On September 29th Universal Travel Group held a conference call to discuss their business model. They took no questions on the phone but instead answered a bunch of pre-prepared questions which included some but by no means all of the questions I asked on this blog.
In the call they specifically indicated that they had no problems with their auditor – but noted that their auditor had only been appointed recently and had not yet affirmed their accounts.
A week later, all that had changed. To quote from their press release:
On September 29, 2010, we received a letter dated September 28, 2010 from our current independent registered public accounting firm, Goldman Kurland Mohidin, LLP (“GKM”), informing us that they had resigned as our independent registered public accounting firm effective with the commencement of business on September 27, 2010. No reason was given as to the cause for their resignation. GKM was only recently appointed as our independent registered public accounting firm on September 1, 2010, and had not yet commenced providing any accounting services to us. Accordingly, GKM had not provided any opinions, qualification or modification to our financial statements for each of the past two fiscal years nor do we have any disagreements with GKM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of GKM, would have caused it to make reference to the subject matter of such disagreements in its report on our financial statements for such periods.
And later in the same release:
Our Audit Committee of our Board of Directors approved the appointment of Windes & McClaughry Accountancy Corporation ("Windes") as our new independent registered public accounting firm effective as of September 30, 2010 and Windes has agreed to act as our new independent registered public accounting firm, subject to the Company clearing Windes’ client acceptance procedures.
Deriving a timeline is difficult here. If the company received the letter on the 29th was that before or after the conference call? If it were before the conference call (or if the company had any indication that the auditor was about to resign) then the statements made on the conference call were actively misleading. The call was held at 9am in New York on the 29th of September which is 9pm in Shenzen (where the company has its head office). It would be deeply problematic if the letter were received in business hours on the 29th at head office.
Also problematic is that they took a full week of trading days to report this to the SEC. I am not a US securities lawyer – so I do not know what the time-frame under which a company is required to report the resignation of an auditor – however – given what was said in the conference call the auditor resignation was market-sensitive – I think the default reporting requirement is rapid. (If someone is familiar with the legal requirements can they please detail in the comments.)
But this is not the first problem that Universal Travel has had with its auditors. The accounting industry publication Going Concern surprised me by going through all their filings for audit changes. I quote:
First we went back to the 10-K filed on March 31, 2008 and discovered that on June 23, 2006, the company dismissed Moore & Associates, Chartered:
On June 23, 2006, we dismissed the firm of Moore & Associates, Chartered (“Former Auditor”), which had served as our independent auditor until that date. The Former Auditor was our auditor prior to the acquisition of control of our Company by Xiao Jun.
On June 23, 2006, we retained Morgenstern, Svoboda & Baer, CPA’s, P.C. to serve as our principal independent accountant.
This seemed to be a pretty good call on UTA’s part since it turned out that Moore & Associates was issuing bogus audit reports. No cause for concern at this point.
The relationship with Morgenstern, Svoboda & Baer appeared to be going on swimmingly but ultimately, for reasons unbeknownst to all, it didn’t work out. MS&B resigned on June 30, 2009 to make way for Acqavella, Chiarelli, Shuster, Berkower & Co., LLP:
On June 30, 2009, our prior independent registered public accounting firm, Morgenstern, Svoboda & Baer CPA (“Morgenstern”) resigned and on the same day, we appointed Acqavella, Chiarelli, Shuster, Berkower & Co., LLP (“ACSB”) as our new independent registered public accounting firm.
Similar to their predecessors, ACSB & Co. was humming along just fine, getting ratified in the recent preliminary proxy statement filing until they were up and fired on September 1st…
End quote. Going Concern continues through a total of five auditors and a smaller handful of CFOs and note that this run compares unfavorably to Overstock. I had no hand in this article and I encourage you to read the whole thing as a beautiful example of accounting due diligence.
But there are questions beyond audit. The conference call downplayed the importance of the websites indicating that about 80 percent of the business came through a traditional (and telephone based) travel agency. It also dismissed my staff-salary concerns by indicating that most the staff were taken on late in 2009 to staff their new 300 person phone center.
This left me puzzled. Somehow this company suddenly had enough extra business to staff a 300 person phone center – but the company had effectively zero marketing expense in 2009. How did potential customers suddenly know the phone number? How is it that anyone can open a phone center that large and without advertising get enough people to ring? There must be some really special marketing tricks here… I just wish the company would explain what they were…
Alas – they do not answer questions I send to them by email so I encourage speculation (especially informed speculation) in the comments. I thank my readers for that.
PS. This blog is having an effect. The 2007-dated “Easter eggs” on the www.cba-hotel.com site are being removed. For instance they have removed the link allowing you to purchase tickets to the 2007 Sinopec Formula 1 Grand Prix. They also removed (my as yet unreported) link to their “latest” air-flights mileage plan (a plan that was abolished when Lufthansa purchased Swiss Air in 2007).