US$369.6 million in defaults at apparently cash-rich firms expose flaws in mainland Chinese auditing practices
- Auditors are held accountable only in rare conditions, which makes the cost for committing a crime ‘small’, says analyst
- Accounting firms colluding with clients to fake financial data is not a new problem
Three mainland Chinese companies have missed a combined 2.5 billion yuan (US$369.6 million) in debt repayments over the past two months despite apparently high cash holdings, a development that has exposed deep flaws in the auditing and financial disclosure practices in the country.
Kangde Xin Composite Material Group, a Shenzhen-listed new material producer, failed to pay a 1 billion yuan local note due on January 15 because of a liquidity crunch, according to the company. Yet, as of September end, it had 15.4 billion yuan in cash and equivalents, more than double the amount of its short-term debt, according to a company financial report for the third quarter.
Accounting giant EY and two partners fined for auditing failures during Hong Kong listing procedures 20 years ago
Shandong SNTON Group failed to repay a total of 398 million yuan by late December 2018, even though it had reported a cash balance of 4 billion yuan by the end of June 2018. Reward Science and Technology Industry Group, meanwhile, defaulted on bonds worth about 698 million yuan in December, despite having 4.2 billion yuan in cash by the end of September.
“Corporate defaults are usually driven by insufficient liquidity, but these companies’ stated cash balances cannot explain the non-payments,” said Renee Lam, regional credit officer at Fitch Ratings.
“Uncertainty over the accuracy of the companies’ books and disclosure of pertinent information is ultimately related to governance and accounting quality.
“International bond investors have become more receptive of Chinese issuers choosing not to hire one of the ‘Big Four’ international accounting firms over the past decade. However, the quality of domestic auditing is variable. It is not unprecedented for domestic audit firms to be reprimanded for shortcomings,” she added.