Dude! Where’s My Auditor?? The Curious Case of Frazer Frost


As the most recent measure of just how crazy the China reverse/merger Nasdaq stock story has become, check out the drama with one of the space’s most prolific auditing firms:  Frazer Frost.  F/F was the auditing firm of the now notorious RINO, which has been halted since last week … but now the auditing firm does not exist?

This firm was formed just a year ago with the announcement of Moore Stephens Wurth Frazer and Torbet LLP plans to merge with Frost PLLC as of the beginning of the year (2010).


The article goes on to detail a “relationship stretching back decades”, with each contributing about $30 million in revenues, it seemed like a marriage made in heaven, right ?.

However less than one year in, we learn the marriage must have been just “friends with benefits”.


Guess the “decades long relationship” was only good enough to justify a “trial period” … a fact left out of the original release.   Well, you know things are bad when you get dropped by your auditor but what happens when your auditor drops himself?

If you call Frost today in Arkansas, they answer “Frost & Co” and say they’re no longer associated with Frazer.  Citron spoke to managing partner Dan Peregrin and twice he told us that the two firms have gone their own way. ….but if you call Frazer, they answer “Frazer Frost” and in a brief conversation with Susan Woo, the RINO auditor, she told Citron that Frazer Frost is still an operating entity.

Really?  If you go to the Frazer Frost website, you see a homepage with no content in the about us section.


This is in contrast to a full description of the firm displayed a short time ago, as you can see in their old website which is still cached on Google.


Why does this matter?

Today we saw an “equity partner” in the purported Harbin takeover (NASDAAQ:HRBN) take a backseat in the deal.  How can anyone rely on any numbers audited by Frazer Frost if they don’t even believe in themselves?  How can anyone take a company private or for that matter be an investor in a China “black box” without confidence in the auditor?

Barrons wrote skeptically about Frazer Frost in its August piece on the China reverse merger space,


It is the opinion of Citron that if RINO was an isolated incident, it would not cause a whole auditing firm to break up.  Instead, this is just a precursor for more to come, we believe not just in Frazer Frost stocks, but the whole space.

The quality of the work of Frazer/Frost makes it impossible to rely on the financials of HRBN, SCOK, and CVVT .  This small cap China space seems to get stranger every day.   These companies should immediately put out 8-K’s and inform the public as to who their auditor really is.  Either that or it is time to call Scooby Doo and the Mystery Machine for the case of the missing auditor.

Cautious Investing To All

China New Borun (BORN) — You are Cold Busted: Now it is Time to Come Clean. The Smoking Gun


Last month Citron exposed potential disclosure problems with China New Borun Corporation (NASDAQ:BORN), a corn alcohol manufacturer, whose reports of tremendous profits boast far-above- average margins in a heavily commoditized and competitive industry.  The company justifies these results with the claim it operates an “advanced” manufacturing process based on their unique proprietary technology.   Citron ‘s first problem with this company was its filed R&D expense over the past three years, which is minuscule, while its main manufacturing facility was on the brink of bankruptcy in 2009.   

The research was than furthered by Alfred Little, who wrote in some depth documenting that not only is BORN using an antiquated and largely unprofitable manufacturing process (“semi-wet”), but they have been in the process of updating their factories’ manufacturing to an industry-standard competing (“semi-dry”) process, as their “advanced and proprietary” (“semi-wet”) process was nothing more than old technology that needed to be replaced.  Worse, Little suggests that the company has an undisclosed debt of $270 mil RMB, as reflected in tax filings that predate its May IPO.  Below is a “reported” copy of the tax documents in Chinese that would corroborate the theory that the company is sitting on undisclosed debt.

BORN Pre IPO Financials (PDF)

It was presented that BORN is hiding RMB 270 million in undisclosed debt, a liability which offsets nearly all of its claimed retained earnings.  If they have to acknowledge that liability, they simply don’t have the assets generated by those retained earnings, the amount of which is claimed to be RMB 288 million accumulated through 12/31/09.

Neither the company nor its analysts have yet responded directly to the debt questions.  We are left to believe that silence is a form of complicity.  Worse, since these revelations have come to surface we have seen defections from the Board of Directors.   Whereas the debt issue would make this stock another Refco, and it MUST be addressed by management, we will now PROVE that the company is operating antiquated plant technology and further is trying to cover up their lie in an attempt to conceal it.


The company and the analyst were quick to respond with a link from the Henan Sheng Wantongtong Machine Manufacture Corp. that there is never and was never a contract with BORN and going as far to say that any mention of a contract was pure fabrication.


This quick website cover-up states that the following full length contract was nothing more than a fabrication by short sellers to damage the company.  Really?  This whole contract is false? 

The contracts BORN wants you to believe do not exist:
Borun Production Technology upgrade contract ENGLISH (PDF)
Borun Production Technology upgrade contract CHINESE (PDF)

Citron has a cached version of their website (before they changed their story), that shows the contract has indeed existed.

Click here to view »

Attention management:  you cannot simply rewrite history by changing a website.

Piper Jaffray

Let us now see whether Piper Jaffray will address this issue, or bury its head in the sand.  This is not the first time that Citron has been at odds with Piper about reality.  Just two years ago Citron exposed a billing scandal at Arthrocare while Piper defended the medical device company and tried to discredit Citron, claiming its own internal review found no wrongdoing.  http://citronresearch.com/index.php/2008/02/14/citron-research-updates-on-arthrocare-artc/

Sure enough, only months later the company got investigated by the US Attorneys Office over the billing scandal and the stock fell apart with massive corporate resignations – but no apology from Piper Jaffray.  Let’s see if Piper will redeem themselves or continue to live in denial.

Questions for Conference Call.

Tomorrow, BORN releases earnings, which we anticipate to be a complete fabrication regardless of the numbers they post.  Their past profits cannot possibly have been generated with an antiquated manufacturing process, much less higher commodity prices for corn.  Management credibility appears to be gone on this issue.  Here are a few questions that can be asked on the conference call:

  1. Are you willing to undergo an independent forensic audit by a credible international accounting firm that specifically addresses the question of undisclosed debt as filed on your corporate tax filings ?
  2. How do you expect shareholders to trust management after such a blatant attempt to cover up your contract to update your factory to an industry-standard manufacturing process?
  3. How soon is the company going to have to raise money?  Why so soon after IPO?

It is the opinion of Citron that BORN is committing fraud on the marketplace.  How can shareholders trust anything that management has said or will say in the future?  Worse, the analysts covering the name are looking for the easy way out instead of actually analyzing the company.  The facts speak for themselves.
Cautious Investing To All

Will China Biotics (CHBT) Come Clean? – Up to Them


As written in two previous stories, Citron Research has stated clearly that it believes China Bitoics is a fraud.  Well, it is not too late for the company to attempt to answer some questions on tomorrow’s conference call.  That would be a step in the right direction of full disclosure.  Investors should not have to fly half way around the world to get these simple questions answered. Read more