It's been an absolute nightmare for me since my last post given the events of Greenstar. I didn't want to talk about it until there was sufficient facts. On April 28th Greenstar announced they would not be releasing their year end financials on time because the auditors were not able to complete their audit procedures. It was later revealed that the reason for the delay was corporate governance and admin deficiencies due to an internal dispute between certain members of the company's finance department led by the controller and the CEO. They basically want more money and the controller has took possession of the finance chop a.k.a seal to gain leverage. Without the finance chop the company is unable to access any banking and tax information which is necessary to complete the audit. The CEO is in possession of the more important legal representative chop. He has the ability to replace the finance chop and the company is in the process of doing so. Once that's done, the company could move forward with completing the audit.
Here's my take on this fiasco. First and most important of all, the delay in the audit was never an issue of fraud. I'm quite sure this is what everyone initially feared when this mess first started. This situation clearly exposes the vulnerability of a Chinese company being hijacked by its employees and that is a negative that can have a permanent impact even if the company survives this, however, the company did say that they are taking steps to ensure such a thing is avoided in the future. Well, they better because this situation just gave people another good reason to be skeptical of Chinese companies. This hijacking however is not nearly as serious as what happened with a couple of other Chinese companies like APX whereby it was the founder/CEO who had a falling out with their board of directors in Canada. That would be a disaster as the founder/CEO has the vital chops in his possession and owns a large percentage of shares and it's very difficult for a board to have the CEO and chops replaced. The situation with Greenstar seems fixable given that the CEO is being cooperative with the board and has the ability to replace the finance chop. The rouge controller doesn't have absolute power over the CEO nor does he own shares. The fact that the company expects to have the audit completed by the end of June is also reassuring and suggests the wheels are in motion. As serious as a trade halt by the OSC is, it was standard procedure given that the company was late in both the filing of the year end and q1 financials which were due end of May. They didn't halt because they suspected any wrong doing aside from the absence of the financials.
A key question I'm looking to get answered is why did the finance department want to get paid more? If I had to speculate what the answer is it would be this. I believe Greenstar may have been subject to higher auditing standards this year as per CPAB (the auditor's regulator). CPAB has demanded that auditors use higher verification standards for emerging market companies given Sino Forrest and some other scams in recent years. So if Greenstar was subject to higher auditing standards this year and were caught flat footed, there would suddenly be a lot more work required by the finance/accounting department and more importance attributed to them as well. This would give them the justification or leverage they needed to demand more pay at such a critical time. Again, all of the above is speculation on my part and it's best to keep such at a minimum.
The bottom line for me is that this is a serious situation but it's not as dire as many people on the message boards make is seem. There is the possibility of more negative surprises to come which would lead to a permanent downward spiral but as things stand right now, the issues seem fixable. If the company does survive this ordeal, they will have to deal with the fact that mgmt's competency has suffered huge damage which would take time...a lot of time, to recover from. To restore confidence, mgmt will have to take very strong remedial actions with respect to corporate governance to ensure such a crisis doesn't happen again and do shareholder friendly things like a buyback and/or dividend hike. Such actions would make Greenstar emerge stronger from this crisis which is the potential silver lining to this, but no sense in looking too far ahead at this point. It's do or die for Greenstar and for me these next few weeks.
