 1990, so we can show you the client list of C&C. Eliminating those where the firm was appointed after 2012, and eliminating those without December year-ends and those which had no convertible notes, and Webb-site find the error in the 2012 annual report of Oriental Unicorn Agricultural Group Ltd, now known as China Demeter Investments Ltd (China Demeter, 8120).

The error was pretty basic: every 40 shares were consolidated into 1 share on 20-Oct-2011, which was during the 17-month accounting period from 1-Aug-2011 to 31-Dec-2012. The calculation of the time-weighted average number of shares had failed to exclude the shares which were removed by the consolidation, and so note 15 on page 66 gave the weighted average number of shares for basic EPS as 484,234,278, when it should have been 280,983,410. Divide that into profits of $59.541m and as a result, basic EPS was stated as $0.1230 when it should have been $0.2119, or 72% higher.

By the time the 2013 results were published, there had been a further 4 for 1 share consolidation, so the 2013 annual report needed to adjust for that in the comparison with 2012, making the adjusted EPS 4 times larger at $0.8476. Note 14 on page 49 covers up the previous error by stating that the EPS has been restated "resulting mainly from the share consolidation", without mentioning how shareholders had been misled in the 2012 report. We searched the announcements but could not find any admission by China Demeter that the original 2012 EPS calculation was wrong.

We call on the Stock Exchange and SFC to require the company to confess to the false and misleading statement in its 2012 annual report. C&C resigned as auditors on 8-Dec-2014 stating that apart from "various factors including the professional risk associated with the audit and the level of audit fees" there were "no other matters in connection with its resignation that needs to be brought to the attention of the shareholders of the Company." Well, the EPS snafu is one matter which we think should have been disclosed.

Oh, and the 2012 audit fee was HK$300,000, or 12 times the penalty levied by HKICPA. Just another cost of doing business for the audit firm. Incidentally, the sanctioned Ms Li is also an INED of South China Holdings Co Ltd (0413) since 2004 and she chairs its audit committee, so that company needs to make an announcement about her sanction.

©, 2015

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