China Finance: Updated data on auditors linked with issues
There has been quite a bit of talk about a new accounting deal between the Public Company Accounting Oversight Board (PCAOB) and China. Most seem to agree with my assessment that while it offers more information for US regulators it does not really change the situation for investors.
My view is that this new deal is more likely to be the final deal that the PCAOB will get, rather than the first step in a deepening collaboration that they are hoping for. So with this in mind we should start making preparations for what this type of limbo deal will mean.
More risk and short sellers returning
The important change here is that there will be more information available on the auditors and how they conduct their work, and some of this information may also be available to the Securities and Exchange Commission (SEC). So we are likely to see more details on accounting practices and possibly some follow-up on previous fraud suspicions levied against US-listed Chinese companies.
However, the lack of bite in current regulations means that shareholders of companies affected by this still do not have any more venues to pursue justice once issues have been found. This could mean a slightly larger risk premium across the board for Chinese companies as a whole, and could also signal a return of the short sellers to this market.
PCAOB will likely start with backlog
From an investor perspective this new development signals that it might be time to have a look at exposure to accounting risk and potential short positions. My first instinct is that if the PCAOB is going to start looking into audit work by firms then once again we find that previous fraud accusations associated with the accounting firms might come into play.
The PCAOB is dealing with a backlog of frauds and accusations, and I would be surprised if this is not where they start using their new access to information. As such, it is very useful to get some idea of which firms will see most of this scrutiny.
I had a post about this last year as well, but as part of a larger project at ChinaRAI we looked into some data that included the auditors' US-listed companies that had been subject to fraud accusations or accounting issues.
This data is a bit different from what was published last time, as it focuses particularly on the US-listed firms, much like what the PCAOB is likely to do. This means that Sino-forest is not included, nor is the recent accusations against Zoomlion or other Hong Kong listed companies.
I cannot guarantee that the list is absolutely exhaustive. For instance what is deemed serious enough to classify as a legitimate fraud accusation is somewhat discretionary. However, with 158 companies on the list it offers good guidance for firms that might be more likely to have papers reviewed by the PCAOB, and thus where there might be more risk.
Interestingly, if we compare to the previous data I had, it appears that the numbers of the big 4 have evened out a bit. Especially PWC has been a lot more prevalent this time around. Deloitte is still the outstanding leader of the table however, and it will be interesting to see what the PCAOB and SEC does with this.
Regardless of what the PCAOB does with the information it is clear that Deloitte’s track record remains an issue, and investors are likely to take this into account for risk evaluations.
Fredrik Oqvist writes regularly about Chinese equities, mainly those listed on foreign exchanges. If you'd like to comment on this story or be notified by email whenever a new China Finance story is published, become a member - it's free, and you can use your Twitter, Facebook, Google or LinkedIn login - and "follow" the China Finance blog during the sign-up process. You can also bookmark the China Finance blog page.