September 16, 2011 / 12:42 PM / 6 years ago

Canada regulator probing China's Zungui Haixi

4 Min Read

(Reuters) - Chinese clothing and footwear company Zungui Haixi Corp said on Friday that Canada's top securities regulator has started to investigate it after the company's auditor flagged accounting concerns last month.

The company did not provide any details on the Ontario Securities Commission investigation. The OSC on Friday issued a 15-day trading halt on the shares, with immediate effect, pending a hearing on the matter.

Zungui is one of many China-focused companies with North American listings to come under pressure recently due to reports of accounting irregularities. The company's auditor, Ernst & Young, suspended an audit of the company in August, pending a probe into certain issues it had identified.

On Friday, Zungui said that the concerns raised by Ernst & Young relate in part to "inconsistencies in bank documents and the inability to obtain bank confirmations in a manner acceptable to the auditors."

Zungui, which sells athletic footwear, apparel and other accessories in China, said in August its audit committee would address the matter via an independent investigation.

The committee of independent directors that is investigating will also address any issues regarding earlier financial statements, the company said.

Zungui said the special committee, composed of board members Patrick Ryan, Margaret Cornish and Elliott Wahle, has been given full authority and broad powers, and that there is no deadline for it to complete its investigation.

The company said the committee has had a number of discussions with Chief Executive Yanda Cai and other insiders, in the past four weeks, seeking their cooperation and assistance.

"It is not clear whether such cooperation or the funding necessary for the special committee to undertake its investigation will be forthcoming, and the special committee is considering alternative courses of action," the company said.

Zungui, whose shares are listed on the TSX Venture Exchange, is one of a growing list of Chinese companies to be tarnished by accounting woes and other irregularities.

China's Sino-Forest, not long ago the largest forestry stock in Canada, has had the highest profile among these companies, which have become the objects of trade halts, de-listings, lawsuits and regulatory investigations.

Sino-Forest's shares have fallen more than 75 percent since early June, when the company was accused by short-seller Carson Block of fraudulently exaggerating the size of its forestry assets. In August, the OSC halted the company's stock and said its initial investigations had caused it some concerns.

Zungui was founded in 1992 and opened its first store nearly a decade later, in 2001. It listed its shares on Canada's small-cap TSX Venture Exchange in 2009 and owns more than 2,000 retail stores in China, according to the latest company presentation on its website.

The company's stock, which has fallen nearly 90 percent this year, has remained halted since August 23, a day after it disclosed that E&Y had suspended its audit. (Reporting by Euan Rocha, editing by Gerald E. McCormick and Peter Galloway)

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