At first glance, Chinese stocks that trade on U.S. exchanges are dirt cheap. But the truth is you need to take a long hard look before you leap.
Behind the curtain you could find that they've cooked the books.
In fact, last week, the U.S. Securities and Exchange Commission accused the Chinese affiliates of "the Big Four" auditing companies of breaking securities laws after they refused to produce the "work papers" related to accounting fraud investigations at nine Chinese companies.
Naturally, they all cried foul.
According to auditors from Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers producing this paperwork is illegal under Chinese law-hence the stalemate.
It's a dispute that highlights the cultural clash between the Chinese need for secrecy and U.S. anti-fraud efforts that demand more transparency.
The bottom line in this case, though, is quite a bit more simple: If there's no way to ensure the accounting practices at Chinese companies are candid, investors should completely avoid them.
Whether it's here or abroad, you should never invest in anything where you can't trust the numbers.
Chinese small caps are just the latest example now that this brewing accounting scandal seems to be coming to a head. The SEC has filed fraud allegations against 40 individuals or companies.