Caterpillar reveals fraud at Chinese unit

Leading machinery manufacturer Caterpillar Inc has announced it discovered accounting misconduct at a Chinese company it recently acquired, but analysts said Monday that this was not a common case among foreign mergers and acquisitions (M&A) in China, although it is a reminder of the need for a rigorous due diligence process.

Caterpillar "has uncovered deliberate, multi-year, coordinated accounting misconduct" at Zhengzhou Siwei Mechanical & Electrical Manufacturing Co, which is wholly owned by ERA Mining Machinery Limited (ERA), a company that was acquired by Caterpillar last June, the US-based machinery manufacturer said in a statement on its website Friday.

According to the company's investigation, several Siwei senior managers engaged in deliberate misconduct, beginning several years prior to Caterpillar's acquisition of ERA.

The company said it would result in a major hit to its 2012 fourth quarter results, with a non-cash goodwill impairment charge of approximately $580 million, or $0.87 per share.

"This is not a typical or common case among US companies' M&A deals in China, as the US firms are always experienced and cautious," Ji Li, an analyst at Beijing-based consultancy Zero2IPO, told the Global Times Monday.

Caterpillar said it had advised the Hong Kong Securities and Futures Commission (SFC) of these issues, because ERA, which sells coal mining equipment in China through Siwei, used to be a publicly traded company on the Hong Kong Stock Exchange (HKSE). Caterpillar also said its investigation into the scandal is ongoing.

The SFC and HKSE both declined to comment on the issue when reached by the Global Times Monday.

Penny Wu, a member of the Global Government & Corporate Affairs department at Caterpillar, told the Global Times Monday that no additional information about the investigation could be released by press time.

However, the discovery of the misconduct at Siwei will not change Caterpillar's strategy for China, and "we continue to believe that the Siwei acquisition is well aligned with the strategy to expand our role as an equipment and solutions provider for the Chinese coal mining industry," Steve Wunning, Caterpillar group president with responsibility for Resource Industries, said in the statement.

Ji of Zero2IPO suggested that foreign companies should develop a comprehensive due diligence process before conducting M&A deals in China.

A former member of the Caterpillar board was quoted by Reuters as saying that the board was distracted at the time of the ERA acquisition by another larger transaction, and had paid relatively little attention to the deal.

"It came as a complete surprise to us. It was presented to us as a pretty straightforward transaction. It's a shame. It should have been investigated further," the former board member, who preferred to remain anonymous because of the sensitivity of the situation, was quoted as saying by Reuters.