SHOW ME THE MONEY AT LIHUA INTERNATIONAL

On May 22, 2011, Deloitte Touche Tohmatsu CPA Ltd. (China) (Deloitte) formally resigned as auditor of Longtop Financial Technologies Limited (LFT). In its resignation letter, Deloitte “determined that, in regard to bank confirmations, it was appropriate to perform follow up visits to certain banks.” These audit steps revealed false confirmations and significant differences in deposit balances and bank borrowings.

Lihua International, Inc. (LIWA) used AGCA, Inc. (AGCA) as its auditor since LIWA began trading in the U.S. capital markets on September 4, 2009 until AGCA was dismissed on July 16, 2010. AGCA’s audit report for calendar year 2009 was dated March 30, 2010. As of December 31, 2009, LIWA reported cash of $35 million and short-term bank loans of $2 million. Did AGCA perform follow up visits to the banks to verify the deposit balances and bank borrowings?

In the past, I have written about material differences between LIWA’s filings in China and the U.S. LIWA’s 2008 financial reports filed with the China State Administration for Industry and Commerce (SAIC) is consistent with the 2009 unaudited financial reports filed with the China State Administration of Taxation (SAT). LIWA’s 2009 financial reports filed with SAIC is consistent with the 2008 and 2009 financial statements filed with the U.S. Securities and Exchange Commission (SEC).

The 2009 SAIC showed substantial net profits and positive other equity besides paid-up capital; the 2008 SAIC/2009 unaudited SAT showed net losses and little/negative other equity besides paid-up capital. The 2009 SAIC showed higher total assets and lower total liabilities than the 2008 SAIC/2009 unaudited SAT. Inflated deposit balances and underreported bank borrowings could account for such differences.

On July 16, 2010, LIWA engaged Crowe Horwath (HK) CPA Limited (Crowe) as its auditor. Crowe’s first audit report was dated March 14, 2011 and covered the calendar year 2010. As of December 31, 2010, LIWA reported cash of $91 million and short-term bank loans of $2 million. Did Crowe perform follow up visits to the banks to verify the deposit balances and bank borrowings?

On April 14, 2010, LIWA raised $32 million from a second public offering of stock. In its prospectus, LIWA stated that the net proceeds were to be used to build a new smelting plant. However, the capital raise was not necessary according to LIWA’s SEC financial statements. As of March 31, 2010 and June 30, 2010, LIWA reported cash of $46 million and $88 million, respectively. The necessity of the second offering was further called into question by LIWA’s announcement of a stock buyback of up to $15 million on January 26, 2011, not even a year later than the second offering.

Even LIWA’s first public offering of stock on September 9, 2009 was not necessary according to their SEC financial statements. LIWA raised $8 million then, yet had cash of $28 million and $39 million as of June 30, 2009 and September 30, 2009. If LIWA truly has the cash on hand, why go through the expense and dilution of public offerings?

Furthermore, as of December 31, 2009 and 2010, LIWA reported short-term bank loans of $2 million. For the year ended December 31, 2010, LIWA earned an average 0.41% of interest income on their cash and paid an average 5.88% of interest expense on their short-term bank loans. Despite having so much cash and the differential between rates on interest income and expense, LIWA continued to carry short-term bank loans.

On May 26, 2011, LIWA announced that it was currently in discussions with a Big Four audit firm to become its auditor. With Deloitte’s newfound audit steps and LIWA’s seemingly strange cash management, it will be interesting to see if those discussions come to fruition.

Disclosure: Author is short LIWA.