tianhe: open letter to auditor
TRANSCRIPT
13 October 2014
BY EMAIL
Deloitte Touche Tohmatsu35/F One Pacific Place88 QueenswayHong Kong Fax: 852 2541 1911
Joseph LoDeloitte China [email protected]
Chris LuDeloitte China [email protected]
Kester YuenManaging Partner of Southern [email protected]
RE: OPEN LETTER TO DELOITTE TOUCHE TOHMATSU REGARDING TIANHE CHEMICALS GROUP LTD.
Dear Deloitte Touche Tohmatsu,
As you are aware, we have published several reports on our website detailing extensive evidence that supportsour view that Tianhe Chemicals Group Ltd (1619.HK) has engaged in fraud in connection with its IPO by grosslymisrepresenting the size and scope of its business and making other misrepresentations and false statements tothe market.1
We are writing this open letter to you, Deloitte Touche Tohmatsu, the reporting accountants for Tianhe’s IPO, orits affiliate, Deloitte Touche Tohmatsu Certified Public Accountants LLP, in order to underscore what we believeis evidence that Tianhe continues to make false representations to the market regarding its business includingregarding its taxes. We believe Tianhe is making false representations and providing falsified documents to you,its auditors, as part of its efforts to obtain your sign off on its accounts, a sign off that we believe should beproperly withheld, based upon all of the evidence.
In this letter, we underscore some of the previous evidence, as well as some new evidence that showsconclusively that Tianhe has lied about the taxes it has paid, and that the tax confirmations that it haspresented to you are either the result of bribes or have been fabricated.
1 http://www.anonanalytics.com/2014/09/tianhe-chemicals.html
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In response to our analysis and conclusions contained in our reports, Tianhe's Management team has releasedseveral clarification announcements via the Hong Kong Stock Exchange. We believe that in making theseclarification announcements, Tianhe has made statements that are contradictory to previous representations,as well as to the Deloitte-audited SAIC filings and financial statements, and that Tianhe has now backed itselfinto a corner and cannot keep up with all the lies it is telling.
Let us explain:
In its 8 October clarification announcement, Tianhe claimed to have obtained tax confirmations from LiaoningYi County State Tax Bureau and Fuxin City Haizhou District State Tax Bureau confirming that Tianhe paid all itstaxes (VAT + Income taxes paid) consistent with its IPO prospectus.
In making its claim, Tianhe presented the following tax breakdown by its only two operating subsidiaries:
Source: http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf pg. 8.
Based on this tax breakdown, it would appear that on the one hand Fuxin Hengtong is barely profitable(consistent with our findings and prior assertions) while on the other hand Jinzhou DPF-TH is incrediblyprofitable (inconsistent with our findings).
Accordingly, it appears to us that Tianhe was only able to fabricate/bribe tax confirmations for Yi County (whereJinzhou DPF-TH is based) and not from Fuxin City (where Fuxin Hengtong is based).
However, there are three primary reasons to believe that the tax confirmation from Jinzhou DPF-TH is fake:
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First, and most important, we have conclusive evidence that the tax confirmation obtained for Jinzhou DPF-THis false because the numbers do not match the Deloitte-audited SAIC filings.
According to the tax confirmation presented by Tianhe, Jinzhou DPF-TH paid total taxes of RMB458 million in2011 and RMB781 million in 2012:
Source: http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf Attachment 5
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However, according to the Deloitte-audited consolidated and standalone cash flow statement, the amount oftotal taxes paid was far less:
There is no ambiguity that the line item '支付的各项税费 ' which means 'all taxes paid' includes VAT, incometaxes, and all local taxes.2
Therefore, according to Deloitte, Jinzhou DPF-TH paid total taxes of RMB212 million in 2011 and RMB390million in 2012. Yet Tianhe’s newly obtained “tax confirmation” claims that Jinzhou DPF-TH paid RMB458million in 2011 and RMB781 million in 2012.
This inconsistency is all the proof you need to see that Tianhe is lying again. The Deloitte-audited financialstatements including the above cash flow statement prove it conclusively.
(We suspect we already know how Tianhe will respond to this damning discrepancy, and we have preemptedour response in Appendix A.)
