To pull off a fraud that humiliates the cream of the global financial elite, you need to have some friends. And where better to have them than at the local bank? The fraud at Longtop Financial Technologies, a Chinese financial software company, was exposed this week in an amazing letter from its auditors, Deloitte Touche Tohmatsu. It appears to be a tale of corrupt bankers and their threats to auditors who had learned of the lies. Deloitte, which had given clean audit opinions to Longtop for six consecutive years, apparently was well on its way to providing a seventh, for the fiscal year that ended March 31. But for some reason — Deloitte did not say why —the auditor went back to Longtop’s banks last week to again seek confirmation of cash balances.
It appears Deloitte sought confirmations from bank headquarters, rather than the local branches that had previously verified that Longtop’s cash really was on deposit. And that set off panic at the software firm. “Within hours” of beginning the new round of confirmations on May 17, the confirmation process was stopped, Deloitte stated in its letter of resignation, the result of “intervention by the company’s officials including the chief operating officer, the confirmation process was stopped.” The company told banks that Deloitte was not really the auditor. It seized documents, Deloitte wrote, and made “threats to stop our staff leaving the company premises unless they allowed the company to retain our audit files.” Despite the company’s efforts, Deloitte learned Longtop did not have the cash it claimed and that there were “significant bank borrowings” not reflected in the company’s books.
A few days later, Deloitte said, Longtop’s chairman, Jia Xiao Gong, told a Deloitte partner that there was “fake cash recorded on the books” because there had been “fake revenue in the past.” The stock has not traded since that confrontation. The final trade on the New York Stock Exchange was for $18.93, a price that valued the company at $1.1 billion. At its peak in November, it had a market capitalization of $2.4 billion. It now seems likely that the stock is worthless. It is a real company, but its revenue and profits probably were a small fraction of the amounts reported. The existence of the “significant” debt means that whatever assets are left are likely to be owned by the banks, not the investors.