Muddy Waters Turns Up Heat on Auditor of Chinese Firm

Carson C. Block has already issued a blistering critique of NQ Mobile, a Chinese mobile security company. Now, he is going after NQ Mobile’s auditor.

Mr. Block, the head of the Muddy Waters research firm, has sent a letter to senior executives of PricewaterhouseCoopers, urging the accounting giant to take a closer look at the books of NQ Mobile, which Mr. Block contends are a “massive fraud.”

If the accounting firm is prevented from doing so, then it should consider resigning as NQ Mobile’s auditor, Mr. Block wrote. The letter, dated Jan. 13, has not been previously reported.

“Any PwC partner who believes the value of the PwC brand is worth preserving should take heed of the experience of other firms operating in China,” Mr. Block said in the letter. “Further unqualified opinions for NQ will likely end in embarrassment and litigation against the firm and its partners.”

A spokesman for PricewaterhouseCoopers declined to comment.

The letter â€" addressed to Dennis M. Nally, the chairman of PricewaterhouseCoopers International; Raymund Chao, the audit and assurance leader in Beijing; and Robert E. Moritz, the chairman and senior partner of the accounting firm â€" is the latest move in a months-long campaign by Mr. Block, a short-seller known for harsh reports purporting to uncover fraud at Chinese companies.

A previous target of his, a Chinese forestry company called Sino-Forest, filed for bankruptcy less than a year after Mr. Block called it a “multibillion-dollar Ponzi scheme.”

Mr. Block fired his initial salvo against NQ Mobile in October, saying that the majority of its China security revenue in 2012 was “fictitious.” The report, which also raised questions about NQ Mobile’s international revenue, sent the company’s stock price falling by half.

Last month, Muddy Waters offered to pay an auditing firm to review the results of an investigation being conducted by NQ Mobile’s independent board committee.

The Chinese company has denied Mr. Block’s accusations. And it still has some friends on Wall Street. Altimeter Capital Management, a hedge fund based in Boston, said in a regulatory filing on Tuesday that it had increased its stake in NQ Mobile to about 17.3 percent.

Muddy Waters is “very concerned” about PricewaterhouseCoopers’s audit of NQ Mobile’s financial statements for 2013, Mr. Block said in the January letter, which urged the accounting firm to perform “additional tests and procedures in response to clear heightened fraud risk.”

“If NQ Mobile prevents PwC from obtaining sufficient appropriate evidence to evaluate whether illegal acts material to the financial statements have (or are likely to have) occurred, PwC should probably disclaim an opinion on the NQ financial statements,” Mr. Block said in the letter. “If NQ management refuses to accept a modified a PwC report, PwC should resign from the engagement, possibly withdraw its opinions on prior financial statements and warn investors on management’s representations.”

“If PwC is unable to determine whether the acts are illegal because NQ imposes limitations on its work or because PwC is unable to interpret applicable laws, regulations or surrounding facts,” the letter went on, “PwC may have to resign the NQ audit.”