By Daniel A. France, CPA, GEO Investing Contributor

I get the impression that the auditors, the SEC and most investors have been caught flatfooted by the controversy currently swirling around the credibility of the financial statements filed with the SEC by small cap China-hybrids.  GEO Investing among others have taken it on themselves to obtain the SAIC and SAT reports filed locally by China-hybrids and comparing them to the financial statements filed with the SEC.  Unfortunately for China space investors the differences between the business operations reported locally to Chinese authorities and what has been reported to the SEC are in some cases staggering.

Fortunately this reporting controversy can easily be addressed by taking the following steps:

1. The Securities & Exchange Commission:  The SEC should require all China based registrants to submit as exhibits to the annual Form 10-K copies of the company’s annual SAIC filings in China together with a reconciliation of the financial statements submitted to the SAIC and SEC.

2. Two Audits, One Auditor:  Apparently it is common practice for China-hybrids to use one auditor for the SEC and another for local SAIC and SAT filings.  Based on the differences noted between SAIC and SEC filings those auditors must be like ships passing in the night looking at completely different sets of books.  If the same auditor did the work for all reports that would not be possible.

3. Activist Investors:  I am not naïve enough to think either the SEC or the management teams of the China-hybrids are easily or quickly going to change what they have been doing.  For the SEC’s part why admit such a glaring hole in their oversight and enforcement role as regulators.  For company management teams why open up a can a worms by consolidating auditing efforts or changing auditors.  It could very well be that they need their existing auditors for their story to hold together.  If there is something to hide a new auditor would blow the story apart.  So what can investors do?  I recommend you contact the companies you have invested in directly and ask if they have prepared a reconciliation of their SAIC and SEC reports.  Ask the same question of the company’s investor relations firm and corporate counsel.  Contact the auditor and ask if their auditing procedures include reconciling the SAIC and SAT reports with the SEC filings.  Don’t be surprised if you get no response from the parties you contact but believe me, they will know you are out there and concerned about this issue.  In time change will come and all investors will benefit once trust and confidence is restored to the financial reports submitted by China-hybrids.