Since for a very long time a series of fraudulent engagement has been found to sweep over the various China based companies. Amidst which many of the accounting firms have found themselves swathed in the legal verification fights.
It was in the year 2011 that caterpillar and the ERA mining machinery came together on a collaborative platform and announced the complete owing of the issued shares of ERA. The basic objective of such a joint venture was looked upon with the protracted investment interest of caterpillar in china. Even as once stated by the caterpillar group President Steve Wunning who quoted that as a part of subsidiary in with Siewi the company intends to grow a profound reputation and responsibility with china. And also look upon to make the above partnership enable the organisation to expand the domain to outside countries also on a wider platform.
Embracement of caterpillar and ERA
Caterpillar being the largest giant of the world in construction and mining machinery. This time the firm was found to be seen to write off about 580 Million USD over the January acquisition of the ERA mining machinery and its senior consecutive subsidiary of Zhengzhou, Siwei mechanical and electrical equipment manufacturing company.
When the cozenage came into light the top accounting firm across the world i.e. Deloitte and Ernst and Young came forward in order to ascertain the due diligence for the later allegations to have performed major accounting irregularities of about 886 million USD over the acquisition of ERA by Caterpillar Inc. Caterpillar has been found to just simply blindfold itself over the acquisition.
Caterpillar claimed that they have figured out a massive accounting fraudulent by ERA, which will come along with the provocation of chargers of goodwill impairment of an amount of 580 million USD which is notably more than half of the amount value of the acquisition. Caterpillar insisted saying that the ERA was involved in misleading the acquisition intentionally by making in look more profitable contrary, to which it was really actually not. It was because of this huge up thrust from these major companies that even the financial firm had to witness the challenge of traditional way of diligence accounting in which the books of target company and even the underlying assets and business model was also being monitored.
Backdrop of the two collaborating firms
ERA is the producers of the hydraulic roof support manufactures who are found to have their deliberate hold production in Chinese coal mines. It was in the year 2010 that a profit of round about 135 million USD was reported while in the concurrent year of 2011, a loss of about 14 million USD was filed for the company in the Hong Kong stock exchange.
Caterpillar had acquired ERA in order to make the biggest producer of coal, China to gain hold on the underground coal mining and to accelerate the factory acquiring capabilities, this whole ideology which accounted for the worth of about 6.15 billion USD .Having found the involvement in the ERA in the illicit acts finally caterpillar closed the ERA mining machinery and it applicable subsidiary Siwei at a worth of amount 653.4 million USD.
When in January the company came forth with the write off because of the imbalance in the finances of the firm, it was being ascertained that some senior managers of the Siwei have been deliberately involved in the act of good will impairment several years prior to the acquisition was held.
Caterpillar as a part of this acquisition had merged along with ERA mining machinery limited which previously had gone public by Siwei, a Zhengzhou based company so as to comply itself in the listing of the stock exchange .It is nothing a kind of reverse merger which was taken by Siwei with the ERA which was indeed effectively trading the growth enterprise market.
The critic statements
Various critic shave time and again are found to cite that the director of caterpillar have failed to gain grounds on the pre-acquisition parameters which could have been of utmost sense of pre requisites before the acquisition decision was being taken.It was conjoined under consideration and was evident that the company was simply overvalued on various accountable and financial domains
Many a time the multinational enterprise caterpillar stated that there were already some existing contradictions witnessed in the inventory set and the financial accounts of Siwei itself. There was a certainly deliberate fraud which was being conducted by the official of the firm itself in terms of cost and revenue. Finally being upset with this current scenario, caterpillar took the impairment loos of value which was certainly more than 80 % the actual value of the acquisition
The lesson from debacle
This major downfall from the acquisition has certainly been able to teach caterpillar a standard lesson to be taken away with in the nearest future. Had enough due diligence being reported on Siwei before the acquisition the scenario would have been completely different because it was a clear example of backdoor listing where the company has got itself traded with audited financial reports.