Written by Julie Zhu and Xie Yu
In a recent development, China’s Ministry of Finance has increased its scrutiny of the work conducted by the Big Four auditing firms for local companies. This move comes amidst concerns that auditors may not be effectively uncovering corporate misconduct.
The intensified oversight is primarily focused on Deloitte, EY, PwC, KPMG, and their audits of financial firms and highly leveraged companies, according to sources familiar with the matter.
This heightened scrutiny began a few months ago following a regulatory investigation into “intermediaries” for property giant China Evergrande Group. The authorities discovered that Evergrande had inflated its revenue by $78 billion and subsequently defaulted on its debt, leading to liquidation orders.
The crisis in the property sector, with numerous developers defaulting on debt, has raised concerns about the exposure of financial firms to this sector and its impact on economic growth. In response, Chinese regulators have pledged to crack down on financial fraud to restore confidence in the country’s stock markets.
The Ministry of Finance, which routinely checks audits by the Big Four, has now demanded more extensive documentation and increased the number of queries audit firms must address. They are particularly interested in audits of small and weak lenders from debt-laden Chinese provinces, as well as audits of asset management companies, state-owned enterprises, and property developers with high leverage.
Despite these developments, PwC declined to comment, and the Ministry of Finance, Deloitte, EY, and KPMG did not respond to requests for comment.
The Evergrande case has underscored the auditors’ failures to identify issues in a timely manner, prompting concerns about the vulnerability of China’s financial services firms. Regulators are likely keen to ensure that audit firms accurately assess risks such as bad loan exposure and leverage levels at client companies.
Reports suggest that PwC may face a record fine for its audit failings related to Evergrande, while Deloitte was fined last year for similar shortcomings in assessing asset quality at China Huarong Asset Management.
These developments highlight the growing importance of rigorous auditing practices in China’s financial landscape, as regulators aim to enhance transparency and accountability in the wake of recent corporate scandals.
