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June 27, 2011 5:40 am
China has announced measures to consolidate its accountancy industry following a string of financial scandals that has shaken investors’ faith in Chinese companies listed abroad.
Large and medium-sized Chinese companies should choose from a small group of approved auditors, including the ‘Big Four’ accountancy firms – KPMG, Ernst & Young, PwC and Deloitte – the finance ministry said.
Sino-Forest, software company Longtop and China Agritech are just some of the dozens of Chinese companies that have been targeted in recent months by short-sellers alleging that auditors had failed to notice fraud on their books.
The new government guidelines did not appear to be a direct response to those problems, but rather part of a reform effort dating back to 2009 to improve Chinese auditing standards and increase the scale of national accounting firms. China has a bevy of small accounting firms, which, in their pursuit of business, often succumb to client bullying.
Chinese companies with foreign listings – as well as those in finance, energy, communication and the military sectors – should choose auditors with established reputations and international-calibre skills, the finance ministry said.
“This is the necessary choice for our nation’s firms as they try to get bigger and strengthen themselves in going abroad, improving the quality of their accounting information and gaining the approval of international capital markets,” it said.
It added that companies should use one of the 12 firms approved to conduct auditing for Chinese companies listed in Hong Kong. Along with the Big Four, smaller global accounting firms such as Grant Thornton and BDO and a few of the leading Chinese accounting firms are on the list.
Many of China’s biggest state-owned enterprises are listed in Hong Kong and already rely on the auditing services of international accounting firms. But medium-sized firms have tended to use local auditors, so the government’s directive could provide a boost for the Big Four.
However, another provision in the guidelines could harm international auditors. In a reiteration of a policy set two years ago, the finance ministry said that Chinese companies must select accounting firms capable of protecting national economic information.
“The only way I can fashion that one is it’s directed against the Big Four. What you’re saying is that some CPA (certified public accountant) firms are better than others at protecting state secrets,” said Paul Gillis, a professor of accounting at Peking University.
The implication was that Beijing does not think that firms with foreigners can be fully trusted and wants to build up national champions to compete with them, he said.
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