China's Ministry of Finance has intensified its scrutiny of the Big Four auditing firms-Deloitte, EY, PwC, and KPMG-focusing on audits of financial and highly leveraged companies. This follows a regulatory probe into intermediaries for the defaulted China Evergrande Group, which inflated its revenue by USD 78 billion. Increased checks are aimed at small lenders, asset management companies, and leveraged state-owned enterprises. PwC faces a potential fine of USD 138 million for its failings, while Deloitte was previously fined USD 30.8 million. This scrutiny aims to address financial vulnerabilities and restore investor confidence amidst the real estate crisis.
According to three sources familiar with the matter, China's Ministry of Finance has increased its scrutiny of the work done by the Big Four auditing firms-Deloitte, EY, PwC, and KPMG-for local companies. This heightened examination primarily focuses on audits of financial and highly leveraged companies. The move follows a regulatory probe into "intermediaries" for China Evergrande Group, which include auditors, rating agencies, and other financial service providers.
Evergrande, which defaulted on its debt and has been ordered into liquidation, was found by authorities to have inflated its revenue by USD 78 billion. Evergrande is just one of many property developers that have defaulted on their debt, causing an economic slowdown and raising concerns about the exposure of financial firms to the sector. In response, Chinese regulators have pledged to clamp down on financial fraud to restore confidence in the country's struggling stock markets.
Routine checks of audits performed by the Big Four are conducted by the finance ministry, but this year, the ministry has demanded more documents and has increased the number of queries to the audit firms, the sources said. According to two of the sources, the ministry is particularly interested in audits of small and weak lenders from debt-laden Chinese provinces. Audits of Chinese asset management companies are also under scrutiny, according to one source. Audits for highly leveraged state-owned enterprises and property developers are also being closely examined, the second person said.
All sources, including two with direct knowledge of the scrutiny, declined to be identified due to the sensitivity of the matter. The Ministry of Finance and the Big Four firms did not respond to Reuters' requests for comment.
Over the last couple of decades, the Big Four firms have built a significant presence in China as Chinese companies sought listings in Hong Kong and overseas, and as the world's second-largest economy became more open to foreign investors. However, the problems at Evergrande have highlighted failures on the part of auditors to catch financial issues before they become critical, according to Francine McKenna, founder of the accounting and auditing newsletter The Dig.
McKenna emphasised that the Ministry of Finance is rightly concerned about whether China's financial services firms are vulnerable to the ongoing issues in the real estate sector. She added that regulators likely want to determine if audit firms have accurately assessed concerns such as bad loan exposure and the extent of leverage at their client companies.
PwC is facing a record fine of at least 1 billion yuan (USD 138 million) due to failings in auditing Evergrande, Bloomberg reported in May. One of the sources indicated that the fine is still being finalised and is not expected to be announced this month.
Even before the spotlight fell on PwC's work for Evergrande, Deloitte was fined USD 30.8 million last year by Chinese authorities for failing to properly assess asset quality at China Huarong Asset Management. Huarong failed to release its 2020 earnings on time, eventually reporting a massive loss. It then had to undergo a government-led restructuring that involved selling off non-core businesses.
In conclusion, the increased scrutiny by China's Ministry of Finance reflects a growing concern about the vulnerabilities in the financial services sector, particularly in relation to the ongoing real estate crisis. The problems at Evergrande and other property developers have exposed significant shortcomings in the auditing practices of the Big Four firms. By demanding more thorough documentation and imposing stricter penalties, Chinese regulators aim to ensure that auditors are more diligent in their work, thereby safeguarding the integrity of the financial system and restoring investor confidence. This rigorous approach underscores the importance of transparency and accountability in maintaining the stability of the country's economic infrastructure.
Advertisement
Facebook
Whatsapp
