May 23, 2011 10:30 pm

Longtop raises fears for small Chinese stocks

Investor jitters over the financial risks of small Chinese stocks are set to escalate after Longtop, a Chinese software company listed in New York, announced the resignation of its independent auditor and its chief financial officer.

The software company also said it was being investigated by the US market regulator.

Longtop said Deloitte Touche Tohmatsu resigned on Sunday as the auditor of the company because information in the company’s accounts regarding cash at bank and loan balances, and possibly regarding sales revenue, had recently been found to be falsified.

Derek Palaschuk tendered a written resignation as chief financial officer on May 19, and the board is considering his resignation, Longtop said. The company added that it had been informed by the Securities and Exchange Commission that an inquiry had begun into the matters raised by Deloitte.

The accounting controversy at Longtop was brought to the attention of a larger number of investors when Mr Palaschuk resigned earlier this month as head of the audit committee of Renren, shortly before the Chinese social networking company’s IPO.

Renren’s shares are on pace to close at their lowest level since the IPO. In mid-day trading on Monday, they were down 4.6 per cent at $12.41.

The developments come almost a week after the New York Stock Exchange halted trading in Longtop shares on May 17. The following day, Longtop said in a terse statement that it would not announce fourth quarter and annual results on Monday as planned.

Longtop is the latest in a series of Chinese companies listed in the US which have seen extended trading halts due to alleged financial irregularities.

China Agritech has been one of the more extreme examples with a trading halt of more than two months. Since last year several Chinese companies have sought and completed IPOs in New York.

Longtop develops software for Chinese banks and offers them outsourced software and hardware services. Its shares started a rollercoaster ride on April 27 after Citron Research, a company which analyses and invests in shares, accused the company of accounting fraud.

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