As global economic growth slows, company executives are coming under great pressure to report higher earnings, which may result in accounting fraud, warns Edward Nusbaum.
The chief executive of the world's fifth largest audit firm, Grant Thornton International, Nusbaum said he was personally invited by executives [not in Hong Kong] to help fabricate numbers on company's balance sheets.
"Under such circumstances, the only thing an auditor could do is resign immediately," he told The Standard.
In Hong Kong, Parker Randall CF (HK) CPA Ltd resigned as auditor of China Billion Resources (0274) on August 11 due to "difference in opinion and the limited availability of financial information and support" related to the firm's financial statements for the year ended December 31, 2012.
CBR shares have been suspended since June 29, 2011.
The Securities and Futures Commission is seeking to liquidate China Metal Recycling (0773), accusing the firm of inflating the size of its business and revenues before listing in 2009.
In 2012, the Financial Reporting Council put 13 listed companies - mainly small-to-medium-sized mainland private enterprises - on its watch list, as some failed to announce financial results within the required period, while some auditors resigned.
Out those 13 firms, shares of Boshiwa International Holding (1698), Daqing Dairy Holdings (1007) and Ausnutria Dairy Corp (1717) remain suspended.
"Risks [from SMEs] derive from those individuals who suddenly become wealthy and are aggressive in creating fraud," Nusbaum said.
He argued that auditors should not be solely blamed for fraud - comparing his work to that of police who try to detect and prevent crimes, but can't do it all.
Nusbaum said executives, especially chief financial officers, should be held accountable over false receipts, invoices or documents.
Reverse mergers and back-door listings raise the level of skepticism among auditors, Nusbaum said, stressing that even in industries like mining and gaming, there are many legitimate players with strong accounting practices.
The motivation to cheat in accounting has not only been seen in China, but also other emerging countries.
Nusbaum said London-based Grant Thornton - which operates in more than 120 countries - has strengthened its due diligence on clients, doing more checks prior to initial public offerings.
It took one year to finish the IPO prospectus for SINOPEC Engineering (Group) (2386), which is so far the largest IPO in the SAR this year.
"We have no preference on IPOs by SMEs or large state-owned companies, "Nusbaum said.
Alibaba, the mainland's largest e-commerce firm, is expected to float its mega IPO soon in Hong Kong or the United States.
Nusbaum said large companies are attracted by strong regulations governing exchanges in the United States, but Shanghai can offer better price-to-earnings ratios.
"Hong Kong offers a blend, namely good return and regulations," he said.