Caterpillar still investigating Chinese accounting discrepancy
Caterpillar Inc., the world’s largest maker of construction and mining equipment, said it’s still investigating the accounting discrepancy at a Chinese business that led to a $580 million writedown.
The company took an 87-cents-a-share writedown in the fourth quarter after finding a “deliberate, multi-year, coordinated accounting misconduct” at its Zhengzhou Siwei Mechanical & Electrical Manufacturing Co. unit, Caterpillar said today in its fourth-quarter earnings statement. Caterpillar has identified “improper revenue recognition practices.”
“We are not done,” the company said. “We are putting in more effort to finish our investigation as we consider all our options to recover our losses and hold those responsible accountable for their wrongdoing.”
The company said it first became concerned about issues at Siwei following a count of physical inventory following Caterpillar’s acquisition of the business. Siwei is part of ERA Mining Machinery Ltd., which Caterpillar bought in October for HK$6.15 billion ($793 million). It was Caterpillar’s largest Asian deal and among $10.3 billion of acquisitions announced by Doug Oberhelman since he became chief executive officer in 2010.
“We believe our process is rigorous and robust and includes Caterpillar personnel and outside accounting, legal and financial advisors,” Caterpillar said, referring to its due diligence process for mergers and acquisitions. “It is important to understand that Siwei was a publicly traded company with audited financial statements.”
Caterpillar said it doesn’t expect the problems at Siwei to have a “significant impact” on its 2013 revenue and profit.
Falling Sales
The incident is the latest setback for the Caterpillar in China, where machine sales have slowed amid excess manufacturing capacity.
China is the largest construction-equipment market and biggest miner of coal. Chinese excavator sales fell in December for the 20th consecutive month, according to China Construction Machinery Business Online. The country’s excavator manufacturing capacity has increased to almost 600,000 a year, compared with a worldwide market of about 300,000, London-based Off-Highway Research said last month.
The Siwei case isn’t unusual in a country whose accounting standards are described by Jefferies & Co. analyst Stephen Volkmann as “opaque.” Zoomlion Heavy Industry Science & Technology Co., a Chinese machinery manufacturer. is trying to allay investor concerns after Ming Pao Daily reported Jan. 8 it had an unsigned letter questioning the company’s sales.
Caterpillar announced the discovery of the Siwei issue and the planned writedown on Jan. 18. Caterpillar said at the time it removed senior managers at Siwei and put in place a new leadership team.