A federal judge is allowing a shareholder lawsuit to proceed against a group of auditing firms that signed off on audits of China Expert Technology, a company they have accused of committing accounting fraud.

This is the fourth time since 2007 that shareholders have tried to sue the audit firms, which include PKF Hong Kong, PKF New York and BDO McCabe Co. Ltd., but the judge in the case dismissed the lawsuit three times. On Tuesday, U.S, District Judge Alvin Hellerstein agreed to allow the lawsuit to move forward, according to Reuters.

In October 2007, the SEC temporarily suspended trading in the company for 12 days, saying there was "a lack of current and accurate information" concerning its securities, and there were "questions regarding the adequacy and accuracy of publicly-disseminated information" concerning its financial performance, business prospects, and current financial condition.

China Expert Technology is one of a number of Chinese companies whose accounting and auditing have been called into question by shareholders and regulators alike. The Public Company Accounting Oversight Board has been seeking access to auditing firms in China to allow inspections of firms that audit companies whose shares trade in the U.S.

A large number of Chinese companies entered the U.S. markets by doing a reverse merger with a U.S.-based shell company. Between January 2007 and March 31, 2010, the PCAOB found that out of the 603 reported reverse merger transactions, 159 of those involved companies from the China region, while the remaining 444 transactions involved primarily U.S. companies.

Twenty-eight auditing firms based in China and Hong Kong audited the financial statements of 230 U.S.-listed companies in 2009 and 2010, but were not inspected by the PCAOB (see PCAOB Warns on Chinese Audits and U.S. in Talks with China about Audit Inspections). Since 2010, according to Reuters, shareholder lawsuits have been filed against over 30 Chinese companies. Chinese companies that executed reverse mergers have been a particular target of short sellers.

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