(Fixes format of instrument codes in second paragraph, corrects
listing code for China Forestry in 16th paragraph)
* Big 4's '09 revenue in China was $1.41 bln, or 1/2 of
China's accounting revs
* Privately run China businesses pose more risks
* Auditing skill shortage low in China, demand high
By Rachel Armstrong
HONG KONG, June 24 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
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
high-quality 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. To read the comments,
click on .
CHINA BOOMING BIZ
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
As the revenues have risen, so have the risks.
Most of the accounting scandals in the U.S. have come from
small Chinese companies who went public via a reverse takeover.
Those companies were audited by smaller U.S 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
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.
Accounting experts say the firms have been acting as they
should by raising the alarm once they find irregularities that
can't be explained by the company. They also point out that the
Big Four's China businesses and its broad global resources are
much better placed than small U.S. firms to conduct audits on
"I think firms here have always been aware of the risks
associated with audit work in China. There is more endemic fraud
in Asia, but people are much more aware of it here and so manage
the risks accordingly," said PWC's Winkelmann.
The latest string of scandals has laid bare some of the
difficulties auditors have in China, forcing the big firms to
reappraise their methods, given that a loss of reputation could
bring them to their knees.
"There's no doubt about it -- the firms are very alert to
these issues and very sensitive to what it means. They will be
looking at their risk assessment procedures," said Chris Joy,
executive director at the Hong Kong Institute of CPAs (HKICPA).
Two of the biggest challenges facing the big four are
staffing and the type of companies they audit.
Together the firms now employ just under 40,000 people in
mainland China, Hong Kong and Taiwan. While that's a relatively
high number compared to other regions, it's not enough to handle
the huge demand created by the rapid economic growth of the
world's most populous country, experts say.
"We are in tremendous need of experienced accounting
professionals and graduating college students," said a
spokeswoman for Ernst & Young, which plans to recruit 1500 new
staff this year.
Finding them might be tough.
"Between us and the CICPA and other bodies that offer
qualifications, we can't produce enough at the moment, but we're
not going to compromise the quality of our programme just to
mass produce accountants," said Joy at the HKICPA.
That skill shortage is likely to be felt even more keenly
now that the type of IPO work the big firms are handling is
shifting. Whereas 10 years ago the majority of firms going
public in China were state-owned enterprises (SOEs), a lot more
of the work now is for privately-run businesses.
"Previously the market was for SOEs, and China is not going
to allow a major embarrassment with an SOE," said PWC's
Winkelmann. "But now it's changing as international firms are
starting to do more of the private enterprises in China, which
don't come with that government support."
($1 = 6.463 Chinese Renminbi)
(Reporting by Rachel Armstrong; Additional reporting by
Benjamin Lim in BEIJING, George Chen in HONG KONG; Editing by