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NYSE-Traded Chinese Company CYD Settles Accounting Case with

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Jun 9, 2010 12:39 pm

NYSE-Traded Chinese Company CYD Settles Accounting Case with SEC

[Below is a partial exerpt from Bill Singer's more detailed analysis in the full Blog]

The world is changing. Quickly.  And it is taking a form that many of us no longer recognize. What better proof could I offer than to report about a recent United States Securities and Exchange Commission (SEC) case against a Bermuda holding company based in Singapore, which is a subsidiary of a People's Republic of China holding company, which trades on the New York Stock Exchange.

Chew on that for a while. Draw up a flowchart. Scratch your head. Smile. Shrug your shoulders. Welcome to the brave new world.

GYMCL’s procurement department staff manually counted warehouse receiving documents and called suppliers to discuss shipments and invoices. Using the procurement department data, the finance department staff substantiated a GR/IR account balance of Renminbi (Rmb) 400 million, but the accounting software indicated a balance of Rmb 568 million.

The Rmb 168 million discrepancy converted to about $21 million U.S. Dollars as of the 2006 exchange rate and about $24.6 million U.S. Dollars as of the June 2010 exchange rate.

On May 30, 2008, CYI filed an amended Form 20-F which reversed the entire January 2006 adjusting entry and restated its financial results for 2005, thus reporting a $4 million net annual loss instead of the previously reported  $8.5 million net income (a decrease of approximately $12.5 million).

In the Matter of China Yuchai International Limited,  (Order Instituting and Imposing Cease-And-Desist, Securities Exchange Act Rel. No. 62235 / Administrative Proc. File No. 3-13925, June 7, 2010), CYI’s Offer of Settlement was accepted by the SEC, whereby CYI consented to the entry of a Cease and Desist Order.

 Bill Singer's Comment: They still manufacture pencils with erasers, and, yes, the old "Backspace" key gets plenty of use as a means to delete computer-entered errors. Human beings make mistakes. Sometimes, our imperfection is merely a minor misspelling or the typical bookkeeping error that plagues many businesses. Other times, our failings can be cataclysmic, as in the case of BP's spewing oil pipe.  There is a world of difference be inadvertent and avoidable.

It does not appear that CYD had adequate and reasonable measures in place in 2005 to detect the accounting errors at issue. That only the tool shed burned down and not the entire plant is irrelevent. The fire should not have ignited in the first place, and when it did, all sorts of alarms and sprinklers malfunctioned.  Nonetheless, in this case, the SEC seems to have been impressed by CYD's fire drill.  The company smelled smoke, found the source of the fire, put out the fire, and installed additional sprinklers and smoke detectors. 

In determining the degree and extent of punishment for our individual and corporate failings, it is important to take into account whether a given error was intentional and/or easily prevented.  Moreover, it is also appropriate to consider the steps taken to confirm the error, how quickly those inquiries were undertaken, how soon following confirmation remedial changes were set in place, and what assurances we have that a recurrence of the same problem has been eliminated or reasonably reduced.

The fear of excessive regulatory reprisal contributes to cover-ups that inflict far more danger on our society.  Regulation works best when those regulated timely uncover their own mistakes, promptly move to correct the damage, and fully disclose the causes, effects, and remedies. 

On the other hand, sometimes indivduals and corporations just don't seem to get it.  They handicap the regulatory system as the cost-of-doing business -- it is merely another gaming scenario inputted into a computer simulation.  The probability of getting caught versus the cost of preventative measures versus the likely range of fines are nothing more than data points. For such miscreants, a measured response is useless. 

Speaking of which, what are we going to do about BP?