August 23, 2011 / 2:08 PM / 7 years ago

UPDATE 1-Pressure on Zungui mounts after auditor's red flag

* Sole analyst drops rating on Zungui’s stock

* Regulator halts trading in Zungui shares

* Law firms open investigations into Zungui’s disclosures (Adds analyst comment, background)

By Euan Rocha

TORONTO, Aug 23 (Reuters) - Zungui Haixi ZUN.V came under increasing pressure on Tuesday after the sole analyst covering the Chinese footwear and clothing company dropped his rating on the stock and two law firms launched investigations into its books.

Zungui is the latest in a string of Chinese companies listed in North America to come under scrutiny for possible accounting irregularities.

The company’s shares, listed on the TSX Venture Exchange, fell more than 75 percent on Monday, after it revealed that Ernst & Young suspended its audit of the company pending an investigation into undisclosed issues the accounting firm had identified. [ID:nL4E7JM2B1]

The company has declined to provide more details about the issues raised by the auditor. It has said its audit committee intends to address the issues via an independent investigation.

“In light of the audit suspension and few details provided, we are putting our recommendation and target price under review,” said Mackie Research analyst Rob Cavallo in a note to clients.

The Investment Industry Regulatory Organization of Canada issued an advisory on Tuesday saying that it was halting trading in Zungui shares pending a clarification of company affairs.

Ontario-based law firms Siskinds LLP and Sutts, Strosberg LLP, which specialize in class action lawsuits, issued statements informing investors that they have begun to investigate the company.

“We are unsure whether there were material issues with internal accounting procedures or whether the standard of care for Chinese companies listed in Canada has increased,” wrote Cavallo.

Zungui is just one of the Sino-Canadian companies to run into trouble lately. China’s Sino-Forest TRE.TO, not long ago the largest forestry stock in Canada, is perhaps the most prominent of these companies, which have been subject to trading halts, lawsuits and regulatory probes. [ID:nN1E76D0RB]

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. [ID:nN1E76502A]

Cavallo cautioned that if the standard of care for these Sino-Canadian entities has indeed increased, additional audit suspensions are likely.

Shares of Zungui, which closed at an all-time low of 34 Canadian cents on Monday, remained halted at 1040 ET on Tuesday. (Reporting by Euan Rocha; Editing by Frank McGurty)

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