Caterpillar, the world's largest maker of construction equipment, has posted a 55 per cent drop in quarterly profit due to a charge connected with accounting fraud at a Chinese subsidiary and weak demand among its dealers.

Caterpillar's bulldozers, tractors and other machines have been accumulating in warehouses due to slowing economies in China, Europe and the US.

The company said it was able to sell off some of this glut in the fourth quarter, reducing the value of its inventory from the third quarter by $2 billion. Inventory levels, however, remain $1 billion above year-ago levels, and executives expect 2013 to be a "tough year."

Adding to the company's troubles, quarterly results were hit by a charge of 87 cents per share after the company discovered accounting fraud at a Chinese coal mining supplier it bought last year.

Caterpillar said the "most significant favourable factor" for 2013 profit will be the absence of the ERA accounting fraud writedown, not increased demand for its machines.

"We're encouraged by recent improvements in economic indicators, but remain cautious," chief executive Doug Oberhelman said.

For the fourth quarter, the company posted net income of $697 million, or $1.04 per share, compared with $1.55bn, or $2.32 per share, in the year-ago quarter.

Revenue fell 7 per cent to $16.08 billion. Analysts expected revenue of $16.12 billion.

Caterpillar closed the purchase of ERA Mining Machinery Limited and its subsidiary Siwei, China's fourth-largest maker of hydraulic coal mine roof supports, in June, paying $653.4m.

After the deal closed, Caterpillar found that physical inventory did not match accounting statements, a discovery that led to the charge.-Reuters