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"On March 29th China MediaExpress Holdings (NASDAQ: CCME) filed an 8-K (here) that included a detailed list of reasons why its auditor, Deloitte, resigned.

Deloitte’s concerns included:

* Authenticity of bank statements
* Suspicious circumstances surrounding bank balance confirmation procedures
* Validity of certain advertising agents/customers and bus operators
* Possible undisclosed bank accounts and bank loans
* Subsidiaries shown in SAIC filings are inconsistent with management’s representations
* Validity of a sampling of tax invoices from certain large transactions
* Subsidiary tax payments to the SAT could not be verified
* Cash salaries to certain employee bank accounts could not be verified
* Production process of advertising programs could not be verified
* Potential double counting of a certain number of buses

Most of Deloitte’s Concerns Share a Common Thread: “Paper”

Bank statements, confirmation letters and contracts of all types, government filings, ownership certificates and tax invoices are all paper documents easily forged by dishonest management with the help of a few dishonest bank and government officials. The consequences of getting “caught” are nil, since Chinese law offers no protections for foreign investors in legally unenforceable variable interest entity (VIE) management contracts used by companies such as CCME and CBEH. Dishonest management can keep turning paper into gold until investors decide the “paper” evidence of profits and growth are contradicted by the reality of the business."

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