Fraud in Sino Forest

REVENUE & ASSET RECOGNITION AND RELATED PARTY DISCLOSURE PRACTICES BY SINO-FOREST CORPORATION

REVENUE & ASSET RECOGNITION AND RELATED PARTY DISCLOSURE PRACTICES BY SINO-FOREST CORPORATION

FINANCIAL ACCOUNTING INDIVIDUAL ASSIGNMENT

Marcus Chong Guan Jie

IE SMU MBA 2014O1

FINANCIAL ACCOUNTING INDIVIDUAL ASSIGNMENT

Marcus Chong Guan Jie

IE SMU MBA 2014O1

BACKGROUND:

Sino-Forest was an Ontario Stock Exchange listed company primarily in the purchasing and selling of Standing Timber in the People’s Republic of China.

From 2007 to 2010, Standing Timber was Sino-Forest’s main source of revenue. ($3.56 billion or 75% of total revenues) 9

Standing Timber was purchased, held and sold by Sino-Forest in two distinct legal structures or models: the “BVI Model” and the “WFOE Model”.

In the BVI Model, Standing Timber trading activity in China was conducted using wholly owned subsidiaries incorporated in the British Virgin Islands (BVI). These subsidiaries were used to first enter into Purchase Contracts with Chinese suppliers and then into Sales Contracts with customers known as “Authorized Intermediaries” in China. 9

In the WFOE Model, subsidiaries were incorporated in China through a structure known as Wholly Foreign Owned Enterprises to acquire, cultivate and sell the Standing Timber. These WFOEs also entered into Purchase Contracts and Sales Contracts with other parties within China.

Sino-Forest utilised a unique “off-book” payables/receivables offsetting arrangement whereby the BVI subsidiaries would not directly receive the proceeds on the sale of Standing Timber from the purchasing Authorized Intermediaries. Instead, Sino-Forest will direct the purchasing Authorized Intermediaries to pay a new Supplier on Sino-Forest’s behalf to allow Sino-Forest to purchase additional Standing Timber. This meant that Sino-Forest did not make direct payments to Suppliers for Standing Timber purchases. 8

Almost all of the buying and...