GAAP Difference or Accounting Fraud? Evidence from Chinese Reverse Mergers Delisted from U.S. Markets

Journal of Forensic and Investigative Accounting Vol. 7, 2015, 122-145

25 Pages Posted: 19 Feb 2015

See all articles by Yimiao Chen

Yimiao Chen

KPMG

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

Ling Lin

University of Massachusetts Dartmouth - Department of Accounting & Finance

Min Xiao

Xiamen University - Department of Finance

Date Written: February 14, 2015

Abstract

In 2012, one in four federal securities class-action lawsuits filed in the U.S. involved Chinese Reverse Merge companies (CRMs). However, these lawsuits sometimes have encountered difficulties in court due to insufficient direct evidence of accounting fraud. We propose a new method for fraud detection: use Chinese companies dual-listed in the U.S. and China to establish a benchmark for the normal GAAP difference between the two countries. Using this methodology, we find that only a small fraction of the discrepancies between delisted CRMs’ financial statements filed in the U.S. and those filed in China can be attributed to GAAP difference. This suggests that the remaining discrepancies, which are large and unexplained, are indeed due to accounting fraud. Therefore, it is reasonable to conclude that delisted Chinese Reverse Merger companies enticed U.S. investors with favorable and fraudulent accounting and financial data.

Keywords: Accounting Fraud, GAAP Difference, Chinese Reverse Mergers, Dual-Listed

Suggested Citation

Chen, Yimiao and Hu, Gang and Lin, Ling and Xiao, Min, GAAP Difference or Accounting Fraud? Evidence from Chinese Reverse Mergers Delisted from U.S. Markets (February 14, 2015). Journal of Forensic and Investigative Accounting Vol. 7, 2015, 122-145. Available at SSRN: https://ssrn.com/abstract=2567141

Yimiao Chen

KPMG ( email )

Gang Hu (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://ganghu.org

Ling Lin

University of Massachusetts Dartmouth - Department of Accounting & Finance ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States

Min Xiao

Xiamen University - Department of Finance ( email )

Xiamen, Fujian 361005
China

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