Harbin Electric (NASDAQ:HRBN)

As of December 31, 2010, management has made a comprehensive review, evaluation and assessment of the effectiveness of the Company's internal control over financial reporting. In making its assessment of the effectiveness of the Company’s internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on this review, evaluation, and assessment, our principal executive officers have concluded that, as a result of material weaknesses identified at our newly acquired subsidiary Xi’an Tech Full Simo Co., Ltd., as of December 31, 2010, our internal controls over financial reporting were not effective. Our assessment of the effectiveness of the Company’s internal control over financial reporting covered seven areas including corporate function, four major subsidiaries and manufacturing operations which are Harbin Tech Full Electric Co., Ltd. (“Harbin”), Shanghai Tech Full Electric Co., Ltd. (“Shanghai”), Weihai Tech Full Simo Motor Co., Ltd. (“Weihai”), and Xi’an Tech Full Simo Motor Co., Ltd. (“Xi’an Simo”) and two small subsidiaries, which are Advanced Electric Motors, Inc, and Advanced Automation Group, LLC. Through our evaluation process, management concluded that, as of December 31, 2010, we generally maintained effective controls over financial reporting in six of the seven areas we assessed, however, management identified material weaknesses attributable to Xi’an Simo, a former State-Owned-Enterprise (“SOE”) the Company acquired in October 2009, which rendered our internal control over financial reporting ineffective on the consolidated level. Xi’an Simo is a former SOE with more than 30 years of operating history and more than twenty subsidiaries, the majority of which are small sales offices, across China. When the Company acquired Xi’an Simo in October 2009, management recognized some control weaknesses inherent in a typical SOE and understood that it would be a challenging and time consuming process to integrate a former SOE into compliance within the Company in its internal controls over financial reporting. Since the beginning of 2010, management has engaged a leading independent accounting advisory firm to assist us in evaluating, developing and validating internal control systems over financial reporting at Xi’an Simo. With the assistance of a professional team from the advisory firm, management developed and implemented processes and procedures to enhance and improve the internal control systems at Xi’an Simo. Our work and efforts were given priority to address major issues in major operations at Xi’an Simo, and time was not sufficient to work through all smaller subsidiaries including sales offices.

Despite significant improvements achieved in its internal control systems, due to its very short history of being part of a U.S. public company, large size, many subsidiaries located away from its headquarters, and limited time to integrate it with the Company, material weaknesses in its internal control over financial reporting were not completely eliminated at Xi’an Simo as of December 31, 2010. The material weaknesses identified by the management at Xi’an Simo are described below.

 
 
1- Control activities related to bank reconciliation – At Xi’an Simo, the bank reconciliation for various bank accounts were not prepared accurately which impacted the valuation and existence of the cash in bank as of December 31, 2010.

 
 
2- Control activities related to the reconciliation and classification of notes receivable – At Xi’an Simo, notes receivables endorsed as payment to third parties were not properly recorded, resulting in a discrepancy between the physical notes receivables on hand and the general ledger. Additionally, the improper classifications of transactions has impacted the completeness, and valuation of accounts payable / advance to suppliers and notes receivable balances at the year ended December 31, 2010 at Xi’an Simo

3- Control activities related to the calculation of provision of income tax – At Xi’an Simo, due to ambiguities in PRC tax rules, the temporary and permanent differences in tax amounts were not properly identified.

 
 
4- Control activities related to valuation of inventory allowance – At Xi’an Simo, slow moving inventories that had not been used over a year were not properly evaluated for inventory allowance.

 
 
5- Control activities related to inventory recording –– At Xi’an Simo, inventory movement between manufacturing facilities and sales entities were not timely and properly recorded on the general ledger.

GeoTeam Corroborates AlfredLittle.com Findings on Harbin and Deer

Through its own set of recordings, GeoInvesting ("The GeoTeam" or "GEO") has confirmed details regarding the claims made by AlfredLittle.com that Harbin Electric (NASDAQ: HRBN) and Deer Consumer Products (NASDAQ: DEER) have likely misappropriated a combined approximately $44.0 million by exaggerating the price paid for land use rights. The GeoTeam is very familiar with issues surrounding land use rights. We have seen similar cases of misrepresentation of land use rights with stories we broke such as China Redstone (CGPI) and Lotus Pharmaceuticals (LTUS). CGPI denied our claims of land use right misrepresentations despite recordings with government officials and the publication of a PRC newspaper article, after our research report, which agreed with our findings. Our findings were even supported by quotes from employees of CGPI! The stock now trades near $0.70 per share. The key lesson to be learned is that ChinaHybrid paper and words cannot be trusted at face value.

