The Perilous Job of Auditing China

Who should be most afraid of auditing in China – a US examiner, the Chinese regulators or the companies being audited? Pick those doing the examining. For all of the accounting profession’s image as a dull and boring occupation, in China it isn’t. Sometimes it can be downright dangerous.

This has gained relevancy because of recent spats between the US and China over the quality of auditing by mainland accounting firms for their US-listed Chinese clients. The situation came to a boil in late January when the US Securities and Exchange Commission administrative law judge Cameron Eliot issued a scathing 112-page opinion that led to a six-month suspension of the Chinese units of the “Big Four” accounting firms from auditing US-listed companies. This follows a long-running dispute over access to documents the SEC demanded investigation of alleged accounting fraud by Chinese companies listed in America, which the Big Four auditors resisted, citing fears of violating Chinese secrecy laws – and also argued that the SEC should be dealing with its Chinese counterparts instead.

The chairman of the US audit watchdog Public Company Accounting Oversight Board, James Doty, said last week that “gaining access to audits of Chinese registered firms has been particularly challenging” but added that the two countries are working on a deal to overcome the impasse by the end of the year to inspect auditing firms located in China.

According to media reports, the Chinese and PCAOB are still exchanging draft agreements, and the Chinese negotiators have said they would not be comfortable with US examiners conducting the inspections on Chinese soil.

Hold it right there.

It is still not clear who exactly these US examiners are – parties from the PCAOB, SEC or US units of the Big Four auditors? – but they should be the ones most uncomfortable with inspections on Chinese soil.

That is because auditing, for all of its staid connotations, is a particularly dangerous profession in China, with periodic incidents of auditors running for their lives or facing death threats and with some isolated cases of ultimate death, according to many industry sources I have come across over the years.

Just a fortnight ago, one veteran auditor revealed how he and his auditing partner once had to run for it and sped off in their car when they visited their Chinese client to take a second look at their accounts. The scene, prompted by a whistle-blower letter prior to a public listing, became hostile. Another seasoned auditor told me in a casual exchange just last month of similar stories and the risks his team often encounter in the mainland.

Sources say these dangers are not confined only to China. It's just that the problem is more prevalent across the mainland but never reported, although well known within the profession and those in-the-know. Interestingly, a client once told me how he had to force his future son-in-law, a Hong Kong-based auditor with clients in China, to change his profession before he would allow the marriage.

One of the most notorious cases burst into the open in 1983 when a Malaysian bank auditor named Jalil Ibrahim was murdered in Hong Ko\ng in an attempt to cover up unauthorized loans and other misdealing on the part of Bumiputra Malaysia Finance, a unit of the state-owned Bank Bumiputra Malaysia, in its relations with the Carrian Group, one of the biggest scandals in Hong Kong history. Jalil’s murderer was never prosecuted.

Many industry sources also point to several reported cases in Thailand, including one in 1999 when Australian accountant Michael Wansley was shot to death after having uncovered a US$150 million Thai sugar mill fraud. Another case involved a Big Four auditor from Singapore who was shot by a passing motorcyclist, allegedly a hired gun, when he was traveling in a car to visit his client outside Bangkok. Other prominent reports in Thailand involved a Thai state auditor who was also victim of a drive-by shooting.

Auditors have often asked if it is even more dangerous conducting commercial investigations in China. The core difference, I would tell them, is that the counter-parties always know who the auditors are and what the auditors do – to look into their accounts. But the counter-parties often don't even know if and who are investigating them because in almost all business intelligence and investigation matters, by the demand and also for the protection of the clients, the work is always performed very discreetly - unlike most investigations by law enforcement officials and regulators – and often with “deep cover”.

In performing their role, auditors ask their clients to produce their books. When they are suspicious of the numbers, rather than pressing their clients, they either drop the clients or insert qualifying statements in their reports, according to industry sources.

There is an unwritten cliché in the consulting profession that the number three is always good – you have three scenarios, three ideas, three solutions, etc. The US examiners representing Washington to examine Chinese accounts would likely be more confrontational given the nature of their mission. Maybe they can offer three choices – give in, give up or give me.

(Vanson Soo runs an independent business intelligence and commercial investigations practice specialized in the Greater China region. Blog: http://vansonsoo.com)