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.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.  

KPMG partners sued over another US accounting spat - Paul Gillis

Paul Gillis

China and the US worked out a deal on the age-old argument where Chinese firm are not allowed to hand over paperwork to US institutions for audits. But the agreement is not valid for Hong Kong, and so close to a hundred current and former KPMG partners got sued over the case of the bankrupt US-listed China Medical, reports Beida accounting professor Paul Gillis last week at his weblog.

Paul Gillis:

It is a bad day for KPMG. Reuters reports that the Hong Kong High Court has issued a contempt summons to 91 current and former KPMG partners for their failure to hand over audit working papers for US listed China Medical. China Medical is in liquidation and the court apparently has been overseeing the liquidation of Hong Kong subsidiaries. The case is a repeat of an earlier spat with EY over working papers for Standard Water, which was resolved when EY “found” the working papers on a server in Hong Kong. 

KPMG says it cannot turn over the working papers without permission from mainland regulators. The US PCAOB reached an enforcement agreement with China that allowed it access to working papers in connection with investigations (but not inspections). Hong Kong has no such arrangements, and this is private litigation. 

China has argued national sovereignty and state secrets concerns trump foreign laws requiring the production of documents on Chinese companies listed abroad or doing business abroad. Hong Kong, while part of China, is being treated the same as the United States, presumably to avoid undermining arguments used against the U.S. I seriously doubt there are any state secrets in these working papers.

More at the Chinaaccountingblog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.