To be clear, by referring to the Deloitte-audited SAIC documents we are not conceding that they are accurate.In fact, we believe Deloitte has been duped into signing off on fake financial information as we explained in our2 September 2014 report.3 But rather, what we are saying is that Tianhe's management team is so incompetentat committing fraud, that their fake tax confirmation is not even consistent with their fake Deloitte-audited SAICfilings.
2 http://www.chinaacc.com/new/635_649_/2009_8_12_le0075121890020.shtml
3 http://www.anonanalytics.com/2014/09/tianhe-chemicals.html
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Second, we note that the 'income tax' numbers for Jinzhou DPF-TH are all rounded numbers, but for FuxinHengtong they are all exact numbers (refer back to page 2). We find it highly unlikely that a professional taxauthority would issue an official tax confirmation using rounded numbers. This is a glaring red flag.
Third, the tax confirmations presented by Tianhe for its Jinzhou DPF-TH subsidiary do not match the tax reportspreviously presented and published by the Yi County government (where Jinzhou DPF-TH is based and paystaxes). These discrepancies are another glaring red flag.
For example, according to an official announcement by the Jinzhou government, the total tax budget of YiCounty in 2011 was RMB190 million, and by 12 December, 2011, the County had collected RMB170 million. YetTianhe claims that Jinzhou DPF-TH paid RMB458 million in 2011:
Source: http://www.jz.gov.cn/lnjz/2011/12/16/152230.html
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By 30 June 2012, Yi County State Tax Bureau had collected all tax income of RMB147 million, which was 52.72%of the whole year's planned tax collection:
Source: http://www.ln.gov.cn/zfxx/qsgd/yks_1/yx/201207/t20120720_916081.html
In other words, 2012's entire planned tax collection was around RMB300 million. Yet, Tianhe's clarificationannouncement claims that Jinzhou DPF-TH paid RMB781 million in taxes in 2012.4 That's about 2.6 times thetotal tax income of the entire County!
In Tianhe's clarification announcement, they claim they have addressed this discrepancy,5 but a careful read oftheir actual announcement shows that the Company completely ignores it.6
4 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf pg. 85 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1010/LTN20141010007.pdf pg. 16 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf
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As the auditor that signed off on these filings, we respectfully suggest that you consider your position in light ofthese obvious discrepancies. We request that you and your audit teams carefully study the issues we haveraised in this letter and in our previous reports and be prepared to make the hard decisions we believe youmust make on behalf of investors and the integrity of the global capital markets. If we are correct that Tianheis a fraud and Deloitte fails to inform investors and regulators of this risk, Deloitte may also be held liable incourts of law and in the court of global public opinion in the event of Deloitte’s failure.
You may contact us for additional information at this email: [email protected]
Sincerely,
Anonymous Analytics
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Appendix: Tianhe's Response to our First Point
We suspect that Tianhe will respond by claiming that VAT taxes are not shown on the income statement. This istrue, but they are clearly shown on the cash flow statement, and this is a basic accounting principle every entry-level accountant should know, including the auditors at Deloitte.
However, to drive home the point, we cite pages 44 and 45 of the textbook titled “Chief Tax Officer” publishedby Tsinghua University Press in 2005 and authored by He Zhidong (ISBN 7302098700, 9787302098706):
This text clearly explains that “all taxes” includes VAT taxes. A second source of information is here:http://www.chinaacc.com/new/635_649_/2009_8_12_le0075121890020.shtml
Furthermore, there are any number of listed Chinese companies that provide examples of this principle:
New Material (600636:SS) reports income statement taxes of RMB48 million in 2012 and RMB33 million in2013. However, its cash flow statement reports total taxes paid of RMB213 million in 2012 and RMB118 millionin 2013.
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Kweichow Moutai (600519:SS) reports income statement taxes of RMB4.7 billion in 2012 and RMB5.5 billion in2013. However, its cash flow statement reports total taxes paid of RMB10.2 billion in 2012 and RMB12.5 billionin 2013.
Lubei Chemical (600727:SS) reports income statement taxes of RMB21 million in 2012 and RMB9 million in2013. However, its cash flow statement reports total taxes paid of RMB76 million in 2012 and RMB53 million in2013.
As is plainly obvious from the above examples and textbook excerpts, all taxes, including income taxes, VATtaxes, and local taxes are represented in the cash flow statements.
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