Leading machinery manufacturer Caterpillar Inc has announced it discovered accounting misconduct at a Chinese company it recently acquired, but analysts said Monday that this was not a common case among foreign mergers and acquisitions (M&A) in China, although it is a reminder of the need for a rigorous due diligence process.
Caterpillar "has uncovered deliberate, multi-year, coordinated accounting misconduct" at Zhengzhou Siwei Mechanical & Electrical Manufacturing Co, which is wholly owned by ERA Mining Machinery Limited (ERA), a company that was acquired by Caterpillar last June, the US-based machinery manufacturer said in a statement on its website Friday.
According to the company's investigation, several Siwei senior managers engaged in deliberate misconduct, beginning several years prior to Caterpillar's acquisition of ERA.
The company said it would result in a major hit to its 2012 fourth quarter results, with a non-cash goodwill impairment charge of approximately $580 million, or $0.87 per share.
"This is not a typical or common case among US companies' M&A deals in China, as the US firms are always experienced and cautious," Ji Li, an analyst at Beijing-based consultancy Zero2IPO, told the Global Times Monday.
Caterpillar said it had advised the Hong Kong Securities and Futures Commission (SFC) of these issues, because ERA, which sells coal mining equipment in China through Siwei, used to be a publicly traded company on the Hong Kong Stock Exchange (HKSE). Caterpillar also said its investigation into the scandal is ongoing.
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