HRBN Summary of Findings

1. We confirmed that Ms. Wang actually does exist and works at Xi’an Lintong Tourism & Business Development Zone Management.
2. Ms. Wang confirmed a much lower land price than indicated by HRBN.

DEER Summary of Findings

1. Contrary to DEER’s claims, we confirmed that Mr. Zhuang and Mr. Fei Li actually do exist and work at Wuhu Economic & Technological Development Area.
2. They both confirmed much lower land prices than indicated by DEER.

Please see the rest of the report here,(http://geoinvesting.com/companies/duediligence/hrbn_report2.aspx), as well as the supporting recordings and transcripts.

Sincerely,

The GeoTeam

Below is a copy of the report Alfredlittle.com originally published yesterday on HRBN and DEER regarding Chinese Government Official confirmations of land fraud.

The GeoTeam has learned that Alfredlittle.com is probing into the issues regarding Harbin Electric (NASDAQ:HRBN) and Deer Consumer Products (NASDAQ:DEER); Issues revolve around the misappropriation of a combined $44 million. Through the use of recordings, emails and face to face meetings with PRC government officials, Alfredlittle.com provides evidence that supports allegations that massive fraud issues exist regarding the purchase of land use rights by both HRBN and DEER. While these allegations seem very damming at face value, the GeoTeam is actively trying to confirm the findings.  Please stay tuned for more details as the story develops.

HRBN findings:

1.       Alfredlittle.com HRBN findings purport that the company made a $23 million prepayment to government for land use rights on June 30th 2011.

2.       Frazer Frost has not responded to allegations.  Frazer Frost is notorious for auditing companies accused of fraud.

3.       HRBN has exaggerated the true cost of the land use rights by at least 92%.

4.       Article shows evidence of some corruption that takes place at government level dealing with land use rights.

5.       Evidence sent to SEC and NASDAQ.

DEER findings:

1.       Alfredlittle.com DEER findings purport that the company paid $37 million to purchase land use rights but failed to disclose receipt of $21 million in rebates.

2.       Management has repeatedly refused to address findings.

3.       Still no construction activity at DEER’s 660 Mu project a year after the first parcel was purchased.  Local government is angered by this issue.

4.       Article shows evidence of some corruption that takes place at government level dealing with land use rights.

5.       Evidence sent to SEC and NASDAQ.

Disclosure: Short HRBN and DEER

Alert originally available to Premium Members only!!  You too can be the first to know.

We and our independent registered public accounting firm, in connection with management's assessment of and the audit of our internal control over financial reporting as of December 31, 2010, identified five material weaknesses in our internal control over financial reporting. The material weakness identified were attributable to Xi’an Simo, a former State-Owned-Enterprise ("SOE") the Company acquired in October 2009, which rendered our internal control over financial reporting ineffective on the consolidated level.  Despite significant improvements achieved in its internal control systems, due to its very short history of being part of a U.S. public company, large size, many subsidiaries located away from its headquarters, and limited time to integrate it with the Company, material weaknesses in its internal control over financial reporting were not completely eliminated at Xi’an Simo as of December 31, 2010. The material weaknesses identified by the management at Xi’an Simo are described below.

   · Control activities related to bank reconciliation – At Xi’an Simo, the bank reconciliation for various bank accounts were not prepared accurately which impacted the valuation and existence of the cash in bank as of December 31, 2010. 

   · Control activities related to the reconciliation and classification of notes receivable – At Xi’an Simo, notes receivables endorsed as payment to third parties were not properly recorded, resulting in a discrepancy between the physical notes receivables on hand and the general ledger. Additionally, the improper classifications of transactions has impacted the completeness, and valuation of accounts payable / advance to suppliers and notes receivable balances at the year ended December 31, 2010 at Xi’an Simo. 

   · Control activities related to the calculation of provision of income tax – At Xi’an Simo, due to ambiguities in the PRC tax rules, the temporary and permanent differences in tax amounts were not properly identified. 

   · Control activities related to valuation of inventory allowance – At Xi’an Simo, slow moving inventories that had not been used over a year were not properly evaluated for inventory allowance. 

   · Control activities related to inventory recording –– At Xi’an Simo, inventory movement between manufacturing facilities and sales entities were not timely and properly recorded on the general ledger.