How KPMG Hong Kong got itself into serious problems - Paul Gillis

Paul Gillis

Beida accounting professor Paul Gillis describes on his weblog how auditor KPMG Hong Kong got itself into trouble for signing off papers on China Medical, a company convicted in 2012 for looting US$400 million from its investors. Problem: KPMG Hong Kong was not really in charge and now the Hong Kong legal system caught up with this omission.

Paul Gillis:

Matt Miller of Reuters has an interesting update on the troubles KPMG is having in Hong Kong with a failed US listed Chinese company. In my view the problems are of its own making. 

KPMG Hong Kong was the auditor of China Medical Technologies Inc., which failed after management was charged by the US Securities and Exchange Commission with looting over $400 million from the company. The company was put into liquidation in 2012 in the Cayman Islands, where it was incorporated. 

Actually, KPMG Hong Kong was not the auditor, and that is the problem. Several years ago I wrote about KPMG’s labeling problem where they had a practice of using Hong Kong letterhead to sign audit opinions on audits done by KPMG Huazhen, KPMG’s China affiliate. To me, this was like a Wenzhou shirt maker sewing a made in Italy tag on a shirt made in China.   ... 

KPMG Hong Kong is in a terrible place. They signed off on an audit without doing one. The Hong Kong Institute of CPAS (HKICPAs), regulator of Hong Kong accountants, should investigate this violation of auditing standards, but I think it is unlikely they will.  The HKICPAs is a feckless regulator and is unlikely to pursue a case against a Big Four firm, especially a case that relates to a company not listed in Hong Kong. There are legislative proposals to strengthen audit regulation in Hong Kong, but the proposals will likely have no effect on this case. 

KPMG was the most egregious at mislabeling their audit work, but all of the Big Four in Hong Kong have had this problem, which I believe came about because the firms failed to recognize the importance of respecting their legal structure. While the China member firms of the Big Four have generally been managed from Hong Kong since the early 2000s, they have always been separate legal entities.

More at the Chinaccountingblog.

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