Are Major Auditors Helping Chinese Firms Get Away with Fraud?

The News Lens
Date: 2017/04/20
By: Li Guangshou

Market dominance by the Big Four accounting firms may be helping unscrupulous companies get listed on US stock exchanges.

Stock prices of China Huishan Dairy Holdings, a firm that operates on the mainland but is listed in Hong Kong, crashed by over 90 percent on March 24 after investment research company Muddy Waters Research said the company is worth next to nothing. Huishan was claimed to have made fraudulent statements in its earnings reports and to have exaggerated its capital spending on dairy farm acquisitions. Its chairman, Yang Kai (楊凱), was accused of embezzling at least 150 million yuan (US$21.7 million) in company funds.

News of Huishan’s stock price collapse came after its official auditor — KPMG, one of the world’s “Big Four” accounting firms — had approved Huishan’s past three annual reports. Investors have given Muddy Waters credit for bringing the fraud to light, but to date, few have asked a key question: Why did a Big Four accountancy firm, with its scope and prestige, fail to detect fraud when given access to Huishan’s books?

Nabbing a company for financial fraud is not easy, especially with the very limited methods available to third-party investigators. A market research firm like Muddy Waters stood no chance of convincing Huishan to cooperate with its probe, or of delving deep into the company’s accounts. It had to work from the outside in, and yet it quickly worked out that Huishan’s stock wasn’t worth a penny.    [FULL  STORY]