SEC: Reverse mergers risk dodgy accounting
Spate of scandals involving reverse mergers by China-based companies has prompts SEC to issue warning
REVERSE MERGERS could result in or conceal accounting irregularities, according to the US Securities and Exchange Commission.
A slew of fraud and scandals have dogged Chinese reverse mergers – where a smaller company buys out a larger peer – and mergers with US shell companies, Reuters reports.
The tactic allows companies to trade on US stock markets despite being based abroad; the listing process is faster than a traditional initial public offering and involves less rigorous scrutiny, potentially allowing for sub-standard accounting.
Some reverse mergers are audited by small US firms, which may not have the resources to fully investigate an overseas company.
More than two dozen China-based companies have suffered auditor resignations or accounting problems since March and the SEC has launched a broad investigation. In a recent bulletin it warned investors: “Many companies either fail or struggle to remain viable following a reverse merger.”