Accounting scandals can lead to crippling losses for the uninformed investor – from the Enron and Worldcom scandals to the more recent fraudulent activity of Kangde Xin and Kangmei in China. This article considers the ever-increasing influence of Chinese capital markets, company-level risk factors for financial misreporting, as well as how investors can use alternative data sources to detect early signs of malfeasance by China-listed companies.

CHINA IS ACTIVELY INVITING MORE FOREIGN INVESTMENT 

During the past decade, the main way for foreign investors to access Chinese companies was through ADRs listed in the US or through the Hong Kong stock exchange (H-shares). However, the majority of Chinese companies (more than 3,500) are listed on China’s onshore stock markets in Shanghai and Shenzhen, are traded in RMB, and have traditionally only been accessible to Chinese residents.

Over recent years, China has implemented reforms to open up its equity markets…