Paul Gillis
Paul Gillis

Two major companies backed by Morgan Stanley, Tianhe and Sihuan, have told security regulators in Hong Kong, they cannot meet the deadlines for filing their audits, reports AP. Two red flags, causing serious problems for Morgan Stanley, says accounting professor Paul Gillis.


The twin filing delays raise uncomfortable questions for Morgan Stanley, which picked the companies from obscurity then promoted them as multibillion-dollar growth stories.

“This is not something an auditing firm would do lightly,” said Paul Gillis, a former Partner for PricewaterhouseCoopers LLP in China who now teaches accounting at Peking University. “There are only two reasonable explanations for being late. One is management incompetence. Two is they’re fighting with the auditors. And neither one of those is good.”

Tianhe and Sihuan could eventually receive a clean bill of health, although announcements about earnings delays due to unfinished audits are generally regarded as portending bad news. Any material problems that led to the delay would have to be disclosed once the companies file their financials.

As U.S. investors increasingly consider Chinese stocks, they rely on investment banks like Morgan Stanley to keep troubled Chinese companies from reaching the market…

Tianhe was the subject of significant public scrutiny over its financials. In September, a shadowy group tied to speculators betting against Tianhe’s stock published allegations that the company had overstated its business in a Morgan Stanley-led public offering just a few months earlier.

An AP investigation corroborated many discrepancies. Tianhe said records cited by AP were outdated and disputed other findings. But the controversy drew public notice from its auditor, Deloitte Touche Tohmatsu Ltd., which Gillis said would have been expected to put extra emphasis on its next audit process.

“The auditors have had plenty of time to look into the allegations and dismiss them,” Gillis said. “In this case, everybody would have been paying attention.”

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