Audits reveal SOE malpractice
By Li Huir
The National Audit Office of China on June 1 publish the financial audit report of 15 state-owned enterprises (SOEs) operated directly by the Chinese central government. All of the companies that were audited have been found to have irregular financial practices and disciplinary violations.
While SOEs once again find themselves in the midst of an image crisis, also called into question were the business integrities of the so-called Big Four audit firms - PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte - which are hired by a large number of SOEs in China to conduct annual audits.
According to the National Audit Office's audit results, China National Petroleum Corporation (CNPC), Sinopec, China Southern Power Grid (CSG) and SinoSteel Corporation are companies that have relatively greater amount of and more prominent irregular practices.
The irregular practices include misuse of funds, overstating earnings, understating assets with improper accounting practices, concealing information about overseas investment activities, evading taxes, excessive bonuses and forged invoices.
The audit reports show that CNPC and Sinopec together report about 2.8 billion yuan less combined profit than actual numbers. SinoSteel inflated sales revenue of nearly 20 billion yuan.
While all the SOEs subjected to the new audit revealed financial malpractices - some of them with hundreds of billions of questionable yuan - some analysts are saying the audit firms involved are partly to blame.
"The irregular practices involve accounting manipulations and financial fraud," a Beijing-based market insider told Beijing Business Today. "For these problems, the auditing agencies are in any case cannot shake off their responsibilities."
Auditing of these SOEs are almost entirely done by the Big Four firms. Meanwhile, Beijing Business Today said it found the problems that resulted in the inaccurate audit reports include some elementary accounting errors, such as mistakes in income recognition and accounting statements that are supposed to be consolidated but were not.
"In addition to checking the financial situation of the companies, the audit agencies also bear the responsibility of blocking loopholes on internal control and corporate governance," the insider said. "But the audit results from the National Audit Office show that the audit firms led by the Big Four have failed even their most fundamental role as the financial gatekeeper."
The Annual Report of the CNPC and Sinopec showed that last year CNPC paid PwC 70 million yuan in audit fee and Sinopec paid KPMG 66 million Hong Kong dollars. Banks also make up a large source of the Big Four's income.
An employee working for one of the Big Four said small amount of deviation in the audit is difficult to avoid. The above deviation is not distortion.
"The SOEs operating directly by the Chinese central government have very large business scope and assets. So the audit work is very arduous. And different audit companies have different understandings on accounting standards. Small amount of deviation in the audit is difficult to avoid."
However, a Beijing university professor teaching accounting thinks differently.
"Audit institutions should never sign on incomplete financial statements. It's not a matter of degree but a matter of professional ethics. I have no doubt on the Big Four's operational capacity. Obviously there are other things that blinded their eyes."
By Li Huir
The National Audit Office of China on June 1 publish the financial audit report of 15 state-owned enterprises (SOEs) operated directly by the Chinese central government. All of the companies that were audited have been found to have irregular financial practices and disciplinary violations.
While SOEs once again find themselves in the midst of an image crisis, also called into question were the business integrities of the so-called Big Four audit firms - PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte - which are hired by a large number of SOEs in China to conduct annual audits.
According to the National Audit Office's audit results, China National Petroleum Corporation (CNPC), Sinopec, China Southern Power Grid (CSG) and SinoSteel Corporation are companies that have relatively greater amount of and more prominent irregular practices.
The irregular practices include misuse of funds, overstating earnings, understating assets with improper accounting practices, concealing information about overseas investment activities, evading taxes, excessive bonuses and forged invoices.
The audit reports show that CNPC and Sinopec together report about 2.8 billion yuan less combined profit than actual numbers. SinoSteel inflated sales revenue of nearly 20 billion yuan.
While all the SOEs subjected to the new audit revealed financial malpractices - some of them with hundreds of billions of questionable yuan - some analysts are saying the audit firms involved are partly to blame.
"The irregular practices involve accounting manipulations and financial fraud," a Beijing-based market insider told Beijing Business Today. "For these problems, the auditing agencies are in any case cannot shake off their responsibilities."
Auditing of these SOEs are almost entirely done by the Big Four firms. Meanwhile, Beijing Business Today said it found the problems that resulted in the inaccurate audit reports include some elementary accounting errors, such as mistakes in income recognition and accounting statements that are supposed to be consolidated but were not.
"In addition to checking the financial situation of the companies, the audit agencies also bear the responsibility of blocking loopholes on internal control and corporate governance," the insider said. "But the audit results from the National Audit Office show that the audit firms led by the Big Four have failed even their most fundamental role as the financial gatekeeper."
The Annual Report of the CNPC and Sinopec showed that last year CNPC paid PwC 70 million yuan in audit fee and Sinopec paid KPMG 66 million Hong Kong dollars. Banks also make up a large source of the Big Four's income.
An employee working for one of the Big Four said small amount of deviation in the audit is difficult to avoid. The above deviation is not distortion.
"The SOEs operating directly by the Chinese central government have very large business scope and assets. So the audit work is very arduous. And different audit companies have different understandings on accounting standards. Small amount of deviation in the audit is difficult to avoid."
However, a Beijing university professor teaching accounting thinks differently.
"Audit institutions should never sign on incomplete financial statements. It's not a matter of degree but a matter of professional ethics. I have no doubt on the Big Four's operational capacity. Obviously there are other things that blinded their eyes."
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