Opinion

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A bad day for Chinese firms

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I recently retired as UK senior partner of BDO after 23 years as a partner with the firm. Last year, I took up a position as visiting professor at Xiamen University, China. My wife is Chinese and I decided to spend three months exploring business opportunities in the region and trying to learn some Mandarin.

I’m blogging about my experiences in China for Real Business – catch up on my journey so far (see “related articles” on the right-hand side).

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Another bad day for the reputation of Chinese companies listed in the US, as old news has new implications: (1) Deloitte Shanghai is subpoenaed by the SEC for failing to hand over documents relating to a US listed audit client from which they resigned; and (2) Fidelity China takes the unusual step of buying back some of its shares, which have underperformed the market since it revealed in July that a couple of its US listed investments have suffered fraud. Even experienced investors, like Anthony Bolton (who manages Fidelity China) and John Paulson have had their fingers burnt in China.

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Balance sheet cash is normally one of the simpler audit areas. However, the level of scepticism required auditing cash in China is high. International Auditing Standards guide auditors to obtain bank certificates to support cash balances (and other matters, such as security, loan facility terms etc), reasoning that third party evidence is worth more than evidence from the company’s own records. 

In China, bank certificates to the auditors have been fabricated by a complicit member of the bank’s staff – at the request of the client, with whom they typically enjoy an important and close relationship.

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The prudent approach to auditing cash in China (and in some other parts of the world, it has to be said) sometimes involves a senior member of the audit team visiting the bank in person and sitting with bank staff, while they pull up from the bank’s systems all of the details of the mutual client’s accounts with the bank. 

One auditor told me this is what was done in a recent situation, where the numbers caused suspicion. The client was, inevitably, unhappy – especially when it was clear that the bank’s records did not accord with the client company’s!

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