Mon Jan 28, 2013 5:44am EST
By Clare Baldwin
HONG KONG Jan 28 (Reuters) - The former chairman of a Chinese mining equipment firm bought by Caterpillar Inc said on Monday he was dismayed by allegations of accounting misconduct at a subsidiary that prompted the U.S. firm to take a $580 million writedown.
Emory Williams Jr said Caterpillar had conducted extensive due diligence before its takeover of Hong Kong-listed ERA Mining Machinery Ltd last June, adding that he was seeking further details from the company, the world's largest maker of tractors and excavators.
"We were shocked and dismayed to learn, from press reports, about the very significant goodwill impairment that Caterpillar is taking in relation to the acquisition of ERA's subsidiary Siwei," Emory Williams Jr said in a statement.
Caterpillar said on Jan. 18 that it would write off most of the $654 million it paid for ERA after uncovering "deliberate, multi-year, coordinated accounting misconduct" at its subsidiary Zhengzhou Siwei.
"We cooperated very closely with the Caterpillar team during their extensive due diligence," Williams said, adding that he and John Lee -- the English name used by fellow ERA director Li Rubo -- had taken the company's fiduciary and reporting responsibilities very seriously prior to its acquisition.
A Caterpillar spokesman declined to comment.
Caterpillar is due to report earnings in the United States later on Monday, with the Siwei writedown expected to wipe out more than half its earnings for the fourth quarter of 2012.
Williams is a Beijing-based U.S. businessman. He is a former chairman of the American Chamber of Commerce in China and the son of a former Sears Bank and Trust Co. chairman and chief executive.
Li, his long-time business associate, is a graduate of the South Dakota School of Mines and a former Chinese government official.
Monday's statement was the first comment by any of ERA's former directors or major shareholders since Caterpillar's statement 10 days ago.
INVENTORY ISSUES
ERA had absorbed Siwei through a reverse takeover in 2010, a corporate manoeuvre that has become controversial in the United States following a series of accounting scandals involving small Chinese companies listed there.
Announcing the writedown, Caterpillar said an internal investigation had uncovered improper accounting of inventories, revenue recognition and cost allocation at Siwei, designed to overstate the profitability of the business in the years before it bought it.
Williams said the former ERA directors had contacted Caterpillar senior management last week to ask for further details.
"To date we have received no response and are now taking advice on how best to respond to the situation in a manner which is constructive for all parties involved," he said.
"We are absolutely committed to providing a comprehensive response to any information Caterpillar shares with us."
Caterpillar said it found discrepancies in November between the inventory on the books of Siwei, which makes hydraulic supports for coal mines, and its actual physical inventory, triggering the internal probe.
The company blamed "several senior managers" whose misconduct it said began some years before it acquired Siwei. Caterpillar did not identify the senior managers. It said it believed its due diligence process was "rigorous and robust".
Citigroup Inc and law firm Freshfields Bruckhaus Deringer LLP served as financial and legal advisers to Caterpillar on the transaction. Blackstone and DLA Piper acted as ERA's financial and legal advisers.
A source directly involved with the Caterpillar deal previously told Reuters that RSM Nelson Wheeler was ERA's auditor, while Deloitte and Ernst & Young acted on Caterpillar's side. None of the auditors has commented.
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