US society is the first to feel the harsher actions of the Chinese authorities.
(Photo: Reuters)
Dusseldorf China is taking a tougher stance on accounting firms. According to a statement by the Ministry of Finance on Monday, regulation of this sector is to be tightened. The aim is to improve the quality of auditing of company balance sheets in the country.
The first signs of the new course are a fine and a temporary non-competition ban for the Beijing office of Deloitte, one of the “Big Four” in global auditing. Local authorities accuse Deloitte of making mistakes in its audit of financial services provider China Huarong Asset Management.
There had been several scandals surrounding the company in recent years before it was picked up by the Chinese state finance and investment company Citic in 2021. The authorities complain that Deloitte, as Huarong’s previous auditor, did not correctly value the assets.
Now Deloitte has to suspend business in China for three months and pay a fine of the equivalent of $30 million. The US auditing company has already approved this.
Deloitte and the industry should draw “a lesson for future audit work” from the incident, says Chinese Deputy Finance Minister Zhu Zhongming. He met with Deloitte’s global CEO, Sharon Thorne, in Beijing over the weekend. Thorne is said to have already promised to “develop a plan to improve audit quality,” reports the state-run newspaper China Daily.
>> Read also: EU postpones next reform of auditors by years
However, the government will also introduce stricter regulations for the work of auditing companies. Chinese supervisory authorities have already announced that they will monitor the work of companies more closely. This applies to all accountants based in the country, including the “Big Four”, which, in addition to Deloitte, also includes PwC, KPMG and EY.
PwC is also under investigation in China
Authorities in Hong Kong are already investigating PwC because of the audit work for the troubled real estate giant Evergrande. At the beginning of January, PwC resigned the mandate for the company due to differences in accounting issues.
The numerous scandals and disagreements in China’s banking and financial services sector are the main reason for the tougher stance on audit firms. The government in Beijing wants to regain confidence in the domestic financial center and is tightening overall control over the sector.
However, the industry also fears that China wants to exclude Western auditors from large parts of the market. According to a report by the US news agency Bloomberg, Beijing has instructed the domestic state-owned companies not to conclude any new orders with the “Big Four” from the USA – for reasons of data protection.
The Ministry of Finance denied the rumors on Monday. China supports the work of international auditing firms as long as they comply with the legal requirements. The government will create a “solid legal framework” that should apply to everyone, including domestic audit firms.
More: “Failure would be a disaster”: How EY wants to save the split project.