Auditors just like drivers in the mind of China's Finance Ministry

The proposal falls in line with Beijing barring SOEs from hiring overseas consultants and using certain computers, all in the name of state secrets

PUBLISHED : Saturday, 31 May, 2014, 12:54am
UPDATED : Tuesday, 28 April, 2015, 11:23am

To understand Beijing's controversial proposal to bar foreign auditors from working on the mainland, a tale shared by a mainland bank director may help.

It was late 2010. The Ministry of Finance ordered all banks and insurers to switch to a new auditor every five years.

It is not difficult to imagine the concern this sparked among independent directors because changing an auditor is a big deal for any financial institution and some of the world's largest banks were involved.

Some tried to get the ministry to understand the downside of the new policy. They thought it would not be too difficult to explain why an auditor who knew the bank would do a better job.

They have moved auditors around like drivers so that no one stays long enough to know too much

The response was shocking. "The [ministry] official said he changed his door guard or driver all the time," said the bank director. "He simply couldn't see our concern."

Exactly. In the eyes of many mainland officials, the job of an auditor is as mechanical as that of a driver.

For the sake of national security, they have moved auditors around like drivers so that no one stays long enough to know too much.

Why would they hesitate to draw a line between the work of foreign and domestic auditors - like the division of drivers into morning and night shifts - when they believe state secrets are at risk?

National security was the No1 justification spelt out by the ministry in a strongly worded four-page response to critics issued on Thursday.

It said: "Some foreign accountancy firms have been doing auditing work in the country under all kinds of names without reporting to any local authority. Then, they fly home with various audit papers. These are outright breaches of our state secrecy laws … no country would allow such an activity that leaves no trace to any authority."

If it was tolerable in the past, it's certainly not now following US regulators' active pursuit of audit papers in their investigations into mainland enterprise fraud scandals.

In January a US judge ordered a six-month ban on the mainland subsidiaries of the "Big Four" auditors for refusing to hand in audit papers.

Tie in this new anxiety with some recent reports of Beijing barring central SOEs from hiring international consultants and using certain computer systems, and the ministry's proposal doesn't seems to be too out of line.

Theoretically, it would bring everyone in line.

First, the auditors. Audit work is to be done only by mainland accountants, barring any foreigner from having access to the papers.

It's true that much of the business will go to the Big Four's joint ventures on the mainland. However, a recent law has already stated that by 2017 their senior partner and 80 per cent of partners must be mainlanders.

Second, the regulators. If anything goes wrong, a foreign regulator won't be able to squeeze any audit papers out of the mainland auditors. All that foreign firms will have will be a checklist and a confirmation letter from their mainland counterparts.

Nor will foreign regulators be able to lay their hands on the mainland auditor because under the proposal the latter will have no legal responsibility for the accounts.

Third, the companies. The proposal has cast a net wide enough to catch not just the private enterprises that have listed in Hong Kong and overseas via a BVI company but also "uncooperative" mega state firms.

Among them are top-tier SOEs such as CNOOC which has not complied with a 2010 directive to replace their Hong Kong auditor with a mainland one, citing investors' lack of confidence in mainland accountants. Of the 200 or so state firms listed in Hong Kong, only about 40 have done so.

And then there are also the red chips like China Mobile and Legend which are registered in Hong Kong and are therefore not subject to the 2010 directive.

To any professional accountant, this is all just wishful thinking, if not impossible. Our accounting professionals have rightly pointed out that auditors don't simply outsource their work, tick a checklist and sign off a report.

"To audit a mainland factory, I have to visit it, know its business, understand its risk and tailor-make a list of audit instructions for my mainland partner," said an auditor. "Then, I will do a review and check the papers before signing off. It's no simple box-ticking."

Unfortunately, that will be a hard-sell to the ministry given what it has witnessed in the work done by some American auditors.

"Some audit firms outsource their work to some small and inexperienced mainland counterparts, or even so-called consultant firms in some cases," the ministry said. "The foreign auditors have barely laid their feet in the country.

"Yet, when some firms were found to have cooked their books, certain entities, in particular the short sellers, put all the blame on our auditors. This is grossly unfair and inappropriate."

Trying to tell them the difference between an auditor and driver won't be easy.