Editor’s Note: This article was updated to give accurate attribution to the report titled “Marcum In the Middle.”
I previously wrote about the confusing situation that Kaixin Auto Holdings (NASDAQ:KXIN) has gotten into with its recent announcements. Now there is another doozey of a press release which clouds KXIN stock even further.
The Chinese company’s board just appointed an auditor that is likely banned from auditing Chinese companies by the U.S. watchdog Public Company Accounting Oversight Board. On Dec. 11, Kaixin announced that its board appointed Marcum Bernstein and Pinchuk LLP as its auditor.
In my last article, I wrote that the binding term sheet that Kaixin signed gave a majority control in KXIN stock to an little-known company, Haitaoche. On Nov. 5, it signed a “binding” term sheet to buy, with no cash, a majority stake in the company via a reverse merger.
Moreover, it appears that Kaixin has no revenue or auto operations unless Haitaoche is bringing something of value to the table.
Now to appoint a banned accounting firm seems to only add more “shadiness” to the situation.
Hindenburg Research On Marcum
Hindenburg called Kandi’s operation a “brazen scheme” to “falsify revenue using fake sales to undisclosed affiliates.” Kandi was selling cars to itself and counting them as sales. This is something its auditor should have caught.
Kandi did get rid of that auditor. But they appointed Marcum, the same auditor that Kaixin is using. However, Hindenburg found the following about the firm:
“Kandi’s current auditor, Marcum, was just handed a three-year ban from auditing Chinese companies by the Public Company Accounting Oversight Board (PCAOB). Rather than firing the auditor, Kandi just reported its intention to renew the engagement.”
In fact, prior to this three-year ban, Hindenburg points out that Marcum had been sanctioned and fined by the PCOAB in September 2019. A year later, the same PCOAB fined and banned Marcum from auditing companies with significant operations in China for three years.
Here is the exact order from the PCOAB on Sept. 24, 2020, fining Marcum $250K and banning the firm along with its consent. “Marcum violated PCAOB rules and auditing standards” in relation to a client in 2013 and 2014.
Hindenburg points out that Marcum immediately signed with Kandi, a Chinese company. And now, a company called MarcumBP has signed up to audit Kaixin.
For investors in KXIN stock, it seems that both Kaixin and Marcum are blatantly ignoring this PCOAB ban.
The Fine Print
To be fair, the PCOAB order refers to Marcum LLP as the “Respondent”. It calls Marcum Bernstein & Pinchuk LLP (“MarcumBP”), a joint venture LLP, as an “Other Relevant Entity.” MarcumBP is the firm that Kaixin has appointed.
However, the order says that Marcum LLP supervised MarcumBP personnel, “who performed auditing procedures regarding the Issuer’s China-based operations and transactions.”
Moreover, blog The Dig recently ran a report titled “Marcum In the Middle” that delves into this Marcum LLP/MarcumBP Chinese ban. Written by John Cheffers of Watchdog Research, it implies that the ban may not affect MarcumBP.
However, from most investors’ standpoint, this appears to be a distinction without a difference. Marcum LLP supervises MarcumBP, according to the PCOAB order. Who knows, it may even be the same personnel.
What To Do With KXIN Stock
The maxim of “where there’s smoke, there usually is fire” probably applies here. The smoke of the flagrant violations that Marcum personnel made dealing with Chinese audits as shown by the PCOAB should bring caution.
And as my previous report on KXIN showed, there are plenty of other basic issues with the company. In fact, it is not even clear at this point if the company has any revenue or earnings to speak of.
Buyer beware with KXIN stock. Most investors should stay away from it at least until things are clearer.
On the date of publication, Mark R. Hake did not hold a long or short position (either directly or indirectly) in any stock mentioned in this article.