US machinery manufacturer Caterpillar still owes the sellers of Chinese company ERA Mining Machinery US$150m in loan notes after it was forced to make a US$580m write-down on the value of the company.
According to filings, on 30 April Caterpillar will have to pay the first tranche of loan notes, which will be at least US$150m and could increase to a maximum total of US$232m if ERA’s profits meet specified levels.
Last month the construction giant revealed it had uncovered “deliberate, multi-year, coordinated accounting misconduct” at ERA’s Zhengzhou Siwei subsidiary and would take a goodwill impairment charge of US$580m from the US$886m it paid for ERA.
Caterpillar added that an internal investigation had uncovered improper accounting of inventories, revenue recognition and cost allocation at Siwei, designed to overstate the profitability of the business in the years before it bought it.
ERA’s controlling shareholder was a vehicle co-owned by US entrepreneur Emory Williams, who said he was “shocked and dismayed” at the write-down, and businessman James Thompson III.
Both men sold 40% of their shares to Caterpillar in cash, and exchanged the remaining 60% for the loan notes. Williams said in a statement that he and his business partner “co-operated very closely with the Caterpillar team during their extensive due diligence prior to the acquisition”.
Deloitte and Ernst & Young are believed to have conducted due diligence for the transaction.
Last week Caterpillar chief executive Doug Oberhelman said the company was “deliberately misled” by the accounting misconduct at Siwei and that they were “considering all options” to recover losses and will “hold those responsible accountable for their wrongdoing.”
AccountingWEB.com said the write-down underscored “the importance of performing extensive due diligence before investing in the world's second largest economy”.
Simon Bevan, head of fraud at BDO, added a warning about the wider issue for large corporates and the knock-on effects of it being brought to the attention of the regulator in their home market.
“For example, if you are a US entity and are involved in fraud or corruption in China you will have the Securities & Exchange Commission asking whether your business is subject to integrity issues in other jurisdictions,” Bevan said.
In a related mining story, last month the chief executive of Rio Tinto stepped down by “mutual agreement with the board” after the company announced a US$14bn write-down.
The impairments outlined in the company’s statement to the market revealed that infrastructure constraints, combined with a downward revision to estimates of recoverable coking coal volumes on the RTCM tenements, led to a reassessment of the overall scale and ramp up schedule of RTCM, and consequently to the impairment.
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another failed due diligence?
cant these big firms do their jobs properly , its not just in China , ash HP about Autonomy