U.S. Auditor Ruling Sinks Baidu to Qihoo: China Overnight

Chinese stocks traded in New York fell to a two-month low, led by E-Commerce China Dangdang Inc. (DANG) and Baidu Inc. (BIDU), after U.S. regulators barred the four largest accounting firms from conducting audits in the Asian nation.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. dropped 3.5 percent to 100.48 yesterday as the ruling sparked concern that the companies won’t be able to put together their 2013 earnings reports in time to meet listing requirements in the U.S. Dangdang, China’s biggest web book retailer, sank 11 percent while SouFun Holdings Ltd. (SFUN), a real-estate information website, posted the biggest drop since October. Baidu, China’s largest web search engine, fell the most in nine months.

The decision was made after the accounting firms’ units in China failed to comply with Securities and Exchange Commission orders for documents needed for a series of accounting fraud probes. The firms receiving six-month bans are Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. The ruling, if finalized, could impact the 425 Chinese companies with market capitalization of $185 billion traded in New York

“There’s a fear that the U.S.-listed Chinese companies may not file their 2013 annual reports in compliance with SEC rules, leading to the possibility that they may fail to meet listing requirements,” Jeff Papp, a Lisle, Illinois-based senior analyst at Oberweis Asset Management, which oversees $1 billion in assets, said by phone. “This issue has been dragging on for a long time, and this will act as an overhang on U.S.-traded Chinese stocks.”

The sanctioned firms said in an e-mailed statement that they will appeal the decision.

Dangdang Drops

Dangdang’s American depositary receipts fell to $9.89 in the biggest drop since Oct. 22. The slump cut Beijing-based Dangdang’s gain to 3.6 percent this year, compared with a 130 percent surge in 2013. Baidu’s ADRs slid 6.2 percent to $163.58, a two-month low. SouFun’s ADRs sank 7.7 percent to $87.47. YY Inc. (YY), owner of an entertainment website, retreated 7.4 percent to $63.77, falling the most since Nov. 6.

The accounting firms have 21 days to file a so-called petition for review with the SEC before the decision by U.S. Administrative Law Judge Cameron Elliot would become final and go into effect. If the five-member commission were to uphold the judge’s decision, the firms could then take it to the U.S. Court of Appeals in Washington.

‘Law Violations’

The SEC enforcement division was “gratified” by the decision, chief litigation counsel Matthew Solomon said in an e-mailed statement. “These records are critical to our ability to investigate potential securities law violations and protect investors.”

NQ Mobile Inc., a Chinese mobile-security service provider, was accused by Muddy Waters LLC of inflating sales in a October report. Beijing-based NQ Mobile has denied the allegations and set up an independent committee to review Muddy Waters’s report.

Carson Block, founder of Muddy Waters, sent a letter to NQ Mobile auditor PricewaterhouseCoopers urging the accounting firm to take a closer look at NQ’s accounting books, according to a Twitter posting of the short-selling firm on Jan. 22. In 2011, Block accused Sino-Forest Corp., a Chinese plantation company listed in Canada, of fraud, leading it file for bankruptcy protection.

Sino-Forest

Ernst & Young didn’t conduct audits of Sino-Forest in accordance with accounting industry standards, the Ontario Securities Commission said in a statement of allegations issued in December 2012, and the accounting firm agreed to pay C$117 million ($118 million) to settle claims in a Canadian class action suit in the largest settlement by an auditor in Canadian history.

“This is a preliminary ruling,” Kim Titus, senior director of corporate communication at NQ Mobile, said by phone from Dallas. “All the reports are going to be out as scheduled. All the work with PricewaterhouseCoopers will continue as it has.”

The worst possible time for the suspension would be in the next month or two, as companies need to file an annual report with an audit opinion on Form 20-F, which is due on April 30, Paul Gillis, a professor of accounting at China’s Peking University, said in a post in his China Accounting blog.

Ctrip, NetEase

“If the firms are suspended, they cannot issue audit reports, so the clients cannot file Form 20-F,” he wrote. “Under exchange rules, this should lead to the companies being suspended from trading since investors do not have the data they need to be able to trade.”

More than two-thirds of web traffic in China, which has more than 618 million Internet users, was disrupted on Jan. 21, according to the online security provider Qihoo 360 Technology Co. Affected sites included those of Alibaba Group and Baidu. China said hackers may have been to blame.

Ctrip.com International Ltd., the biggest online travel agency in China, and NetEase Inc., a web game operator, are scheduled to report their 2013 full-year results on Feb. 12, according to their statements this week. Calls seeking comments from the companies after regular business hours in China weren’t returned.

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., tumbled 4.5 percent to $35.02, the largest retreat since November 2011. The Standard & Poor’s 500 Index declined 0.9 percent after a China manufacturing index showed contraction and investors analyzed corporate earnings.

The preliminary reading of 49.6 for January in a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics yesterday was below a final figure of 50.5 in December and all 19 estimates of analysts in a Bloomberg News survey.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net