A Simple but Effective Trick

During earnings season, if you notice a company suddenly replacing its CFO (or financial head) or switching auditors (especially downgrading, e.g., from a Big Four firm to a local one), coupled with major shareholders reducing stakes or pledging shares—run for the hills.

Don’t assume pre-announced earnings are reliable. They can be revised downward, leaving you blindsided.

Case Study: Youzu Interactive

• Dec 28, 2019: Resignation of non-independent director Wang Pengfei (core planner since 2010) and vice president Cui Rong (since 2011).

• Feb 28, 2020: Preliminary 2019 results: revenue ¥3.516B, profit ¥575M.

• Same day: CFO Lu Jun (ex-PwC partner with 22 years’ experience) resigned. Notably, Youzu replaced PwC with local auditor Lishen.

• Mar 13, 2020: Major shareholder Lin Qi cut stake by 1%.

• Apr 28, 2020: Revised results: revenue ¥3.22B (-10.07%), profit ¥166M (-84.18%). Stock price hit limit-down.

Red Flags Summary:

1. Reluctance to hire reputable international auditors (especially when CFO hails from one).

2. Sudden departure of CFO/financial heads during sensitive reporting periods.

3. Key department heads (e.g., core planners) exiting near fiscal year-end.

4. Sudden major stake reductions/pledges around reporting dates.

5. History of large shareholder sell-offs (e.g., 2019’s repeated减持).