The string of accounting problems and stock plunges at publicly traded Chinese groups has sparked deep concerns across the world's biggest audit firms, putting the so-called Big Four on alert from worries that their reputation could be brought down along with a growing list of stricken companies. Auditing Chinese firms preparing to go public on overseas exchanges is a lucrative business and one that plays into the strengths of the top, international auditing partnerships known as the Big Four: KPMG, Ernst & Young, Deloitte Touche Tohmatsu and PricewaterhouseCoopers. Yet fears are growing that the struggle to find enough highquality auditors in China and Hong Kong means it may only be a matter of time until one of the top firms finds itself caught in a blow-up rivaling Enron, which brought down their old rival Arthur Andersen. Costs have gone up, fees have gone down, as competition for fees is enormous. You can easily see there is a real risk of an audit firm failing, said Paul Winkelmann, the partner in charge of risk and compliance for PWC in Greater China. According to interviews with professionals at the four firms, each firm is getting more and more cautious about the work they take on from mainland companies looking to IPO. The whole industry, I will say, is very sensitive and cautious to China IPOs, said an auditor at one of the Big Four, who handles IPO work, who did not want to be named. The Big Four are also getting nervous about work with existing Chinese clients, turning to lawyers at an earlier stage if they think something might be amiss. If a risk situation arises they're now consulting lawyers earlier and dealing with it in a much more structured way than was perhaps the case in the past, said Tom Fyfe, a partner at law firm Barlow, Lyde & Gilbert in Hong Kong who acts for some of the big four in litigation issues.
All four of the audit firms responded to a Reuters request to comment on the matter. The four firms said they have a rigorous approach to risk management. The big four have basked in China's emergence as an economic powerhouse. In 2009 their revenue from work on the mainland stood at 9. 1 billion yuan ($1. 41 billion) according to the Chinese Institute of CPAs (CICPA), around half of China's accounting industry's revenue. Last year's figures were not immediately available. As the revenues have risen, so have the risks. Most of the accounting scandals in the US have come from small Chinese companies who went public via a reverse takeover. Those companies were audited by smaller US or Hong Kong-based accountancy practices, not the Big Four's China firms. But some recent high profile cases have started to drag in the names of the world's most prestigious auditors. Last month, Deloitte quit as auditor of Longtop Financial Technologies after working on the company's books for six years, citing recently identified falsity in their finances. Ernst & Young was named in two class action lawsuits over its work on Sino-Forest, the Toronto-listed company accused by short-seller Muddy Waters of accounting fraud. In Hong Kong, KPMG said in January that it had found possible irregularities in the books of China Forestry, leading to a suspension of its shares. - www.economictimes.indiatimes.com
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