Earnings Manipulation around Backdoor Listing: The Case of Neosemitech

Backdoor listing is a method of listing on a stock exchange in which an unlisted company merges with a listed company. Unlike initial public offerings, in which firms have to pass a rigorous listing eligibility review, backdoor listings are subject to relatively lax listing requirements. Many firms have gained readily access to the capital markets via backdoor listing. However, due to backdoor listing of fraudulent companies, investors have suffered losses from management malpractice, embezzlement, and stock price manipulation. Neosemitech conducted backdoor listing by merging with D&T on October 2009, only to be delisted on September 2010, less than a year since listing. Neosemitech listed on the stock exchange to increase capital and reduce financial distress. The company performed false disclosures and inflated sales and assets on the financial statements. Eventually, accounting fraud led to delisting of the company. This case implies that measures must be taken in auditing, listing eligibility reviews, audit reviews, disclosure regulations, and the overall backdoor listing system.