There is little to be worried about the quality of audits of firms operational in China, believes the chief executive of one of the four largest accountancy agencies of the world.
The quality of the auditing done by Earnest & Young (EY) in on companies in China is not something that makes the Global Chairman and Chief Executive of EY, Mark Weinberger, nervous despite some experts expressing concerns about the trend of using affiliate companies in China which are much harder to audit, scrutinize and regulate.
“No, not the individual audits themselves. The risk in China is the huge levels of debt, the uncertainty in the overall economy,” Weinberger said in a television interview.
While the companies conducting audit such as EY are themselves subject to scrutiny and oversight, the issue with the Chinese authorities is that they would not allow any of the US regulators to make direct inspection of the affiliate accountants in China and Hong Kong.
There are concerns because these affiliate firms are separate business entities and are used on a regular basis for auditing Chinese companies on behalf of large multinational accountancy firms such and EY and others.
Analysts and experts have repeatedly raised concerns that the level of quality of auditing that is done by these affiliate firms in China on businesses in the country might not be of the same standard as expected internationally because there is no system to check out the quality and methods of accountancy that is adopted by these local Chinese accounting firms.
Offering professional services such as audit, accounting, taxation and management consulting globally, EY are considered one of “The Big Four” accounting firms in the world. its competitors include Deloitte & Touche, KPMG and PwC.
Weinberger said that EY offer and provide their services for a majority of the IPOs that come onto the market in China with the help of a 16-thousand strong team in the country.
While acknowledge that it is “complicated” to live with China’s local rules, he also stressed on his belief that EY was doing enough in China to meet the global standards of auditing and accounting while also appropriately applying it to Chinese culture.
In recent times, there has been greater scrutiny of the state of health of the Chinese businesses because the state-owned banks have put a lid on lending due to rising concerns of excessive levels of debt being taken by the corporate and the fears of the trade war.
So far this year, about one third fall has been noted in the value of the Shenzhen Composite Index because of vulnerability of companies listed there as they have taken in huge amounts of debts against large parts of their shares as collateral.
Analysts say that the situation has entered a vicious circle because more shares are sold with every loss in share value which in turn speeds up losses.
(Adapted from CNBC.com)