The U.S. Department of Justice is investigating accounting fraud at unspecified Chinese companies listed on U.S. stock exchanges, according to a Wall Street Journal article entitled “Shift in Sentiment Toward China’s Internet Darlings.” The Department of Justice has not identified the companies being investigated. Last year, the SEC was reportedly investigating financial services firms that helped bring these Chinese companies to market, as well as the Chinese companies themselves.
According to the Wall Street Journal, auditors and short sellers have accused many of these companies of misrepresenting the true extent of their businesses. In addition to the accounting fraud issues, the internet traffic data on these companies is considered to be unreliable, and there are reports that the Chinese government may change a complicated organizational structure known as the Variable Interest Entities Structure, which provides Chinese companies “back-door” access to U.S. financial markets.
Shares of U.S.-listed Chinese internet companies have plunged in reaction to these disclosures. One J.P. Morgan analyst said the market is factoring in a worst-case scenario. This is not surprising, given the hidden nature of the risks.
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